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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 (323) 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
(323) 938-6300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
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NORMAN B. ANTIN, ESQ. STANLEY F. FARRAR, ESQ.
JEFFREY D. HAAS, ESQ. AND SULLIVAN & CROMWELL
KEVIN M. HOULIHAN, ESQ. 1888 CENTURY PARK EAST, 21ST FLOOR
ELIAS, MATZ, TIERNAN & HERRICK LOS ANGELES, CALIFORNIA 90067
L.L.P. (310) 712-6600
734 15TH STREET, N.W., 12TH FLOOR
WASHINGTON, D.C. 20005
(202) 347-0300
</TABLE>
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Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM AGGREGATE
AMOUNT BEING OFFERING PRICE OFFERING AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED(1) PER SHARE(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
% Noncumulative Exchangeable Preferred
Stock, Series B, par value $0.01 per share...... 1,840,000 shares $25.00 $46,000,000 $12,788
</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.
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INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE SECURITIES AND EXCHANGE COMMISSION
DECLARES OUR REGISTRATION STATEMENT EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 9, 1999
PROSPECTUS
SHARES
PEOPLE'S PREFERRED CAPITAL CORPORATION
% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES B
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
EXCHANGEABLE INTO PREFERRED STOCK OF PEOPLE'S BANK OF CALIFORNIA
People's Preferred Capital Corporation is a real estate investment trust
which was incorporated in Maryland in June 1997 to acquire, hold and manage
mortgage assets and other authorized investments. We are offering and selling
shares of our % Noncumulative Exchangeable Preferred Stock, Series B, for
$25.00 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT YOU SHOULD CONSIDER BEFORE YOU INVEST IN THE SERIES B PREFERRED SHARES
BEING OFFERED BY THIS PROSPECTUS. IN PARTICULAR, YOU SHOULD CONSIDER THE
FOLLOWING RISKS:
- A significant decline in interest rates could have an adverse effect on
our cash flow and net earnings;
- Investments in real estate mortgages are subject to price fluctuations
based on changes in interest rates and problems unique to particular
geographic regions where our investments may be concentrated;
- Our dependence on People's Bank of California for our day to day
operations and the possibility of conflicts of interest between the
Bank and us;
- Under certain circumstances, your shares of Series B Preferred Shares
could be automatically exchanged for preferred shares of the Bank; and
- A possibility that we will not qualify as a real estate investment
trust for federal income tax purposes.
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PER SHARE TOTAL
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Initial price to public.................................................. $ 25.00 $
Underwriting discount.................................................... $ $
Proceeds to People's Preferred before expenses........................... $ $
</TABLE>
The underwriter may, under certain circumstances, purchase up to an
additional shares of Series B Preferred Shares from us at the initial
price to public less the underwriting discount.
------------------------
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL AGENCY
OR STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
We have applied for quotation of the Series B Preferred Shares on the Nasdaq
National Market under the symbol " ."
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SANDLER O'NEILL & PARTNERS, L.P.
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This Prospectus is dated , 1999.
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[MAP]
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY........................................................................................
People's Preferred Capital Corporation..................................................................
People's Bank of California.............................................................................
Risk Factors............................................................................................
The Offering............................................................................................
Our Business and Strategy...............................................................................
RISK FACTORS..............................................................................................
Changes in interest rates could negatively impact our financial condition, results of operations and our
ability to pay dividends..............................................................................
Our mortgage loan portfolio is subject to local economic conditions which could affect the value of the
real estate assets underlying our loans...............................................................
We do not have insurance to cover our exposure to borrower defaults and bankruptcies and special hazard
losses that are not covered by standard insurance.....................................................
Delays in liquidating defaulted mortgage loans could occur which could cause our business to suffer.....
We could be held responsible for environmental liabilities of properties we acquire through
foreclosure...........................................................................................
Our acquisition of commercial mortgage loans subjects us to risks that are not present in a portfolio of
residential mortgage loans............................................................................
Our mortgage loans are concentrated in California, and adverse conditions in California could negatively
impact our operations.................................................................................
There has been no third party valuation of the proposed portfolio and no arm's-length negotiations,
which may result in loans being transferred at a price other than fair market value...................
We are dependent in virtually every phase of our operations on the diligence and skill of the officers
and employees of the Bank, and our relationship with the Bank may create potential conflicts of
interest..............................................................................................
If our computer systems do not properly work on January 1, 2000, our business operations will be
disrupted.............................................................................................
Bank regulators may limit our ability to implement our business plan and may restrict our ability to pay
dividends.............................................................................................
A decline in the Bank's capital levels may result in your Series B Preferred Shares being subject to
automatic exchange into Series B Bank Preferred Shares................................................
We would suffer adverse tax consequences if we fail to qualify as a REIT................................
We have imposed ownership limitations in order to protect our ability to qualify as a REIT..............
We may redeem the Series A and Series B Preferred Shares upon the occurrence of a Tax Event.............
You are not entitled to receive dividends unless declared by our Board of Directors.....................
The Series B Preferred Shares are a new issue and there has never been a market for Series B Preferred
Shares................................................................................................
THE COMPANY...............................................................................................
CERTAIN TRANSACTIONS TO FACILITATE THE OFFERING...........................................................
Facilitation of the Offering............................................................................
Benefits to the Bank....................................................................................
HOW WE INTEND TO USE THE PROCEEDS.........................................................................
CAPITALIZATION............................................................................................
SELECTED FINANCIAL DATA...................................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................
Financial Condition.....................................................................................
Results of Operations...................................................................................
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PAGE
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Description of the Portfolio and the Proposed Portfolio.................................................
Liquidity and Capital Resources.........................................................................
Interest Rate Risk......................................................................................
Year 2000...............................................................................................
Acquisition of the Proposed Portfolio...................................................................
BUSINESS AND STRATEGY.....................................................................................
General.................................................................................................
General Description of Mortgage Assets and Other Authorized Investments; Investment Policy..............
Dividend Policy.........................................................................................
Management Policies and Programs........................................................................
Servicing...............................................................................................
Employees...............................................................................................
Competition.............................................................................................
Legal Proceedings.......................................................................................
BENEFICIAL OWNERSHIP OF OUR COMMON STOCK..................................................................
MANAGEMENT................................................................................................
Directors and Executive Officers........................................................................
Independent Directors...................................................................................
Audit Committee.........................................................................................
Compensation of Directors and Officers..................................................................
Limitations on Liability of Directors and Officers......................................................
The Advisor.............................................................................................
DESCRIPTION OF SERIES B 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.........................................................................................
Ability 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.................................................................................
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....................................................................
</TABLE>
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UNDERWRITING..............................................................................................
EXPERTS...................................................................................................
VALIDITY OF SERIES B PREFERRED SHARES.....................................................................
FORWARD LOOKING STATEMENTS................................................................................
ADDITIONAL INFORMATION....................................................................................
GLOSSARY..................................................................................................
INDEX TO FINANCIAL STATEMENTS............................................................................. F-1
ANNEX I--OFFERING CIRCULAR FOR SERIES B BANK PREFERRED SHARES............................................. OC-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER
BEFORE INVESTING IN OUR SERIES B PREFERRED SHARES. YOU SHOULD READ THE FOLLOWING
SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES CONTAINED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
PEOPLE'S PREFERRED CAPITAL CORPORATION
We are a real estate investment trust ("REIT") that was formed in June 1997
in order to acquire, hold and manage mortgage assets and other authorized
investments. All of our common stock is owned by People's Bank of California
(the "Bank"). We expect that all of our mortgage assets will be acquired from
the Bank or purchased from other companies that are not affiliated with us. To
date, all of our mortgage assets have been acquired from the Bank.
As a REIT, dividends paid to our stockholders are deductible for federal and
state income tax purposes. Under the Internal Revenue Code, REITs are subject to
numerous organizational and operational requirements, including a requirement
that they distribute at least 95% of their taxable income, as calculated on an
annual basis. If we fail to qualify for taxation as a REIT in any year, our
income will be taxed at regular corporate rates, and we may not be able to
qualify for treatment as a REIT for that year and the next four years.
In October 1997, we completed the sale of 1,426,000 shares of 9.75%
Noncumulative Exchangeable Preferred Stock, Series A (our "Series A Preferred
Shares") at an offering price of $25.00 per share. Except with respect to the
dividend rate and the call and maturity dates, the Series A Preferred Shares
have terms which are substantially the same as the terms of the Series B
Preferred Shares offered by this prospectus.
We will use the aggregate net proceeds of approximately $ million from
the sale of the Series B Preferred Shares, together with a capital contribution
from the Bank of approximately $ million, to purchase additional mortgage
assets from the Bank.
We are offering the Series B Preferred Shares for the following principal
reasons:
- to strengthen the Bank's regulatory capital;
- to support the Bank's internal growth and implementation of its business
strategy; and
- to increase the Bank's earnings and accelerate the use of the Bank's net
operating loss carryforwards.
Our principal executive offices are located at 5900 Wilshire Boulevard, Los
Angeles, California 90036, and our telephone number is (323) 938-6300.
PEOPLE'S BANK OF CALIFORNIA
The Bank is a federally chartered savings bank which conducts business from
its executive offices located in Los Angeles, California and 23 full-service
branch offices located in Los Angeles, Orange and Ventura Counties in Southern
California. The Bank's branch system includes two branches purchased in August
1999 with approximately $137.3 million in deposits. In addition, in June 1999,
the Bank agreed to purchase The Bank of Hollywood, a California commercial bank
headquartered in Hollywood, California with $138.3 million of assets, $124.7
million of deposits and $13.3 million of stockholders' equity at June 30, 1999.
The transaction is expected to close in the fourth quarter of 1999. At June 30,
1999, the Bank had total assets of $3.52 billion, total deposits of $1.61
billion and total stockholder's equity of $168.9 million. The Bank is a
wholly-owned subsidiary of PBOC Holdings,
1
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Inc ("PBOC"). Unless otherwise noted, the information presented in this
prospectus does not give effect to the recently completed branch acquisitions
and the pending Bank of Hollywood transaction.
The principal executive offices of the Bank are located at 5900 Wilshire
Boulevard, Los Angeles, California 90036, and its telephone number is (323)
938-6300.
RISK FACTORS
Prior to making an investment decision, you should carefully consider all of
the information in this prospectus, and, in particular, you should evaluate the
risk factors set forth under the caption "Risk Factors" beginning on page .
THE OFFERING
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Securities Offered.............. Series B Preferred Shares. We have granted the
Underwriters an option for 30 days to purchase up to an
additional Series B Preferred Shares at the initial
price to public solely to cover over-allotments, if any.
Ranking......................... The Series B Preferred Shares will rank equal to the
Series A Preferred Shares and senior to our common stock
with respect to the payment of dividends and amounts due
upon liquidation. As long as any Series A or Series B
Preferred Shares remain outstanding, we cannot issue
additional shares of preferred stock ranking senior to the
Series A or Series B Preferred Shares without the approval
of the holders of at least two-thirds of both the Series A
and Series B Preferred Shares. As long as any Series A or
Series B Preferred Shares remain outstanding, we cannot
issue additional shares of preferred stock ranking equal
to the Series A or Series B Preferred Shares without the
approval of a majority of our independent directors.
Use of Proceeds................. We intend to use the net proceeds from the Offering,
together with the proceeds received as a capital
contribution from the Bank, to purchase additional
mortgage assets from the Bank and to pay the expenses of
the Offering.
Dividends....................... Dividends are noncumulative and will be payable at the
rate of % per annum of the initial liquidation
preference (equivalent to $ per share per year) if
declared by our board of directors. Because the Series B
Preferred Shares rank equal to the Series A Preferred
Shares, if our board of directors does not authorize and
declare a dividend with respect to any quarterly dividend
period on the Series A or Series B Preferred Shares, you
will have no right to receive a dividend on your Series B
Preferred Shares for that period.
Liquidation Preference.......... The liquidation preference for each Series B Preferred
Share is $25.00, plus an amount equal to any quarterly
accrued and unpaid dividends for the then-current dividend
payment.
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Redemption...................... Subject to certain limited exceptions involving either a
change of control of the Bank or PBOC or certain changes
to the tax laws, the Series B Preferred Shares are not
redeemable prior to , 2004. On and after ,
2004, we may redeem the Series B Preferred Shares for cash
at our option at the redemption price of $25.00 per share,
plus any authorized, declared and unpaid dividends, to the
date fixed for redemption, without interest. The Series A
Preferred Shares may not be redeemed prior to October 15,
2002 except under similar circumstances.
Automatic Exchange.............. Under limited circumstances relating to a deterioration of
the Bank's regulatory capital or the placement of the Bank
into conservatorship or receivership, the Bank's federal
regulator may direct that we exchange the Series B
Preferred Shares for Series B Bank Preferred Shares. In
that case, you will be obligated to surrender to the Bank
all certificates representing your Series B Preferred
Shares, and, in exchange, the Bank will be obligated to
issue to you certificates representing an equal number of
Series B Bank Preferred Shares. Similar exchange
provisions apply to the Series A Preferred Shares.
Voting Rights................... Except under limited circumstances, you, as a holder of
the Series B Preferred Shares, will not have any voting
rights. In any matter on which you may vote, you will be
entitled to one vote for each Series B Preferred Share you
hold.
Tax Consequences................ As long as we qualify as a REIT, corporate holders of the
Series B Preferred Shares will not be entitled to a
dividends-received deduction for any income recognized
from the Series B Preferred Shares.
Independent Directors........... As long as any Series B Preferred Shares are outstanding,
our articles of incorporation provide that certain actions
by us must be approved by a majority of our independent
directors. We currently have two independent directors on
our board of 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.
Ownership Limits................ With limited exceptions, our articles of incorporation
provide that no individual or entity is permitted to own
more than 8.25% of the aggregate initial liquidation value
of the issued and outstanding shares of our preferred
stock, including the Series A and Series B Preferred
Shares. Assuming Series B Preferred Shares are
issued, no person may own more than $ of the
aggregate liquidation value of our preferred stock (or an
aggregate of shares of our Series A and Series B
Preferred Shares). Any Series B Preferred Shares held in
violation of this limit will be automatically transferred
to a trust for the exclusive benefit of a charity to be
named by us. All rights to dividends for those shares will
be held by such trust.
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Trading......................... We applied for quotation of the Series B Preferred Shares
on the Nasdaq National Market under the symbol " ."
</TABLE>
OUR BUSINESS AND STRATEGY
Our principal business objective is to acquire, hold and manage mortgage
assets and other authorized investments that will generate net income for
distribution to our stockholders. At June 30, 1999, we had total assets of $72.4
million, total liabilities of $31,000 and total stockholders' equity of $72.4
million. As of that date, $68.8 million or 95.0% of our assets were comprised of
mortgage loans. An aggregate of $59.2 million or 86.0% of our mortgage loans at
June 30, 1999 were secured by single-family (one-to-four-unit) residential
properties with a weighted average yield of 7.24% and $9.6 million or 14.0% of
our mortgage loans were secured by multi-family residential and commercial
properties with a weighted average yield of 9.24%. The overall yield on our
Current Portfolio as of June 30, 1999 was 7.52%. As described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Pro Forma Presentation and Analysis of the Portfolio and the
Proposed Portfolio," the composition of our mortgage loan portfolio is expected
to change with the proposed purchase of mortgage loans which is contemplated in
connection with the Offering. The portfolio of mortgage loans expected to be
acquired in connection with the Offering will contain a greater proportion of
commercial real estate loans (when compared with our existing portfolio), which
will increase the overall percentage of commercial real estate loans in our loan
portfolio and correspondingly increase the weighted average portfolio yield.
These loans are also expected to be less seasoned and to have greater average
outstanding balances than the loans presently held in our loan portfolio. The
larger average outstanding loans expected to be included in the Proposed
Portfolio are consistent with the larger balance loans the Bank has been
originating and purchasing since completion of PBOC's initial public offering in
May 1998.
Although we have the authority to acquire an unlimited number of mortgage
assets from unaffiliated third parties, all of our mortgage assets acquired
through June 30, 1999 have been acquired from the Bank (although a portion of
our mortgage assets were acquired by the Bank from unaffiliated third parties)
and all of the mortgage loans which we intend to purchase in connection with the
Offering will be purchased from the Bank. We have no present plans or
expectations with respect to purchases of mortgage assets from unaffiliated
third parties. We may also acquire from time to time mortgage-backed securities
and a limited amount of non-mortgage related securities.
Our board of directors is composed of six members, two of whom are
independent directors. In addition, we currently have four officers. We have no
other employees and do not anticipate that we will require additional employees.
4
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS, IN ADDITION TO THE RISKS
HIGHLIGHTED ON PAGES THROUGH OF THE ATTACHED OFFERING CIRCULAR RELATING TO
THE BANK AND THE SERIES B BANK PREFERRED SHARES, BEFORE MAKING A DECISION TO BUY
OUR SERIES B PREFERRED SHARES. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN
SUCH CASE, THE TRADING PRICE OF OUR SERIES B PREFERRED SHARES COULD DECLINE, AND
YOU MAY LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR SERIES B PREFERRED
SHARES. THE RISK FACTORS BELOW DO NOT NECESSARILY APPEAR IN ORDER OF IMPORTANCE.
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATION.
CHANGES IN INTEREST RATES COULD NEGATIVELY IMPACT OUR FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND OUR ABILITY TO PAY DIVIDENDS
Our income consists primarily of interest payments on the mortgage loans
held by us. While all of the mortgage loans held by us at June 30, 1999 bear
interest at fixed rates and while we anticipate that all of the mortgage loans
to be purchased from the Bank in connection with this Offering will also bear
interest at fixed rates, we may purchase mortgage loans in the future which will
bear interest at adjustable rates. Adjustable-rate loans decrease the risks to a
lender associated with changes in interest rates but involve other risks. As
interest rates rise, the payment by the borrower rises to the extent permitted
by the terms of the loan, and the increased payment increases the potential for
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. In a declining interest rate
environment, we may experience an increase in prepayments on our mortgage loans
as borrowers refinance their mortgages at lower interest rates. Under these
circumstances, we may find it more difficult to purchase additional mortgage
loans with rates sufficient to support the payment of the dividends on the
Series A and Series B Preferred Shares. Because the rate at which dividends are
required to be paid on the Series A and Series B Preferred Shares is fixed,
there can be no assurance that a declining interest rate environment would not
adversely affect our ability to pay dividends on the Series A and Series B
Preferred Shares.
OUR MORTGAGE LOAN PORTFOLIO IS SUBJECT TO LOCAL ECONOMIC CONDITIONS WHICH COULD
AFFECT THE VALUE OF THE REAL ESTATE ASSETS UNDERLYING OUR LOANS
The results of our operations will be affected by various conditions in the
real estate market, many of which are beyond our control, such as:
- local and other economic conditions affecting real estate values;
- the continued financial stability of a borrower and the borrower's ability
to make mortgage payments, which may be adversely affected by job loss,
recession, divorce, illness or personal bankruptcy;
- the ability of tenants to make lease payments;
- the ability of a property to attract and retain tenants, which may be
affected by 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;
- interest rate levels and the availability of credit to refinance loans at
or prior to maturity; and
- increased operating costs, including energy costs, real estate taxes and
costs of compliance with environmental controls and regulations.
5
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WE DO NOT HAVE INSURANCE TO COVER OUR EXPOSURE TO BORROWER DEFAULTS AND
BANKRUPTCIES AND SPECIAL HAZARD LOSSES THAT ARE NOT COVERED BY STANDARD
INSURANCE
We generally do not obtain credit enhancements such as mortgagor bankruptcy
insurance or obtain special hazard insurance for our mortgage loans, other than
standard hazard insurance, which will in each case only relate to individual
mortgage loans. Without third party insurance, we are 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).
DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS COULD OCCUR WHICH COULD CAUSE OUR
BUSINESS TO SUFFER
Substantial delays could be encountered in connection with the liquidation
of defaulted mortgage loans, with corresponding delays in our receipt of related
proceeds. 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 which may impede our ability to foreclose
on or sell the mortgaged property or to obtain proceeds sufficient to repay all
amounts due on the related mortgage loan.
WE COULD BE HELD RESPONSIBLE FOR ENVIRONMENTAL LIABILITIES OF PROPERTIES WE
ACQUIRE THROUGH FORECLOSURE
In the event that we are forced to foreclose on a defaulted mortgage loan to
recover our investment in the mortgage loan, we may be subject to environmental
liabilities in connection with the underlying real property which could exceed
the value of the real property. Although we intend 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 may be discovered on properties during our
ownership or after a sale to a third party. There can be no assurance that we
would not incur full recourse liability for the entire cost of any removal and
clean-up on an acquired property, that the cost of removal and clean-up would
not exceed the value of the property or that we could recoup any of the costs
from any third party.
OUR ACQUISITION OF COMMERCIAL MORTGAGE LOANS SUBJECTS US TO RISKS THAT ARE NOT
PRESENT IN A PORTFOLIO OF RESIDENTIAL MORTGAGE LOANS
As of June 30, 1999, 14.0% of our mortgage assets (measured by aggregate
outstanding principal amount) consisted of commercial mortgage loans and we
anticipate that immediately subsequent to the purchase of additional mortgage
loans from the Bank in connection with this Offering, approximately 31.0% of our
mortgage assets will consist of commercial mortgage loans. Commercial mortgage
loans generally lack standardized terms, 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.
Commercial real estate properties tend to be unique and are more difficult to
value than single-family residential real estate properties. They are also
subject to relatively greater environmental risks and to the corresponding
burdens and costs of compliance with environmental laws and regulations.
OUR MORTGAGE LOANS ARE CONCENTRATED IN CALIFORNIA, AND ADVERSE CONDITIONS IN
CALIFORNIA COULD NEGATIVELY IMPACT OUR OPERATIONS
All of the properties underlying our loans which we held at June 30, 1999 or
which we propose to purchase from the Bank in connection with this Offering are
located in California. Because of the concentration of our loan portfolio in
California, and particularly Southern California, in the event of adverse
economic conditions in California, we would likely experience higher rates of
loss and delinquency on our mortgage loans than if our loans were more
geographically diversified. Additionally, our mortgage loans may be subject to a
greater risk of default than other comparable mortgage loans
6
<PAGE>
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. In the event of any natural disaster, our ability to pay dividends on
the Series A and Series B Preferred Shares could be adversely affected.
THERE HAS BEEN NO THIRD PARTY VALUATION OF THE PROPOSED PORTFOLIO OF
MORTGAGE LOANS AND NO ARM'S-LENGTH NEGOTIATIONS, WHICH MAY RESULT IN LOANS BEING
TRANSFERRED AT A PRICE OTHER THAN FAIR MARKET VALUE
We expect to pay approximately $ million to the Bank for the mortgage
loans we propose to purchase from the Bank in connection with the Offering. This
amount approximates the aggregate carrying value of such loans as reflected on
the Bank's Statement of Financial Condition as of June 30, 1999. There has been
no third party valuations of the mortgage loans to be purchased for purposes of
this Offering, and there can be no assurance that the fair value of such
mortgage loans does not differ from the purchase price payable by us.
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 ours is selling the mortgage
loans to us, or purchasing the mortgage loans from us. Accordingly, there can be
no assurance that the consideration to be paid (or received) by us to (or from)
the Bank or any of our affiliates in connection with future acquisitions or
dispositions of mortgage loans will not differ from the fair value of such
mortgage loans.
WE ARE DEPENDENT IN VIRTUALLY EVERY PHASE OF OUR OPERATIONS ON THE DILIGENCE
AND SKILL OF THE OFFICERS AND EMPLOYEES OF THE BANK, AND OUR RELATIONSHIP WITH
THE BANK MAY CREATE POTENTIAL CONFLICTS OF INTEREST
The Bank, which is the sole holder of our common stock, is involved in
virtually every aspect of our existence. The Bank administers our day-to-day
activities in its role as advisor under the advisory agreement. As such, we are
dependent on the diligence and skill of the officers and employees of the Bank
for the selection, structuring and monitoring of our mortgage assets and other
authorized investments. In addition, we are dependent on the Bank and others for
the servicing of our mortgage loans. Other than the independent directors, all
of our officers and directors are also officers and directors of the Bank. As
the holder of all of our outstanding voting stock, the Bank will have the right
to elect all of our directors, including the independent directors, except under
limited circumstances with respect to our failure to pay dividends. The Bank may
have interests which are not identical to our interests and PBOC, the ultimate
owner of the Bank's common stock, may have investment goals and strategies that
differ from those of the holders of the Series A and Series B Preferred Stock.
Consequently, conflicts of interest may arise with respect to:
- our present portfolio of mortgage loans and our acquisition of mortgage
loans from the Bank in connection with the Offering;
- future acquisitions of mortgage loans from the Bank;
- servicing of mortgage loans, particularly with respect to mortgage loans
that are placed on nonaccrual status;
- future dispositions of mortgage loans to the Bank; and
- the modification of the advisory agreement or the servicing agreements.
IF OUR COMPUTER SYSTEMS DO NOT PROPERLY WORK ON JANUARY 1, 2000, OUR
BUSINESS OPERATIONS WILL BE DISRUPTED.
The Year 2000 issue exists because many software systems, which use only two
digits to identify a year in a date field, were designed without considering the
impact of the upcoming change in the
7
<PAGE>
century. There is significant uncertainty concerning the scope and magnitude of
problems associated with the century change. Some of the systems critical to our
operations could fail or function improperly if not made Year 2000 compliant.
If our computer systems and the computer systems operated by our third party
vendors do not properly work on January 1, 2000, then we could experience a
disruption in our business operations. As a result, our financial condition and
results of operations could be adversely impacted. In addition, if we do not do
an adequate job preparing for the January 1, 2000 date change, then applicable
regulators may take action against us.
We also face risks that any third parties with which we transact business
may not be Year 2000 compliant. We rely on the Bank and our transfer agent for
certain computer-related services, and we have entered into discussions
regarding their Year 2000 readiness. If the Year 2000 issue prevents these or
any other third parties from delivering the products or services we require, our
operations could be adversely affected.
BANK REGULATORS MAY LIMIT OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN AND MAY
RESTRICT OUR ABILITY TO PAY DIVIDENDS
Because we are a subsidiary of the Bank, regulatory authorities will have
the right to examine us and our activities and, under certain circumstances, to
impose restrictions on the Bank or us which could impact our ability to conduct
business pursuant to our business plan, which could adversely effect our
financial condition and results of operations:
- If the Bank's regulators determine that the Bank's relationship with us
results in an unsafe and unsound banking practice, the regulators have the
authority to restrict our ability to transfer assets, to make
distributions to our stockholders (including dividends to holders of the
Series A or Series B Preferred Shares) or to redeem shares of preferred
stock, or even to require the Bank to sever its relationship with us or
divest its ownership of us, which could potentially result in our failure
to qualify as a REIT.
- Payment of dividends on the Series A or Series B Preferred Shares could
also be subject to regulatory limitations if the Bank becomes
"undercapitalized" for purposes of regulations issued by the Office of
Thrift Supervision. Under these regulations, the Bank will be deemed
"undercapitalized" if it has a total risk-based capital ratio of less than
8.0%, a Tier 1 risk-based capital ratio of less than 4.0% and a core
capital (or leverage) ratio of less than 4.0%. At June 30, 1999, the
Bank's total risk-based capital ratio was 11.98%, its Tier 1 risk-based
capital ratio was 11.12% and its core capital (or leverage) ratio was
6.16%. The Bank currently intends to maintain its capital ratios in excess
of the "well-capitalized" levels under these regulations. However, there
can be no assurance that the Bank will be able to maintain its capital in
excess of the "well-capitalized" levels. See "Risk Factors--Acquisition
Strategy" in the Bank's Offering Circular set forth in Annex I for the pro
forma impact of both the Bank's recent acquisitions and the Offering.
- While we do not believe that dividends on the Series A or Series B
Preferred Shares should be considered "capital distributions" under the
regulations of the Office of Thrift Supervision which apply to thrift
institutions such as the Bank, there can be no assurance that the Office
of Thrift Supervision would agree with this position. However, in any
event, we believe that the Office of Thrift Supervision would not object
to our payment of quarterly dividends on the Series A and Series B
Preferred Shares up to the amount of our net income for that quarter. We
currently expect that our net income will be in excess of amounts needed
to pay dividends on the Series A and Series B Preferred Shares.
8
<PAGE>
A DECLINE IN THE BANK'S CAPITAL LEVELS MAY RESULT IN YOUR SERIES B PREFERRED
SHARES BEING SUBJECT TO AUTOMATIC EXCHANGE INTO SERIES B BANK PREFERRED SHARES
The returns from your investment in the Series B Preferred Shares will be
dependent to a significant extent on the performance and capital of the Bank. A
decline in the performance and capital levels of the Bank or the placement of
the Bank into conservatorship or receivership could result in the automatic
exchange of your Series B Preferred Shares for Series B Bank Preferred Shares,
which would represent an investment in the Bank and not in us. Under these
circumstances:
- you would become a preferred stockholder of the Bank at a time when the
Bank's financial condition has deteriorated or when the Bank has been
placed into conservatorship or receivership and, accordingly, it is
unlikely that the Bank would be in a financial position to make any
dividend payments on the Series B Bank Preferred Shares;
- in the event of a liquidation of the Bank, the claims of depositors and
creditors of the Bank would be entitled to priority in payment over the
claims of holders of equity interests such as the Series B Bank Preferred
Shares, and, therefore, you likely would receive substantially less than
you would receive had the Series B Preferred Shares not been exchanged for
Series B Bank Preferred Shares; and
- the exchange of the Series B Preferred Shares for Series B Bank Preferred
Shares would be a taxable event to you under the Code, and you would incur
a gain or loss, as the case may be, measured by the difference between
your basis in the Series B Preferred Shares and the fair market value of
the Series B Bank Preferred Shares received in the exchange.
The Series A Preferred Shares also have a similar exchange feature whereby,
under the circumstances described above, the appropriate federal regulatory
agency can require an exchange of the Series A Preferred Shares for Series A
Bank Preferred Shares at the same time as the Series B Preferred Shares are
exchanged for Series B Bank Preferred Shares.
WE WOULD SUFFER ADVERSE TAX CONSEQUENCES IF WE FAIL TO QUALIFY AS A REIT
Although we currently conduct our operations so as to qualify as a REIT
under the Code, no assurance can be given that we will be able to continue to
operate in such a manner so as to remain qualified as a REIT. 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 our control. No assurance can be given 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 our ability to operate.
If we were to fail to qualify as a REIT, the dividends on shares of our
preferred stock, including the Series A and Series B Preferred Shares, would not
be deductible by us for federal (and California state) income tax purposes, and
we would likely become part of the consolidated group of which the Bank is a
member. Consequently, the consolidated group would face a greater tax liability
which could result in a reduction in the Bank's net earnings after taxes. A
reduction in the Bank's net earnings after taxes could adversely affect the
Bank's ability to raise additional capital (as well as its ability to generate
additional capital internally) and consequently its ability to add
interest-earning assets to its portfolio.
If in any taxable year we fail to qualify as a REIT, unless we are entitled
to relief under certain statutory provisions, we would also be disqualified from
treatment as a REIT for the four taxable years following the year our
qualification was lost. As a result, the amount of funds available for
distribution
9
<PAGE>
to our stockholders would be reduced for the year or years involved. A failure
by us to qualify as a REIT would not by itself give us the right to redeem the
Series A or Series B Preferred Shares.
As a REIT, we generally will be required each year to distribute as
dividends to our stockholders at least 95% of our "REIT taxable income"
(excluding capital gains). Failure to comply with this requirement would result
in our earnings being subject to tax at regular corporate rates. In addition, we
would be subject to a 4% nondeductible excise tax on the amount by which certain
distributions considered as paid by us with respect to any calendar year are
less than the sum of (1) 85% of our ordinary income for the calendar year, (2)
95% of our capital gains net income for the calendar year and (3) any
undistributed taxable income from prior periods.
We currently intend to operate in a manner designed to qualify as a REIT.
However, future economic, market, legal, tax or other considerations may cause
us to determine that it is in our best interests and the best interests of
holders of our common stock and preferred stock to revoke the REIT election. As
long as any Series A or Series B Preferred Shares are outstanding, any such
determination by us may not be made without the approval of a majority of our
independent directors.
WE HAVE IMPOSED OWNERSHIP LIMITATIONS IN ORDER TO PROTECT OUR ABILITY TO QUALIFY
AS A REIT
To qualify as a REIT under the Internal Revenue Code, no more than 50% of
the value of our outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities) during the last half of a taxable year (other
than the first year) (the "Five or Fewer Test"). The Internal Revenue Code
requires that the Five or Fewer Test be applied using constructive ownership
rules which treat certain organizations as one individual.
Our 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 Internal Revenue Code, more than 8.25% of the aggregate
initial liquidation value of all of our issued and outstanding shares of
preferred stock, including both the Series A and Series B Preferred Shares (the
"Ownership Limit"). Under the constructive ownership rules which must be used
for the Five or Fewer Test, our common stock will be treated as owned by the
stockholders of PBOC, which is the sole stockholder of the Bank.
Although the Five or Fewer Test references the aggregate value of all shares
of our capital stock, the Ownership Limit has been established with reference to
the aggregate initial liquidation preference of the outstanding shares of our
preferred stock. If (i) the relative values of our common stock and any
outstanding shares of our preferred stock, including the Series A and Series B
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 we believe 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.
The ownership of our common stock or the transfer of shares of common stock
and/or preferred stock of PBOC to an entity which is considered an individual
for purposes of the Five or Fewer Test could, in certain circumstances (e.g.,
the sale of all PBOC stock to an individual), cause us to fail the Five or Fewer
Test and, consequently, to fail to qualify as a REIT.
Our board of directors may (but will not be required to), upon the receipt
of a ruling from the Internal Revenue Service or the advice of counsel
satisfactory to us, 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 our status as a REIT. The transfer of any shares of
preferred stock, including Series A or Series B 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
10
<PAGE>
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.
WE MAY REDEEM THE SERIES A AND SERIES B PREFERRED SHARES UPON THE OCCURRENCE OF
A TAX EVENT
At any time following the occurrence of certain changes in the tax laws or
regulations concerning REITs, even if such change or changes occurs prior to
, 2004 in the case of the Series B Preferred Shares and October 15,
2002 in the case of the Series A Preferred Shares, we will have the right to
redeem the Series A and Series B Preferred Shares in whole, subject to the prior
written approval of the Office of Thrift Supervision. The occurrence of such
changes in the tax laws or regulations will not, however, give a holder any
right to request that such Series A or Series B Preferred Shares be redeemed.
YOU ARE NOT ENTITLED TO RECEIVE DIVIDENDS UNLESS DECLARED BY OUR BOARD OF
DIRECTORS
Dividends on the Series B Preferred Shares are not cumulative. Consequently,
if our board of directors does not authorize and declare a dividend on the
Series B Preferred Shares for any quarterly period, including if prevented by
bank regulators, you will not be entitled to receive that dividend whether or
not funds are or subsequently become available. Our board of directors may
determine that it would be in our best interests to pay less than the full
amount of the stated dividends on the Series B Preferred Shares or no dividends
for any quarter even though funds are available. Factors that would generally be
considered by our board of directors in making this determination are our
financial condition and capital needs, the impact of current and pending
legislation and regulations, economic conditions, and our continued
qualification as a REIT. If full dividends on the Series A and Series B
Preferred Shares have not been paid for six full dividend periods, the holder of
the Series A and Series B Preferred Shares shall have the right to elect two
additional directors.
THE SERIES B PREFERRED SHARES ARE A NEW ISSUE AND THERE HAS NEVER BEEN A MARKET
FOR SERIES B PREFERRED SHARES
The Series B Preferred Shares is a new issue and, consequently, prior to
this Offering, there has been no public market for the Series B Preferred
Shares. We have applied for quotation of the Series B Preferred Shares on the
Nasdaq National Market under the symbol " ." The Series A Preferred Shares
are currently quoted on the Nasdaq National Market under the symbol "PPCCP."
Nevertheless, there can be no assurance that an active and liquid trading market
for the Series B Preferred Shares will develop or that, if developed, it will
continue, or that the Series B Preferred Shares may be resold at or above the
initial price to the public of $25.00 per share.
Although the Series B Preferred Shares are expected to be quoted on the
Nasdaq National Market, the Bank does not intend to apply for listing or
quotation of the Series B Bank Preferred Shares 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 Series B Bank Preferred
Shares, if issued, or that an active and liquid trading public market for the
Series B Bank Preferred Shares will develop or be maintained. The lack of
liquidity and an active trading market could adversely effect prospective
investors' ability to dispose of the Series B Bank Preferred Shares.
11
<PAGE>
THE COMPANY
We were incorporated in June 1997 as a Maryland corporation to acquire, hold
and manage mortgage assets ("Mortgage Assets") and other authorized investments.
We operate in a manner so as to qualify as a REIT for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code"). As a
REIT, we are generally not subject to federal income tax on net income and
capital gains that we distribute to our stockholders. We are a wholly-owned
subsidiary of the Bank, a federal savings bank organized under the laws of the
United States. The Bank is a wholly-owned subsidiary of PBOC.
In October 1997, we completed a public offering of 1,426,000 shares of the
Series A Preferred Shares, at a liquidation preference of $25.00 per share. The
Series A Preferred Shares are quoted on the Nasdaq National Market under the
symbol "PPCCP." Except with respect to the dividend rate, the terms of the
Series A Preferred Shares are substantially identical to the terms of the Series
B Preferred Shares.
We used the gross proceeds of $35.7 million raised from the offering of
Series A Preferred Shares (the "Series A Offering") and the concurrent
contribution of $38.8 million in additional capital by the Bank to pay expenses
incurred during the Series A Offering and our formation and to purchase from the
Bank our initial portfolio of mortgage loans for an aggregate purchase price of
$72.1 million. In addition, we have purchased additional mortgage loans from the
Bank from time to time.
CERTAIN TRANSACTIONS TO FACILITATE THE OFFERING
FACILITATION OF THE OFFERING
Prior to or simultaneously with the completion of the Offering, we and the
Bank will engage in the transactions described below which are designed (i) to
facilitate the Offering and (ii) to transfer to us the ownership of the
portfolio of mortgage loans proposed to be purchased from the Bank in connection
with the Offering (the "Proposed Portfolio").
The transactions to facilitate the Offering will include the following:
- Our articles of incorporation will be amended to establish the terms of
the Series B Preferred Shares.
- We will sell to the public Series B Preferred Shares in the Offering
(assuming the Underwriters' over-allotment option is not exercised).
- The Bank will make a capital contribution to us equal to the sum of
$ million plus the aggregate amount of underwriting commissions and
expenses of the Offering. The Bank currently owns, and following the
completion of the Offering will continue to own, all of the issued and
outstanding shares of our common stock (the "Common Stock"). The Bank
currently intends that, so long as any Series A or Series B Preferred
Shares are outstanding, it will maintain direct ownership of at least a
majority of the outstanding shares of our Common Stock.
- The Bank will sell the Proposed Portfolio to us for an aggregate purchase
price equal to approximately $ million pursuant to the terms of 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").
- Pursuant to the commercial servicing agreement with the Bank (the
"Commercial Servicing Agreement"), the Bank will service the commercial
and multi-family residential mortgage loans ("Commercial Mortgage Loans")
expected to be included in the Proposed Portfolio under the
12
<PAGE>
same terms and conditions as it services the Commercial Mortgage Loans
included in the Current Portfolio. Pursuant to the residential servicing
agreement to be entered into with the Bank (the "Bank Residential
Servicing Agreement"), as well as a residential servicing agreement
entered into with Temple Inland Mortgage Corporation ("TIMC") (the "TIMC
Residential Servicing Agreement"), in connection with the Series A
Offering, both the Bank and TIMC (each a "Servicing Agent" and,
collectively, the "Servicing Agents") will service the residential
mortgage loans (the "Residential Mortgage Loans") expected to be included
in the Proposed Portfolio (the Bank Residential Servicing Agreement and
the TIMC Residential Servicing Agreement are collectively referred to as
the "Residential Servicing Agreements.")
The following chart outlines the relationship between us and the Bank
following completion of the Offering (without giving effect to the expenses of
the Offering).
[INSERT CHART.]
BENEFITS TO THE BANK
The Bank expects to realize the following benefits in connection with the
Offering:
- The Bank has advised us that the Bank expects a portion of the Series B
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 B Preferred Shares as core capital will enable the Bank to retain a
higher base of interest-earning assets, resulting in incrementally higher
related earnings;
- The dividends paid on the Series B Preferred Shares will be deductible for
income tax purposes as a result of our qualification as a REIT, which
provides the Bank with a more cost-effective means of obtaining regulatory
capital than if the Bank were to directly issue preferred stock;
- The Bank will receive approximately $ million in connection with the
sale of the Proposed Portfolio to us (approximately $ million of
which represents new funds after giving effect to the Bank's capital
contributions);
- The Bank will continue to receive annual advisory and servicing fees and
annual dividends in respect of the Common Stock; and
- The Bank will also be entitled to retain any late payment charges, or
penalties and assumption fees and conversion fees collected in connection
with the mortgage loans serviced by it. In addition, the Bank will receive
all benefits derived from interest earned on collected principal and
interest payments between the date of collection and the date of
remittance to us and from interest earned on tax and insurance escrow
funds with respect to mortgage loans serviced by it.
HOW WE INTEND TO USE THE PROCEEDS
The gross proceeds to be received by us from the sale of the Series B
Preferred Shares are expected to be $ million, or $ million if the
Underwriters' over-allotment option is exercised in full. Simultaneously with
the consummation of this Offering, the Bank will make an initial capital
contribution to us equal to approximately $ million plus an additional
capital contribution equal to the underwriting commissions and expenses of the
Offering (currently estimated to be approximately $ million in the
aggregate). We will use the aggregate proceeds of $ million received in
connection with both the Offering and the capital contribution by the Bank to
purchase the Proposed Portfolio.
If the Underwriters exercise the over-allotment option in the Offering, the
Bank will make an additional capital contribution equal to the aggregate initial
price to public of such additional Series B Preferred Shares. We will use the
additional proceeds from any additional sales of Series B Preferred
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<PAGE>
Shares and capital contributions to purchase additional mortgage loans of the
types described in "Management's Discussion and Analysis of Financial Condition
and Results of Operations." We expect that we will purchase any additional
mortgage loans within six months from the exercise by the Underwriters of their
over-allotment option. During the time period prior to purchasing any additional
mortgage loans, we will invest the additional proceeds in mortgage-backed
securities or short-term money market investments.
The following table illustrates the source and use of proceeds received by
us from the sale of the Series B Preferred Shares (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 B Preferred Shares....................... $
Gross proceeds from the capital contribution 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 us equal to such excess.
USE OF FUNDS
(IN THOUSANDS)
<TABLE>
<S> <C>
Purchase of Mortgage Assets from the Bank..................................... $
-----------
Underwriting commissions and other expenses of the Offering................... $
-----------
-----------
</TABLE>
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1999 and as adjusted to reflect (i) the consummation of the Offering
(assuming the Underwriters' over-allotment option is not exercised) and (ii) the
use of the net proceeds as described under "How We Intend to Use the Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------
ACTUAL AS ADJUSTED
--------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
STOCKHOLDERS' EQUITY
Preferred Stock, par value, $0.01 per share; 4,000,000 shares
authorized; 1,426,000 Series A Preferred Shares issued and
outstanding, actual................................................. $ 14 $
Series B Preferred Shares issued and outstanding, as adjusted...
Common Stock, par value $0.01 per share; 4,000,000 shares authorized;
10,000 shares issued and outstanding, actual and as adjusted........
Additional paid-in capital............................................ 72,075
Retained earnings..................................................... 317
--------- -----
Total stockholders' equity.......................................... 72,406
--------- -----
TOTAL CAPITALIZATION.................................................... $ 72,406 $
--------- -----
--------- -----
</TABLE>
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the period from inception through
December 31, 1997 and the year ended December 31, 1998 is derived in part from
our audited financial statements. The financial data for the six months ended
June 30, 1999 and 1998 is derived from our unaudited financial statements. The
unaudited financial statements include all adjustments consisting of normal
recurring accruals, which our management considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the six months ended June 30, 1999 and are not
necessarily indicative of the results that may be expected for any other interim
period or the entire year ending December 31, 1999. The selected financial data
set forth below should be read in conjunction with, and is qualified in its
entirety by, our financial statements, including the related notes, included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 OR FOR THE
AT OR FOR THE AT OR FOR PERIOD
SIX MONTHS ENDED THE JUNE 19, 1997
JUNE 30, YEAR ENDED THROUGH
-------------------------- DECEMBER 31, DECEMBER 31,
1999 1998 1998 1997
------------ ------------ ------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF EARNINGS:
Total revenues...................................... $ 2,795 $ 2,934 $ 5,780 $ 1,476
Net earnings........................................ 2,555 2,679 5,250 1,367
BALANCE SHEET:
Mortgage Loans, net................................. 68,527 68,165 69,457 70,423
Total assets........................................ 72,437 73,030 72,405 72,597
Total stockholders' equity.......................... 72,406 73,030 72,363 72,137
OTHER DATA:
Number of Series A Preferred Shares outstanding..... 1,426,000 1,426,000 1,426,000 1,426,000
Dividends paid on Series A Preferred Shares......... $ 1,738 $ 1,738 $ 3,476 $ 859
Number of shares of Common Stock outstanding(1)..... 10,000 10,000 10,000 10,000
Dividends paid on Common Stock...................... 774 48 1,548 460
Delinquencies (2)................................... $ 1,371 $ 320 $ 374 $ 49
Ratio of earnings to fixed charges and preferred
stock dividend requirements(3).................... 1.44x 1.51x 1.48x 1.56x
</TABLE>
- ------------------------
(1) Because our Common Stock is wholly-owned by the Bank, earnings per share
data is not presented.
(2) Represents Mortgage Loans greater than 30 days delinquent as to principal
and interest.
(3) For purposes of computing this ratio, earnings represent income from
continuing operations plus fixed charges. Fixed charges represent advisory
fees paid.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
At each of June 30, 1999 and December 31, 1998, we had total assets of $72.4
million, compared to total assets of $72.6 million at December 31, 1997. As of
June 30, 1999, an aggregate of $68.8 million or 95.0% of our assets was
comprised of mortgage loans ("Mortgage Loans"), net of the allowance for loan
losses, all of which were acquired from the Bank. At the time of the closing of
the Series A Offering in October 1997, we acquired Residential Mortgage Loans
with an aggregate principal balance of $58.3 million and Commercial Mortgage
Loans with an aggregate principal balance of $13.0 million, net of allowance for
loan losses.
During the six months ended June 30, 1999 and the years ended December 31,
1998 and 1997, we purchased from the Bank additional Residential Mortgage Loans
with an aggregate principal balance of $10.4 million, $23.1 million and $74.0
million, respectively. As of June 30, 1999, our Current Portfolio of Mortgage
Loans (the "Current Portfolio") was comprised of $59.2 million of Residential
Mortgage Loans and $9.6 million of Commercial Mortgage Loans, or 86.0% and 14.0%
of our total portfolio of Mortgage Loans, respectively. The weighted average
yield of our Current Portfolio as of such date was 7.52%. In connection with the
Offering and the acquisition of the Proposed Portfolio, the amount of Commercial
Mortgage Loans expected to be included as a percentage of the entire portfolio
of Mortgage Loans is expected to increase. See "--Description of the Current
Portfolio and the Proposed Portfolio" and "--Pro Forma Presentation and Analysis
of the Current Portfolio and the Proposed Portfolio." At June 30, 1999, amounts
due from affiliates aggregated $620,000, accrued interest amounted to $373,000
and we maintained an allowance for loan losses of $253,000.
We maintain an allowance for loan losses to absorb potential loan losses
from the entire Mortgage Loan portfolio. We have not incurred any loan losses
since our inception. On an ongoing basis, management monitors the loan portfolio
and evaluates the adequacy of the allowance for loan losses. Based upon its
analysis, management believes that the allowance for loan losses as of June 30,
1999 is sufficient to absorb any unidentified losses that currently exist in the
Mortgage Loan portfolio. Management will continue to review the Mortgage Loan
portfolio to determine the extent to which any changes in loss experience may
require additional provisions in the future.
At June 30, 1999, our total liabilities amounted to $31,000, as compared to
$42,000 and $460,000 at December 31, 1998 and 1997, respectively. At June 30,
1999, stockholders' equity amounted to $72.4 million, after taking into
consideration earnings of $2.6 million and aggregate dividend payments on the
Common Stock and the Series A Preferred Shares of $2.5 million during the year.
At December 31, 1998 and 1997, stockholders' equity amounted to $72.4 million
and $72.1 million, respectively.
RESULTS OF OPERATIONS
We reported net earnings of $2.6 million for the six months ended June 30,
1999 compared to $2.7 million for the comparable period in 1998 and $5.3 million
for the year ended December 31, 1998 as compared to $1.4 million for the period
ended December 31, 1997. The decrease in earnings during the six month period
was due to a decrease in interest earned on Mortgage Loans, which offset
decreased expenses. The increase in net earnings during 1998 was primarily due
to the commencement of our business in October 1997. We paid $3.5 million and
$859,000 in dividends on our preferred stock in 1998 and 1997, respectively. We
also paid $2.0 million in dividends on our Common Stock in 1998.
Total revenues for the six months ended June 30, 1999 decreased from $2.9
million to $2.8 million over the comparable prior period, due to decreased
interest on Mortgage Loans and deposits. Total revenue for the year ended
December 31, 1998 amounted to $5.8 million compared to $1.5 million for
17
<PAGE>
the period ended December 31, 1997. The increase in total revenue during 1998
was primarily attributable to interest earned on our Current Portfolio of
Mortgage Loans. We also earned $283,000 and $16,000 of interest on deposit
accounts in 1998 and 1997, respectively.
Total expenses for the six months ended June 30, 1999 decreased to $240,000
from $255,000 during the six months ended June 30, 1999, primarily due to a
decrease in professional fees. Total expenses for the year ended December 31,
1998 amounted to $530,000 and amounted to $109,000 for the period ended December
31, 1997, of which $200,000 and $50,000 was paid to the Bank as a management fee
in accordance with the terms of an advisory agreement between us and the Bank
(the "Advisory Agreement"). Advisory fee payments were $100,000 during each of
the six month periods ended June 30, 1999 and 1998. The Bank received $14,000,
$15,000, $30,000 and $8,000 for servicing our Commercial Mortgage Loans and
$34,000, $1,700, $16,000 and nothing for servicing a portion of our Residential
Mortgage Loans during the six months ended June 30, 1999 and 1998, for the year
ended December 31, 1998 and for the period ended December 31, 1997,
respectively. TIMC, which services a portion of our Residential Mortgage Loans,
received $38,000, $69,000, $123,000 and $38,000 in servicing fees during the six
months ended June 30, 1999 and 1998, the year ended December 31, 1998 and the
period ended December 31, 1997, respectively.
DESCRIPTION OF THE CURRENT PORTFOLIO AND THE PROPOSED PORTFOLIO
GENERAL. Information is presented below both with respect to our Current
Portfolio, as well as with respect to the Proposed Portfolio. In both instances,
all of such Mortgage Loans were originated and/or purchased by the Bank. To the
extent the over-allotment option is exercised, we expect to purchase additional
Residential Mortgage Loans and/or Commercial Mortgage Loans from the Bank which
have approximately the same characteristics as those described below. Any such
additional Mortgage Loans may have different characteristics than the Mortgage
Loans that are intended to be included in the Proposed Portfolio, but we do not
expect that any such differences will be material.
The composition of the Proposed Portfolio actually purchased by us
contemporaneously with the consummation of the Offering will differ from the
Proposed Portfolio as described below only to the extent it is discovered prior
to the consummation of the Offering that a Mortgage Loan included in the
Proposed 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) on 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 that event, a Mortgage Loan similar in aggregate outstanding
principal balance and product type will be substituted for the non-purchased
Mortgage Loan. Mortgage Loans that are on "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 that are deemed
substandard, doubtful or loss with respect to collectibility.
Information with respect to the Mortgage Loans in both the Current Portfolio
and the Proposed Portfolio is presented as of June 30, 1999. References herein
to percentages of Mortgage Loans included in either the Current Portfolio or the
Proposed Portfolio refer in each case to the percentage of the aggregate
outstanding principal balance of the Mortgage Loans in such portfolio as of June
30, 1999, based on the outstanding principal balances of such Mortgage Loans as
of such date, after giving effect to expected scheduled monthly payments
received and applied on or prior to such date.
GENERAL CHARACTERISTICS OF THE CURRENT PORTFOLIO AND THE PROPOSED
PORTFOLIO. As of June 30, 1999, the Current Portfolio contained 265 Residential
Mortgage Loans, representing approximately 86.0% of the unpaid book balance of
the Mortgage Loans contained in our Current Portfolio, and 53 Commercial
Mortgage Loans, representing approximately 14.0% of the unpaid book balance of
the Mortgage Loans
18
<PAGE>
contained in our Current Portfolio. On June 30, 1999, the Mortgage Loans
included in our Current Portfolio had an aggregate outstanding book balance of
$68.8 million.
As of June 30, 1999, the Proposed Portfolio contained 77 Residential
Mortgage Loans, representing approximately 54.4% of the unpaid book balance of
the Mortgage Loans contained in the Proposed Portfolio, and 33 Commercial
Mortgage Loans, representing approximately 45.6% of the unpaid book balance of
the Mortgage Loans contained in the Proposed Portfolio. On June 30, 1999, the
Mortgage Loans expected to be included in the Proposed Portfolio had an
aggregate outstanding book balance of $80.0 million.
As described under "Pro forma Presentation and Analysis of the Current
Portfolio and the Proposed Portfolio," the composition of our mortgage loan
portfolio is expected to change with the proposed purchase of Mortgage Loans
which is contemplated in connection with the Offering. The portfolio of Mortgage
Loans expected to be acquired in connection with the Offering will contain a
greater proportion of Commercial Mortgage Loans (when compared with our Current
Portfolio), which will increase the overall percentage of Commercial Mortgage
Loans in our Current Portfolio and correspondingly increase the weighted average
portfolio yield. These loans are also expected to be less seasoned and to have
greater average outstanding balances than the loans presently held in our
Current Portfolio. The larger average outstanding loans expected to be included
in the Proposed Portfolio is consistent with the large loans the Bank has been
originating and purchasing since completion of PBOC's initial public offering in
May 1998.
Substantially all of the Residential Mortgage Loans included in our Current
Portfolio and expected to be included in the Proposed 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 our Current Portfolio and expected to be included in
the Proposed Portfolio were originated and/or purchased in a manner consistent
with the underwriting policies of the Bank at the time at which such mortgage
loans were originated and/or purchased.
All of the Residential Mortgage Loans included in our Current Portfolio were
originated and/or purchased between June 1973 and April 1999, and had original
terms to stated maturity of primarily 15, 20, 25 or 30 years. As of June 30,
1999, the average outstanding book balance of a Residential Mortgage Loan was
$223,000. The weighted average number of months since origination of the
Residential Mortgage Loans included in our Current Portfolio (calculated as of
June 30, 1999) was approximately 33 months and the weighted average expected
remaining maturity was 305 months. The weighted average Loan-to-Value Ratio
(defined below) of the Residential Mortgage Loans included in our Current
Portfolio was 67.6%; however, 6.9% 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 or (ii) if the Mortgage Loan was made to finance the
acquisition of property, the purchase price of the mortgaged property.
All of the Residential Mortgage Loans expected to be included in the
Proposed Portfolio were originated and/or purchased between November 1989 and
June 1999, and had original terms to stated maturity of 30 years. As of June 30,
1999, the average outstanding book balance of a Residential Mortgage Loan was
$566,000. The weighted average number of months since origination of the
Residential Mortgage Loans expected to be included in the Proposed Portfolio
(calculated as of June 30, 1999) was approximately 19 months and the weighted
average remaining maturity was 336 months. The weighted average Loan-to-Value
Ratio of the Residential Mortgage Loans expected to be included in the Proposed
Portfolio is 68.8% and none of the Residential Mortgage Loans have Loan-to-Value
Ratios of greater than 80%.
The mortgage notes with respect to most of the Mortgage Loans included in
our Current Portfolio and those expected to be included in the Proposed
Portfolio contain "due-on-sale" provisions which
19
<PAGE>
prevent the assumption of the Mortgage Loan by a proposed transferee and
accelerate the payment of the outstanding principal balance of the Mortgage
Loan. With respect to a limited number of Mortgage Loans included in our Current
Portfolio and expected to be included in the Proposed Portfolio, the mortgage
notes permit assumption of the Residential Mortgage Loan provided that the
proposed transferee satisfies certain criteria with respect to his ability to
repay the Mortgage Loan.
Each Commercial Mortgage Loan included in our Current 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
our Current Portfolio were originated and/or purchased between March 1974 and
June 1997 and had original terms to stated maturity of between 10 and 30 years.
As of June 30, 1999, the average outstanding book balance of a Commercial
Mortgage Loan was $181,000. The weighted average number of months since
origination of the Commercial Mortgage Loans included in our Current Portfolio
(calculated as of June 30, 1999) was approximately 118 months. As of June 30,
1999, the weighted average Initial Loan-to-Value Ratio of the Commercial
Mortgage Loans included in our Current Portfolio was 68.4%. In addition, as of
June 30, 1999, no Commercial Mortgage Loan included in our Current Portfolio had
a Loan-to-Value Ratio greater than 80%.
Each Commercial Mortgage Loan expected to be included in the Proposed
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 expected to be included in the Proposed Portfolio were originated and/or
purchased between August 1997 and March 1999, and had original terms to stated
maturity of between 10 and 15 years. As of June 30, 1999, the average
outstanding book balance of the Commercial Mortgage Loans expected to be
included in the Proposed Portfolio was $1,105,000. The weighted average number
of months since origination of the Commercial Mortgage Loans expected to be
included in the Proposed Portfolio (calculated as of June 30, 1999) was
approximately 9 months. As of June 30, 1999, the weighted average Initial
Loan-to-Value Ratio of the Commercial Mortgage Loans expected to be included in
the Proposed Portfolio was 62.9%. In addition, as of June 30, 1999, no
Commercial Mortgage Loans expected to be included in the Proposed Portfolio had
a Loan-to-Value Ratio greater than 80%. See "--Pro Forma Presentation and
Analysis of the Current Portfolio and the Proposed Portfolio" for information on
the effect on the Current Portfolio of the increased proportion of Commercial
Mortgage Loans expected to be purchased by us in connection with the Offering.
RESIDENTIAL MORTGAGE LOANS. The following tables set forth as of June 30,
1999 certain information with respect to each type of Residential Mortgage Loan
included in our Current Portfolio and in the Proposed Portfolio:
CURRENT PORTFOLIO--TYPE OF RESIDENTIAL MORTGAGE LOAN PRODUCT
<TABLE>
<CAPTION>
PERCENTAGE OF
RESIDENTIAL
MORTGAGE LOANS BY WEIGHTED AVERAGE WEIGHTED AVERAGE
AGGREGATE BOOK AGGREGATE BOOK INITIAL LOAN TO EXPECTED REMAINING
TYPE BALANCE BALANCE VALUE RATIO MATURITY (MONTHS)
- ------------------------- ------------------- ------------------- ----------------- -------------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C>
7/23 Step Rate........... $ 1,146 1.9% 83.3% 279
15-Year Fixed-Rate....... 3,875 6.5 62.0 114
30-Year Fixed-Rate....... 54,142 91.6 67.8 320
------- ---
Total.................. $ 59,163 100% 67.6% 305
------- --- --- ---
------- --- --- ---
</TABLE>
20
<PAGE>
PROPOSED PORTFOLIO--TYPE OF RESIDENTIAL MORTGAGE LOAN PRODUCT
<TABLE>
<CAPTION>
PERCENTAGE OF
RESIDENTIAL WEIGHTED
MORTGAGE LOANS BY AVERAGE WEIGHTED AVERAGE
AGGREGATE BOOK AGGREGATE BOOK INITIAL LOAN TO EXPECTED REMAINING
TYPE BALANCE BALANCE VALUE RATIO MATURITY (MONTHS)
- ------------------------- ------------------- ----------------- --------------- -------------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C>
30-Year Fixed-Rate....... $ 43,565 100% 68.8% 336
------- -----
Total.................. $ 43,565 100% 68.8% 336
------- ----- ------ ---
------- ----- ------ ---
</TABLE>
The Residential Mortgage Loans included in our Current Portfolio and
expected to be included in the Proposed Portfolio either bear interest at fixed
rates or are "7/23 step rate" loans. The "7/23 step rate" loan has a fixed
initial interest rate for the first seven years (i.e., 84 monthly payments) and
adjusts once thereafter to a rate which applies for the remaining 23 years
(i.e., 276 monthly payments) equal to 150 basis points above the Federal
National Mortgage Association ("FNMA") 30-year commitment rate for delivery as
of a date specified in the related mortgage note. The interest rates of the
fixed-rate Residential Mortgage Loans included in our Current Portfolio range
from 6.0% per annum to 13.5% per annum. At June 30, 1999, the weighted average
net interest rate of the Residential Mortgage Loans included in our Current
Portfolio was approximately 7.24% per annum. The interest rates of the
fixed-rate Residential Mortgage Loans expected to be included in the Proposed
Portfolio range from 6.75% per annum to 10.63% per annum. The weighted average
net interest rate of the fixed-rate Residential Mortgage Loans expected to be
included in the Proposed Portfolio is approximately 7.19% per annum.
21
<PAGE>
The following tables contain certain additional data with respect to the
interest rates of the Residential Mortgage Loans included in our Current
Portfolio and expected to be included in the Proposed Portfolio at June 30,
1999:
CURRENT PORTFOLIO--INTEREST RATE OF RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF OUR
NUMBER OF AGGREGATE PORTFOLIO
MORTGAGE BOOK BY AGGREGATE BOOK
CURRENT INTEREST RATE LOANS BALANCE BALANCE
- ------------------------------------------------------ ------------- ------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Up to 7.499%.......................................... 76 $ 33,813 57.1%
7.500%--7.749%........................................ 54 10,117 17.1
7.750--7.999.......................................... 48 6,829 11.5
8.000--8.249.......................................... 11 1,340 2.3
8.250--8.499.......................................... 6 752 1.3
8.500--8.749.......................................... 12 1,313 2.2
8.750--8.999.......................................... 11 1,575 2.7
9.000--9.249.......................................... 7 268 0.5
9.250--9.499.......................................... 4 132 0.2
9.500--9.749.......................................... 3 243 0.4
9.750--9.999.......................................... 6 375 0.6
10.000--10.249........................................ 7 738 1.2
10.250--10.499........................................ 5 340 0.6
10.500--10.749........................................ 6 906 1.5
10.750--10.999........................................ 1 33 0.1
11.000--11.249........................................ 1 30 0.1
12.000--12.249........................................ 1 50 0.1
12.250--12.499........................................ 1 128 0.2
12.500--12.749........................................ 2 106 0.2
12.750--12.999........................................ 2 53 0.1
13.500--13.749........................................ 1 22 0.0
--- ------------- ---
Total............................................... 265 $ 59,163 100%
--- ------------- ---
--- ------------- ---
</TABLE>
PROPOSED PORTFOLIO--INTEREST RATE OF RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
PROPOSED
AGGREGATE PORTFOLIO BY
NUMBER OF MORTGAGE BOOK AGGREGATE
CURRENT INTEREST RATE LOANS BALANCE BOOK BALANCE
- ------------------------------------------ --------------------- ------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Up to 7.500%.............................. 46 $ 25,759 59.1%
7.500%--7.749%............................ 22 13,626 31.3
7.750--7.999.............................. 3 3,158 7.3
8.000--8.249.............................. 1 170 0.4
8.250--8.499.............................. 1 147 0.3
8.500--8.749.............................. 1 110 0.3
8.750--8.999.............................. 1 105 0.2
9.500--9.749.............................. 1 263 0.6
10.500--10.749............................ 1 227 0.5
--
------------- ---
Total................................... 77 $ 43,565 100%
--
--
------------- ---
------------- ---
</TABLE>
Substantially all of the Mortgage Loans included in our Current Portfolio
and expected to be included in the Proposed 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.
22
<PAGE>
COMMERCIAL MORTGAGE LOANS. The Commercial Mortgage Loans included in our
Current Portfolio and expected to be included in the Proposed Portfolio consist
of loans secured by commercial properties located in California. The borrowers
of the Commercial Mortgage Loans included in our Current Portfolio and expected
to be included in the Proposed 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. The outstanding book
balances of the Commercial Mortgage Loans included in our Current Portfolio
ranged from $2,000 to $2.1 million as of June 30, 1999. The outstanding book
balances of the Commercial Mortgage Loans expected to be included in the
Proposed Portfolio ranged from $683,000 to $1.8 million as of June 30, 1999.
The following tables set forth as of June 30, 1999 certain information with
respect to each type of multi-family residential and commercial property
underlying each Commercial Mortgage Loan included in our Current Portfolio and
expected to be included in the Proposed Portfolio:
CURRENT PORTFOLIO--TYPE OF COMMERCIAL MORTGAGE LOAN
<TABLE>
<CAPTION>
PERCENTAGE OF WEIGHTED WEIGHTED
COMMERCIAL AVERAGE AVERAGE
MORTGAGE LOANS WEIGHTED AVERAGE CURRENT LOAN MONTHS
AGGREGATE BOOK BY AGGREGATE INITIAL LOAN TO TO VALUE REMAINING TO
TYPE BALANCE BOOK BALANCE VALUE RATIO(1) RATIO(2) MATURITY
- ------------------------- ------------------- --------------- ----------------- --------------- ---------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial mortgage
fixed-rate balloon..... $ 4,077 42.4% 68.3% 66.0% 90
Commercial mortgage
fixed-rate............. 1,369 14.2 74.4 47.2 113
Multi-family fixed-rate
balloon................ 1,879 19.6 47.5 45.5 93
Multi-family
fixed-rate............. 2,292 23.8 74.4 39.9 90
------ ---
Total.................. $ 9,617 100% 68.4% 53.1% 94
------ --- --- --- ---
------ --- --- --- ---
</TABLE>
PROPOSED PORTFOLIO--TYPE OF COMMERCIAL MORTGAGE LOAN
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMERCIAL WEIGHTED WEIGHTED WEIGHTED
MORTGAGE LOANS AVERAGE INITIAL AVERAGE CURRENT AVERAGE MONTHS
AGGREGATE BOOK BY AGGREGATE LOAN TO VALUE LOAN TO VALUE REMAINING TO
TYPE BALANCE BOOK BALANCE RATIO(1) RATIO(2) MATURITY
- ----------------------------- --------------------- ----------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN
THOUSANDS)
Commercial mortgage
fixed-rate balloon......... $ 32,957 90.4% 62.9% 62.2% 110
Commercial mortgage
fixed-rate................. 1,786 4.9 54.8 53.7 174
Multi-family fixed-rate
balloon.................... 1,723 4.7 71.7 71.1 109
------- ---
Total...................... $ 36,466 100% 62.9% 62.2% 113
------- --- --- --- ---
------- --- --- --- ---
</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.
23
<PAGE>
(2) Represents the ratio of the outstanding principal amount of the Commercial
Mortgage Loan at June 30, 1999 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 our Current Portfolio at June
30, 1999, approximately 61.9% are not fully amortizing and will have significant
principal balances or "balloon" payments due upon maturity. Of the Commercial
Mortgage Loans expected to be included in the Proposed Portfolio, approximately
95.1% are not fully amortizing and will have significant principal balances or
"balloon" payments due upon maturity.
All of the Commercial Mortgage Loans included in our Current Portfolio and
expected to be included in the Proposed Portfolio at June 30, 1999 bear interest
at fixed rates. The interest rates of the fixed-rate Commercial Mortgage Loans
included in our Current Portfolio range from 8.5% per annum to 11.0% per annum.
The weighted average net interest rate of the Commercial Mortgage Loans in our
Current Portfolio at June 30, 1999 was approximately 9.24% per annum. The
interest rates of the fixed-rate Commercial Mortgage Loans expected to be
included in the Proposed Portfolio range from 8.25% per annum to 9.875% per
annum. The weighted average net interest rate of the Commercial Mortgage Loans
in our Proposed Portfolio at June 30, 1999 was approximately 8.26%.
The following tables contain certain additional data as of June 30, 1999
with respect to the interest rates of the Commercial Mortgage Loans included in
our Current Portfolio and expected to be included in the Proposed Portfolio:
CURRENT PORTFOLIO--INTEREST RATE OF COMMERCIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF OUR
CURRENT PORTFOLIO
AGGREGATE BY
NUMBER OF BOOK AGGREGATE
INTEREST RATE MORTGAGE LOANS BALANCE BOOK BALANCE
- --------------------------------------------------------- ----------------- ----------- -----------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
8.500%--8.749%........................................... 1 $ 490 5.1%
9.000--9.249............................................. 3 1,736 18.1
9.250--9.499............................................. 14 1,617 16.8
9.500--9.749............................................. 18 2,943 30.6
9.750--9.999............................................. 6 890 9.2
10.000--10.249........................................... 6 1,491 15.5
10.250--10.499........................................... 1 108 1.1
10.500--10.749........................................... 2 189 2.0
10.750--10.999........................................... -- -- --
11.000--11.249........................................... 2 153 1.6
--
----------- ---
Total.................................................. 53 $ 9,617 100%
--
--
----------- ---
----------- ---
</TABLE>
24
<PAGE>
PROPOSED PORTFOLIO--INTEREST RATE OF COMMERCIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
PROPOSED
PORTFOLIO BY
NUMBER OF AGGREGATE BOOK AGGREGATE
INTEREST RATE MORTGAGE LOANS BALANCE BOOK BALANCE
- -------------------------------------------- ----------------- ------------------- ---------------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
8.250%--8.499%.............................. 13 $ 13,472 36.9%
8.500--8.749................................ 12 14,684 40.3
8.750--8.999................................ 1 1,457 4.0
9.250--9.499................................ 3 3,118 8.6
9.500--9.749................................ 3 2,948 8.1
9.750--9.999................................ 1 787 2.1
--
------- ---
Total..................................... 33 $ 36,466 100%
--
--
------- ---
------- ---
</TABLE>
ASSET QUALITY. At June 30, 1999, there were six Residential Mortgage Loans
30 to 59 days past due as to principal and interest aggregating $1.4 million, or
2.3% of the Residential Mortgage Loan portfolio. No Commercial Mortgage Loans
were past due as of such date.
25
<PAGE>
PRO FORMA PRESENTATION AND ANALYSIS OF THE CURRENT PORTFOLIO AND THE
PROPOSED PORTFOLIO. The following table sets forth selected information with
respect to our Current Portfolio and Proposed Portfolio as of June 30, 1999. The
percentages of Mortgage Loans included in either the Current Portfolio or the
Proposed Portfolio refer in each case to the percentage of the aggregate
outstanding principal balance of such Mortgage Loans as of such date, after
giving effect to expected scheduled monthly payments received and applied on or
prior to such date.
<TABLE>
<CAPTION>
PRINCIPAL AND INTEREST
LOAN BALANCE
CURRENT PORTFOLIO (JUNE 30, 1999) PAYMENT
- ------------------------------------------------- NUMBER ---------------------- ------------------------
LOAN TYPE OF LOANS PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------- ------------- ----------- --------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial mortgage fixed-rate................... 7 1.6% $ 1,369 0.9% $ 21 1.8%
Commercial mortgage fixed-rate balloon........... 6 1.4 4,077 2.7 37 3.1
Multi-family fixed-rate.......................... 37 8.6 2,292 1.5 38 3.2
Multi-family fixed-rate balloon.................. 3 0.7 1,879 1.3 16 1.3
--- --- --------- --- ----------- ---
Commercial Subtotal............................ 53 12.3 9,617 6.4 112 9.4
--- --- --------- --- ----------- ---
Residential 7/23 step rate....................... 5 1.2 1,146 0.8 9 0.8
Residential 15-year fixed-rate................... 36 8.4 3,875 2.6 54 4.5
Residential 30-year fixed-rate................... 224 52.3 54,142 36.4 402 33.6
--- --- --------- --- ----------- ---
Residential Subtotal........................... 265 61.9 59,163 39.8 465 38.9
--- --- --------- --- ----------- ---
Residential and Commercial Subtotal............ 318 74.2 68,780 46.2 577 48.3
--- --- --------- --- ----------- ---
PROPOSED PORTFOLIO
LOAN TYPE
Commercial mortgage fixed-rate................... 2 0.5 1,786 1.2 18 1.5
Commercial mortgage fixed-rate balloon........... 29 6.8 32,957 22.1 278 23.3
Multi-family fixed-rate balloon.................. 2 0.5 1,723 1.2 13 1.1
--- --- --------- --- ----------- ---
Commercial Subtotal............................ 33 7.8 36,466 24.5 309 25.9
--- --- --------- --- ----------- ---
Residential 30-year fixed-rate................... 77 18.0 43,565 29.3 309 25.8
--- --- --------- --- ----------- ---
Residential and Commercial Subtotal.............. 110 25.8 80,031 53.8 618 51.7
--- --- --------- --- ----------- ---
Total of Current and Proposed Portfolios......... 428 100% $ 148,811 100% $ 1,195 100%
--- --- --------- --- ----------- ---
--- --- --------- --- ----------- ---
<CAPTION>
ORIGINAL
WEIGHTED LOAN
CURRENT PORTFOLIO LOAN-TO-VALUE BALANCE
- ------------------------------------------------- ------------------------ ---------
LOAN TYPE WAIR(1) WAM(2) SEAS(3) ORIGINAL CURRENT AMOUNT
- ------------------------------------------------- ----------- ------------- ------------- ----------- ----------- ---------
<S> <C>
Commercial mortgage fixed-rate................... 9.736% 113 262 74.4% 47.2% $ 2,440
Commercial mortgage fixed-rate balloon........... 9.188 90 30 68.3 66.0 4,220
Multi-family fixed-rate.......................... 9.454 90 261 74.4 39.9 4,476
Multi-family fixed-rate balloon.................. 8.723 93 32 47.5 45.5 1,948
---------
Commercial Subtotal............................ 9.239 94 118 68.4 53.1 13,084
---------
Residential 7/23 step rate....................... 7.406 279 81 83.3 76.9 1,243
Residential 15-year fixed-rate................... 7.781 114 56 62.0 45.2 5,589
Residential 30-year fixed-rate................... 7.201 320 31 67.8 64.7 56,962
---------
Residential Subtotal........................... 7.243 305 33 67.6 63.7 63,794
---------
Residential and Commercial Subtotal............ 7.522 276 45 67.7 62.2 76,878
---------
PROPOSED PORTFOLIO
LOAN TYPE
Commercial mortgage fixed-rate................... 8.135 174 6 54.8 53.7 1,820
Commercial mortgage fixed-rate balloon........... 8.384 110 10 62.9 62.2 33,359
Multi-family fixed-rate balloon.................. 8.115 109 11 71.7 71.1 1,737
---------
Commercial Subtotal............................ 8.359 113 9 62.9 62.2 36,916
---------
Residential 30-year fixed-rate................... 7.187 336 19 68.8 67.4 44,418
---------
Residential and Commercial Subtotal.............. 7.721 235 14 66.1 65.1 81,334
---------
Total of Current and Proposed Portfolios......... 7.629% 254 29 66.9% 63.7% $ 158,212
---------
---------
<CAPTION>
CURRENT PORTFOLIO
- -------------------------------------------------
LOAN TYPE PERCENT
- ------------------------------------------------- -----------
Commercial mortgage fixed-rate................... 1.6%
Commercial mortgage fixed-rate balloon........... 2.7
Multi-family fixed-rate.......................... 2.8
Multi-family fixed-rate balloon.................. 1.2
---
Commercial Subtotal............................ 8.3
---
Residential 7/23 step rate....................... 0.8
Residential 15-year fixed-rate................... 3.5
Residential 30-year fixed-rate................... 36.0
---
Residential Subtotal........................... 40.3
---
Residential and Commercial Subtotal............ 48.6
---
PROPOSED PORTFOLIO
LOAN TYPE
Commercial mortgage fixed-rate................... 1.1
Commercial mortgage fixed-rate balloon........... 21.1
Multi-family fixed-rate balloon.................. 1.1
---
Commercial Subtotal............................ 23.3
---
Residential 30-year fixed-rate................... 28.1
---
Residential and Commercial Subtotal.............. 51.4
---
Total of Current and Proposed Portfolios......... 100%
---
---
</TABLE>
- ------------------------------
(1) Weighted average interest rate
(2) Weighted average maturity (in months)
(3) Seasoning of Mortgage Loans (in months)
26
<PAGE>
The composition of our mortgage loan portfolio is expected to change with
the proposed purchase of mortgage loans which is contemplated in connection with
the Offering. The portfolio of mortgage loans expected to be acquired in
connection with the Offering will contain a greater proportion of commercial
real estate loans (when compared with our Current Portfolio), which will
increase the overall percentage of commercial real estate loans in our loan
portfolio and correspondingly increase the weighted average portfolio yield.
These loans are also expected to be less seasoned and to have greater average
outstanding balances than the loans presently held in our Current Portfolio. The
larger average outstanding loans expected to be included in the Proposed
Portfolio are consistent with the larger balance loans the Bank has been
originating and purchasing since completion of PBOC's initial public offering in
May 1998.
GEOGRAPHIC DISTRIBUTION. As of June 30, 1999, all of the residential real
estate properties underlying our Residential Mortgage Loans included in our
Current Portfolio were located in California and we currently anticipate that
all of the residential real estate properties underlying the Residential
Mortgage Loans expected to be included in the Proposed Portfolio will be located
in California. Of the Residential Mortgage Loans included in our Current
Portfolio, as of June 30, 1999, approximately 4.0% are secured by real estate
located in Northern California and 96.0% are secured by real estate located in
Southern California. Of the Residential Mortgage Loans expected to be included
in the Proposed Portfolio, approximately 1.5% are secured by real estate located
in Northern California and 98.5% are secured by real estate located in Southern
California. Because of our concentration of Mortgage Loans in California, our
Residential Mortgage Loans may be subject to a greater risk of default than
other comparable Residential Mortgage Loans in the event of adverse economic,
political or business developments and natural hazards (earthquakes, wild fires
and mud slides, for example) in California that may affect the ability of
residential property owners in California to make payments of principal and
interest on the underlying mortgages. Standard hazard insurance required to be
maintained with respect to Residential Mortgage Loans held by us may not protect
us against losses occurring from earthquakes and other natural disasters. In the
event of a natural disaster, our ability to pay dividends on the Series A or
Series B Preferred Shares could be adversely affected as it is our current
intention to not maintain special hazard insurance to protect against such
losses.
As of June 30, 1999, all of the commercial mortgage properties underlying
our Commercial Mortgage Loans included in our Current Portfolio were located in
California and all of the commercial mortgage properties underlying the
Commercial Mortgage Loans expected to be included in the Proposed Portfolio will
be located in California. Of the Commercial Mortgage Loans included in our
Current Portfolio at June 30, 1999, approximately 1.3 were secured by real
estate located in Northern California and 98.7% were secured by real estate
located in Southern California. Of the Commercial Mortgage Loans expected to be
included in the Proposed Portfolio, approximately 2.5% are secured by real
estate located in Northern California and 97.5% are secured by real estate
located in Southern California. Because of our concentration of Mortgage Loans
in California, our 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 $3.8 million of the
Residential Mortgage Loans included in our Current Portfolio as of June 30, 1999
had Loan-to-Value Ratios of greater than 80% at the time of origination. Of such
Residential Mortgage Loans, at June 30, 1999, approximately $3.0 million were
insured under private mortgage insurance policies. The remaining $769,000 of
such Residential Mortgage Loans did not require private 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 our
27
<PAGE>
Current 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 60.1% and have a weighted average
seasoning since origination (calculated as of June 30, 1999) of 197 months. As
of June 30, 1999, not more than approximately 22.6% of the Residential Mortgage
Loans that require private mortgage insurance are insured by any one private
mortgage insurance policy issuer.
All of the Residential Mortgage Loans expected to be included in the
Proposed Portfolio had Loan-to-Value Ratios of less than or equal to 80% at the
time of origination.
At the time of origination of all Residential Mortgage Loans, each of the
private mortgage insurance policy insurers was approved by FNMA or the Federal
Home Loan Mortgage Corporation ("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 also may be covered by a flood insurance
policy as required by law. No mortgagor bankruptcy insurance will be maintained
by us with respect to the Residential Mortgage Loans in our Current Portfolio,
nor will any Residential Mortgage Loan be insured by the Federal Housing
Administration or guaranteed by the Veterans Administration. We will not
maintain any special hazard insurance policy with respect to any Residential
Mortgage Loan that could mitigate damages caused by any natural disaster.
A standard hazard insurance policy also is required to be maintained by the
mortgagor with respect to each of the Commercial Mortgage Loans included in our
Current Portfolio and expected to be included in the Proposed Portfolio. If the
commercial real estate property securing a Commercial Mortgage Loan is located
in a flood zone, such Commercial Mortgage Loan may be covered by a flood
insurance policy as required by law. However, as with the Residential Mortgage
Loans, no special hazard insurance or mortgagor bankruptcy insurance is or will
be maintained by us with respect to the Commercial Mortgage Loans in the Current
Portfolio or the Proposed Portfolio.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of our financial commitments and to capitalize
on opportunities for our business expansion. In managing our liquidity, we take
into account various legal limitations placed on a REIT.
Our principal liquidity needs are to pay operating expenses and dividends
and acquire additional Mortgage Loans as Mortgage Loans currently in our Current
Portfolio mature or prepay. Operating expenses and dividends are expected to be
funded through cash generated by our operations, while the acquisition of
additional Mortgage Loans is intended to be funded with the proceeds obtained
from repayment of principal balances by individual mortgagees. We do not have
and do not anticipate having any material capital expenditures.
To the extent that our board of directors ("Board of Directors") determines
that additional funding is required, we may raise such funds through additional
equity offerings, debt financings 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 income), or a combination of these
methods.
We had no debt outstanding at June 30, 1999, and we do not currently intend
to incur any indebtedness. However, our Articles of Incorporation do not contain
any limitation on the amount or percentage of debt, funded or otherwise, we
might incur, except that the incurrence by us of debt for borrowed money in
excess of 20% of our total stockholders' equity will require the approval of a
majority of our independent directors ("Independent Directors"). Any such debt
incurred may include intercompany advances made by the Bank to us.
We also may issue additional series of preferred stock ("Preferred Stock").
However, we may not issue additional shares of Preferred Stock senior to the
Series A or Series B Preferred Shares without first obtaining the consent of
holders of at least two-thirds of the outstanding shares of both Series A and
Series B Preferred Shares, and we may not issue additional shares of Preferred
Stock on a parity with the Series A or Series B Preferred Shares without first
obtaining the approval of a majority of our Independent Directors. We do not
currently intend to issue any additional series of Preferred Stock unless we
simultaneously receive additional capital contributions from the Bank equal to
the aggregate offering price of such additional Preferred Stock plus our
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, we 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.
INTEREST RATE RISK
Our interest rate risk is primarily related to loan prepayments and payoffs.
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 us 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 the
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).
29
<PAGE>
The following table summarizes the anticipated maturities or repricing of our
interest-earning assets as of June 30, 1999, based on the information and
assumptions set forth in the note below.
<TABLE>
<CAPTION>
MORE THAN
WITHIN THREE TO MORE THAN THREE YEARS NET
THREE TWELVE ONE YEAR TO TO FIVE OVER FIVE PORTFOLIO
MONTHS MONTHS THREE YEARS YEARS YEARS TOTAL VALUE
--------- ----------- ----------- ----------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Loans receivable
Single-family residential loans:
Fixed-rate/step rate................ $ 1,341 $ 6,319 $ 12,685 $ 9,811 $ 29,147 $ 59,303 $ 57,790
Multi-family residential:
Fixed-rate balloon.................. 23 110 243 238 1,265 1,879 1,904
Fixed-rate.......................... 63 308 682 572 667 2,292 2,330
Commercial real estate:
Fixed-rate balloon.................. 50 247 549 493 2,738 4,077 4,073
Fixed-rate.......................... 33 165 320 273 578 1,369 1,369
Other interest-earning assets......... 2,892 -- -- -- -- 2,892 2,892
--------- ----------- ----------- ----------- ----------- --------- ---------
Total................................. $ 4,402 $ 7,149 $ 14,479 $ 11,387 $ 34,395 $ 71,812 $ 70,358
--------- ----------- ----------- ----------- ----------- --------- ---------
--------- ----------- ----------- ----------- ----------- --------- ---------
</TABLE>
- ------------------------
(1) All Mortgage Loans are fixed-rate loans and have been included in the
periods in which they are scheduled to be repaid, based on scheduled
amortization, as adjusted to take into account estimated prepayments based
on assumptions used by the Office of Thrift Supervision ("OTS") in assessing
interest rate sensitivity.
YEAR 2000
During 1997, we finalized our plan to address issues related to the year
2000 ("Y2K") problem. The Y2K issue is primarily a result of computer software
recognizing a two-digit date field rather than the full four digits, which
identify the appropriate year. Date-sensitive computer programs, hardware or
equipment controlled by microprocessor chips may not appropriately deal with the
year "00".
Our loan portfolio is currently serviced by the Bank and the Servicing
Agent. The Bank utilizes Fiserv CBS, a third party vendor, to process
substantially all of its data processing functions. The Bank has contacted its
critical vendors, including the Servicing Agent, and has received confirmation
that they will be Year 2000 compliant. The Bank is working with Fiserv CBS and
other critical vendors to ensure that their operational and financial systems
will not be adversely effected by the Y2K problem.
The Bank has completed the validation or testing phase of the Year 2000
compliance plan. The Bank developed a test plan that contained test requirements
and criteria, manpower assignments and target dates. A dedicated local area
network specifically for Y2K testing was established to communicate with the
Fiserv CBS test system. Detailed test scripts designed to test date-related
functions were processed on the system for the FFIEC's recommended critical test
dates. The results were reviewed to ensure the system is functioning properly.
We have successfully tested dates up through and including December 31, 2001.
TIMC is also testing its system currently and has indicated that it will be Y2K
compliant.
We have developed a contingency plan in the unlikely event that we or our
servicers and/or business partners are not ready for Year 2000. The contingency
plan will address any required service provider changes or need to outsource to
Y2K compliant entities. The plan will be tested during the upcoming months to
ensure an ordinary continuation of key operations in the event a problem occurs.
We have not incurred any significant expenses to date and do not expect to
incur any in connection with the Y2K problem.
Our plans to complete Y2K compliance are based on management's and our Board
of Directors' best estimates. There can be no guarantee that these estimates
will be achieved, and the final results could be significantly different due to
unforeseen circumstances.
30
<PAGE>
BUSINESS AND STRATEGY
GENERAL
Our principal business objective is to acquire, hold and manage Mortgage
Assets and Other Authorized Investments that will generate net income for
distribution to our stockholders. At June 30, 1999, we had total assets of $72.4
million, total liabilities of $31,000 and stockholders' equity of $72.4 million.
As of such date, $68.8 million or 95.0% of our assets were comprised of Mortgage
Loans. An aggregate of $59.2 million or 86.0% of our Mortgage Loans at June 30,
1999 were secured by single-family (one-to-four-unit) residential properties
with a weighted average yield of 7.24% and $9.6 million or 14.0% of our Mortgage
Loans were secured by multi-family residential and commercial properties with a
weighted average yield of 9.24%. The overall yield on our Current Portfolio as
of June 30, 1999 was 7.52%. As described under "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Pro Forma Presentation
and Analysis of the Current Portfolio and the Proposed Portfolio," certain
characteristics of our Current Portfolio are expected to change with the
proposed purchase of Mortgage Loans which is contemplated in connection with the
Offering. The Proposed Portfolio expected to be acquired in connection with the
Offering will contain a greater proportion of Commercial Mortgage Loans (when
compared with our existing Portfolio), which will increase the overall
percentage of Commercial Mortgage Loans in our Current Portfolio and
correspondingly increase the weighted average portfolio yield. Such loans are
also expected to be less seasoned and to have greater average outstanding
balances than the Commercial Mortgage Loans presently held in our Current
Portfolio. The larger average outstanding loans expected to be included in the
Proposed Portfolio are consistent with the larger balance loans the Bank has
been originating and purchasing since completion of PBOC's initial public
offering in May 1998.
Although we have the authority to acquire an unlimited number of Mortgage
Assets from unaffiliated third parties, all of our Mortgage Assets acquired
through June 30, 1999 have been acquired from the Bank (although a portion of
our mortgage assets were acquired by the Bank from unaffiliated third parties)
and all of the Mortgage Loans which we intend to purchase in connection with the
Offering will be from the Bank. We have no present plans or expectations with
respect to purchases of Mortgage Assets from unaffiliated third parties. We may
also acquire from time to time mortgage-backed securities and a limited amount
of non-mortgage related securities.
Our board of directors is composed of six members, two of whom are
independent directors. In addition, we currently have four officers. We have no
other employees and do not anticipate that we will require additional employees.
GENERAL DESCRIPTION OF MORTGAGE ASSETS AND OTHER AUTHORIZED INVESTMENTS;
INVESTMENT POLICY
RESIDENTIAL MORTGAGE LOANS. We acquire both conforming and nonconforming
Residential Mortgage Loans. Conforming Residential Mortgage Loans comply with
the requirements for inclusion in a loan guarantee or purchase program sponsored
by either the FHLMC or FNMA. Under current regulations, the maximum principal
balance allowed on conforming Residential Mortgage Loans ranges from $240,000
for one-unit residential loans to $461,350 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. A majority of the nonconforming Residential Mortgage Loans
acquired by us to date are nonconforming because they have original principal
balances which exceed the requirements for FHLMC or FNMA programs or generally
because they vary in certain other respects from the requirements of such
programs other than the requirements relating to creditworthiness of the
mortgagors. A substantial portion of our 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.
31
<PAGE>
Each Residential Mortgage Loan is 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.
COMMERCIAL MORTGAGE LOANS. We acquire Commercial Mortgage Loans secured by
multi-family properties of five units or more, industrial, warehouse and
self-storage properties, office buildings, office and industrial condominiums,
retail space and strip shopping centers, mixed use commercial properties, mobile
home parks, nursing homes, hotels and motels ("Commercial Properties"). Unlike
Residential Mortgage Loans, Commercial Mortgage Loans generally lack
standardized terms. Commercial Mortgage Loans also may 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, generally are subject to relatively greater environmental
risks than non-commercial properties, giving rise to increased costs of
compliance with environmental laws and regulations. There is no requirement
regarding the percentage of any commercial real estate property that must be
leased at the time we acquire a Commercial Mortgage Loan secured by such
commercial real estate property nor are Commercial Mortgage Loans required to
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 generally are subject to a number of complicating
factors, including environmental considerations, which are not generally present
in foreclosures of Residential Mortgage Loans.
MORTGAGE-BACKED SECURITIES. We may from time to time acquire
mortgage-backed securities representing interests in or obligations backed by
pools of Mortgage Loans ("Mortgage-Backed Securities"). We intend 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. We do not intend to acquire any
interest-only or principal-only Mortgage-Backed Securities. We will not be
precluded from investing in Mortgage-Backed Securities when the Bank is the
sponsor or issuer. At June 30, 1999, we did not hold any Mortgage-Backed
Securities.
OTHER ASSETS. We may invest up to 20% of the total value of our assets in
investments other than Residential Mortgage Loans, Commercial Mortgage Loans,
Mortgage-Backed Securities eligible to be held by REITs, cash, cash equivalents
(including receivables) and government securities. Although the foregoing assets
must constitute at least 75% of the value of the REIT's total assets under
Section 865(c)(5)(A) of the Code, up to 25% of the value of a REIT's total
assets may be comprised of non-mortgage-related securities as defined in the
Investment Company Act of 1940 (the "Investment Company Act"). Under the
Investment Company Act, the term "security" is defined broadly to include, among
other things, any note, stock, treasury stock, debenture, evidence of
indebtedness, or certificate of interest or participation in any profit sharing
agreement or a group or index of securities. The Code requires that the value of
any one issuer's securities (other than those securities included in the 75%
test) may not exceed 5% of the total assets (by volume) of the REIT and the REIT
may not own more
32
<PAGE>
than 10% of the voting securities (other than those securities included in the
75% test) of any one issuer. At June 30, 1999, we did not hold any such
investments.
DIVIDEND POLICY
We expect to distribute annually an aggregate amount of dividends with
respect to our outstanding shares of capital stock equal to approximately 100%
of our REIT taxable income (excluding capital gains). In order to remain
qualified as a REIT, we are required to distribute annually 95% of our "REIT
taxable income" (excluding capital gains) to our stockholders.
Dividends will be authorized and declared at the discretion of our Board of
Directors after considering our 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 and Series B
Preferred Shares represent in the aggregate only approximately 50% of our
capitalization and (iii) we do not anticipate incurring any indebtedness, we
currently expect that both our cash available for distribution and our REIT
taxable income will be in excess of the amounts needed to pay dividends on the
Series A and Series B Preferred Shares, even in the event of a significant drop
in interest rate levels. Accordingly, we expect that we will, after paying the
quarterly dividends on the Series A and Series B Preferred Shares, pay dividends
to holders of our Common Stock in an amount sufficient to comply with applicable
requirements regarding qualification as a REIT. There are, however, certain
limitations that restrict our ability to pay dividends on the Common Stock. See
"Description of Series B Preferred Shares--Dividends."
Under certain circumstances, including any determination that the Bank's
relationship to us results in an unsafe and unsound banking practice, federal
regulatory authorities will have the authority to issue an order that restricts
our ability to make dividend payments to our stockholders.
MANAGEMENT POLICIES AND PROGRAMS
GENERAL. In administering our Mortgage Assets and Other Authorized
Investments, the Advisor has a high degree of autonomy. Our Board of Directors,
however, has adopted certain policies to guide the administration of us 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 our Board of Directors (in certain circumstances subject to
the approval of a majority of our Independent Directors) without a vote of our
stockholders, including holders of the Series A and Series B Preferred Shares.
UNDERWRITING STANDARDS. The Bank has represented to us that all of the
Residential Mortgage Loans and Commercial Mortgage Loans acquired by us and
expected to be included in the Proposed Portfolio (including those that were
originated by unaffiliated third parties) were originated in accordance with the
underwriting policy customarily employed by the Bank during the period in which
the Residential Mortgage Loans and Commercial Mortgage Loans acquired by us were
originated.
The underwriting standards applied at origination of the Residential
Mortgage Loans included in our Current Portfolio and expected to be included in
the Proposed Portfolio were intended to evaluate the borrower's credit standing
and repayment ability, and the value and adequacy of the underlying mortgaged
property as collateral. Generally, each prospective borrower was required to
provide a loan application and other supporting documents describing assets and
liabilities, the borrower's income and expenses, as well as, to the extent
required by applicable state law, an authorization to apply for a credit report
which summarized the borrower's credit history with merchants and lenders and
any record of bankruptcy.
For any prospective borrower, an employment verification was obtained from
the borrower's employer wherein the employer reported the length of employment
with the employer, the employee's
33
<PAGE>
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 generally was required to submit copies of
personal and business federal income tax returns for the previous two years. For
certain prospective borrowers, the borrower authorized verification of all
deposits at financial institutions at which the borrower had demand or savings
accounts.
After 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 acquired by us) 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, then 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 require 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.
The loan underwriting procedures and guidelines utilized by the Bank in
connection with the origination of the Commercial Mortgage Loans acquired by us
and expected to be included in the Proposed Portfolio are 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 its proposed use; the availability, rental rates and
relative value of comparable properties in the relevant market area and the
anticipated growth or decline in both the immediate and broader geographic areas
in which the mortgaged property is located; the current or projected occupancy
or leasing ratios, if relevant; the condition and age of the mortgaged property;
the management ability of the borrower, including its business experience and
financial soundness; and such other economic, demographic or other factors as in
the judgment of the Bank might affect the value of the mortgaged property and
the ability of the borrower to service the Commercial Mortgage Loan. Each
proposal for a Commercial Mortgage Loan was presented to the appropriate lending
personnel of the Bank, which analyzed the proposed transaction focusing on
economic assumptions and the feasibility of the loan, identified and evaluated
potential risks and made a recommendation to approve or disapprove the loan. The
proposed transaction was then presented to appropriate credit officers of the
Bank for approval.
After a loan proposal was approved, a loan commitment was issued by the Bank
to the proposed borrower, subject to, among other things, an appraisal report
and, if deemed appropriate or required, environmental engineering reports. The
Bank contracted with approved firms to prepare certain required reports for the
account of the Bank.
ASSET ACQUISITION AND DISPOSITION POLICIES. We anticipate that from time to
time we will purchase additional Mortgage Loans from the Bank or unaffiliated
third parties on a basis consistent with
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secondary market standards pursuant to the Mortgage Purchase Agreements, out of
proceeds received in connection with the repayment or disposition of Mortgage
Loans or the issuance of additional shares of Common Stock or Preferred Stock.
We anticipate that additional Mortgage Loans purchased from the Bank will be
purchased on terms that are substantially identical to those that could be
obtained by us if such additional Mortgage Loans were purchased from third
parties unaffiliated with us. We have no present plans or intentions to purchase
Mortgage Loans from unaffiliated third parties. We currently anticipate that
additional Mortgage Loans acquired by us will be of the types described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of the Current Portfolio and of the Proposed Portfolio,"
although we may purchase additional types of Mortgage Loans and are generally
not limited as to the type or amount that may be purchased. In addition, we may
from time to time acquire Mortgage- Backed Securities representing interests in
or obligations backed by pools of Mortgage Loans that will be secured by
single-family residential, multi-family or commercial real estate properties
located throughout the United States as well as a limited amount of Other
Authorized Investments. We currently anticipate that we will not acquire the
right to service any Mortgage Loan we acquire in the future and that the Bank
will act as servicer of any such additional Residential Mortgage Loans or
Commercial Mortgage Loans. We anticipate that any servicing arrangement that we
enter 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 us.
Our current policy is not to acquire any Commercial Mortgage Loan that
constitutes more than 5.0% of the total book value of our Mortgage Assets at the
time of acquisition. In addition, our 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) on 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.
See "--Servicing" for a discussion of the treatment of Mortgage Loans which
become nonperforming or real estate owned ("REO").
CREDIT RISK MANAGEMENT POLICIES. We expect 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 "--Underwriting
Standards." We also expect that all Mortgage Loans held by us will be serviced
pursuant to the Servicing Agreements, which require servicing in conformity with
any servicing guidelines promulgated by us with respect to Commercial Mortgage
Loans and, in the case of Residential Mortgage Loans, with FNMA and FHLMC
guidelines and procedures.
CONFLICT OF INTEREST POLICIES. Because of the nature of our relationship
with the Bank, it is likely that conflicts of interest will arise with respect
to certain transactions, including, without limitation, our 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 either of the Servicing Agreements. It is our 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 either of the Servicing Agreements may be modified or
terminated without the approval of a majority of our Independent Directors.
Conflicts of interest between us 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 also could arise in
connection with actions taken by the Bank as our parent company.
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It is the intention of us and the Bank that any agreements and transactions
between us 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 our Articles of Incorporation that certain of our actions be
approved by a majority of our Independent Directors also is intended to ensure
fair dealings between us and the Bank. There can be no assurance, however, that
any such agreement or transaction will be on terms as favorable to us as could
have been obtained from unaffiliated third parties.
There are no provisions in our Articles of Incorporation limiting any
officer, director, security holder or affiliate of us from having any direct or
indirect pecuniary interest in any Mortgage Asset to be acquired or disposed of
by us or in any transaction in which we have 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 us
(including without limitation the sale of Mortgage Assets to us); however, none
of our officers or directors will have any interests in such Mortgage Assets.
OTHER POLICIES. We intend to operate in a manner that will not subject us
to regulation under the Investment Company Act of 1940, as amended. We do 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, our officers, directors or other affiliates. We
may, under certain circumstances, purchase the Series A or Series B Preferred
Shares and other shares of our capital stock in the open market or otherwise. We
have no present intention of repurchasing any shares of our capital stock, and
any such action would be taken only in conformity with applicable federal and
state laws and regulations and the requirements for qualifying as a REIT.
We are conducting our 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 Securities and
Exchange Commission (the "Commission"), in order to qualify for this exemption,
we, among other things, must maintain at least 55% of our 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 we may acquire
therefore may be limited by the provisions of the Investment Company Act. We
have established a policy of limiting Other Authorized Investments to no more
than 20% of the value of our total assets.
We currently distribute to our 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 our independent auditors. Our Articles of
Incorporation provide that we will maintain our status as a reporting company
under the Exchange Act for so long as any of the Series A or Series B Preferred
Shares are outstanding.
We currently make investments and operate our business in such a manner
consistent with the requirements of the Code to qualify as a REIT. However,
future economic, market, legal, tax or other considerations may cause our Board
of Directors, subject to approval by a majority of our Independent Directors, to
determine that it is in the best interests of us and our stockholders to revoke
our REIT status. The Code prohibits us from electing REIT status for the four
taxable years following the year of such revocation.
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SERVICING
RESIDENTIAL MORTGAGE LOAN SERVICING. In March 1997, the Bank sold to TIMC
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 initially acquired by us from the Bank in connection with the
Series A Offering. In connection with such sale, the Bank entered into the TIMC
Residential Servicing Agreement with TIMC pursuant to which TIMC services, among
other things, all of the Residential Mortgage Loans initially acquired by us
from the Bank in connection with the Series A Offering as well as with respect
to certain Residential Mortgage Loans sold by the Bank to us thereafter. The
Bank again began servicing Residential Mortgage Loans originated by it in
February 1998 and will act as the Servicing Agent with respect to the
Residential Mortgage Loans expected to be included in the Proposed Portfolio
pursuant to the Bank Residential Servicing Agreement.
The Residential Servicing Agreements provide that the Servicing Agents will
receive an annual servicing fee with respect to each Residential Mortgage Loan
serviced for us that shall be equal to the outstanding principal balance of such
Residential Mortgage Loans multiplied by a fee of 0.25% (in the case of
fixed-rate Residential Mortgage Loans (including "7/23 step rate" loans)) and
0.375% (in the case of adjustable-rate Residential Mortgage Loans).
The Residential Servicing Agreements require the Servicing Agents to service
our Residential Mortgage Loans in a manner generally consistent with servicing
guidelines promulgated by the Bank and with FNMA and FHLMC guidelines and
procedures and as otherwise set forth in the Residential Servicing Agreements.
The Servicing Agents 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 they service. The Servicing Agents also provide accounting and
reporting services to us for such Residential Mortgage Loans. Additionally the
Servicing Agents assume responsibility for payment of ground rents, taxes,
assessments, water rates, mortgage insurance premiums, and other charges that
are or may become liens upon the mortgaged property. The Servicing Agents also
are responsible for any late charges or tax penalties incurred due to its
failure to pay such bills. The Residential Servicing Agreements require the
Servicing Agents to follow such collection procedures that are consistent with
the Servicing Agents' 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 Agents 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 Agents'
reasonable and prudent determination such waiver, modification, postponement or
indulgence is not materially adverse to us; provided, however, that the
Servicing Agents 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 our prior written consent. However, the Servicing Agents may permit
forbearance or allow for suspension of monthly payments if the borrower is in
default or the Servicing Agents determine in their reasonable discretion that a
default is imminent and if the Servicing Agents determine that granting such
forbearance or suspension is in our best interest. The Servicing Agents will use
their best efforts, consistent with the procedures that the Servicing Agents
would use in servicing loans for their 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.
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The Residential Servicing Agreement with TIMC provides that we can direct
TIMC to transfer the servicing and disposition functions with respect to all
Residential Mortgage Loans which become Nonaccrual back to the Bank. The
servicing of properties that become REO automatically will be transferred back
to the Bank for the same purpose. The Bank will charge a servicing fee with
respect to the Nonaccrual Mortgage Loans transferred to it. The Bank will then
service and dispose of such properties, as required, on our behalf.
The Residential Servicing Agreements require the Servicing Agents to pay all
customary, reasonable and necessary expenses related to the performance of its
duties under such agreements, including, but not limited to, costs associated
with the preservation, restoration and protection of mortgaged property and
enforcement of any required judicial proceedings. For advances of reimbursable
out-of-pocket costs and expenses, the Servicing Agents generally will be
reimbursed out of proceeds related to such Residential Mortgage Loan.
In connection with any foreclosure proceedings that the Servicing Agents may
institute, the Servicing Agents 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 our name with the
servicing with respect to such Residential Mortgage Loan to be transferred back
to us. It is expected that the Bank will service such REO on our behalf.
We may terminate the Residential Servicing Agreements upon the happening of
one or more events specified in such Residential Servicing Agreements. Such
events generally relate to either (i) the Servicers' 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, we also may
terminate the TIMC Residential Servicing Agreement without cause but, in such
case, would be required to pay a termination fee, which, for the first seven
years from June 1, 1997 shall be equal to 1.10% of the aggregate outstanding
principal amount of the loans then serviced and, thereafter, 1.0% of the
aggregate outstanding principal amount of the loans then serviced. Similarly, we
may terminate the Bank Residential Servicing Agreement without cause upon
payment of a termination fee equal to 1.5% of the aggregate outstanding
principal balance of the loans then serviced under the Bank Residential
Servicing Agreement. As long as any Series A or Series B Preferred Shares remain
outstanding, we may not terminate, or elect not to renew, the Residential
Servicing Agreements without first obtaining the approval of a majority of our
Independent Directors.
As is customary in the mortgage loan servicing industry, the Servicing
Agents will be entitled to retain any late payment charges, penalties and
assumption fees collected in connection with the Residential Mortgage Loans
serviced by it. In addition, the Servicing Agents 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 us 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 Agents to remit to us 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 Agents 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 our 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
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such circumstances, the Servicing Agents will negotiate an assumption agreement
with the person to whom the mortgaged property has been conveyed or is proposed
to be conveyed, pursuant to which such person becomes liable under the mortgage
note. When an assumption is allowed, the Servicing Agents 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 Agents 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 Agents as additional servicing compensation.
COMMERCIAL MORTGAGE LOAN SERVICING. The Bank services our Commercial
Mortgage Loans pursuant to the terms of a Commercial Servicing Agreement entered
into between the Bank and us in connection with the Series A Offering (the
"Commercial Servicing Agreement.") The Bank receives an annual servicing fee
with respect to each Commercial Mortgage Loan serviced for us which shall equal
the outstanding principal balance of such Commercial Mortgage Loans multiplied
by a fee of 0.25% to 0.375%.
The Bank may, from time to time, subject to approval of a majority of our
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 us to perform thereunder.
The Commercial Servicing Agreement requires the Bank to service our
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 us. The Bank collects and remits principal and
interest payments, administers mortgage, custodial and escrow accounts, submits
and pursues insurance claims and initiates and supervises foreclosure
proceedings on the Commercial Mortgage Loans it services. The Bank provides
accounting and reporting services required by us for such Commercial Mortgage
Loans. Additionally, for all Commercial Mortgage Loans, the Bank assumes
responsibility for payment of taxes and other charges which are or may become a
lien upon the mortgaged property. The Bank is also responsible for any late
charges or tax penalties incurred due to its failure to pay such bills. The
Commercial Servicing Agreement requires the Bank to follow such collection
procedures that are consistent with the Bank's procedures for Mortgage Loans
comparable to the Commercial Mortgage Loans held for its own account, including
contacting delinquent borrowers and supervising foreclosures and property
dispositions in the event of unremedied defaults. The Bank may, in its
discretion, arrange with a defaulting borrower a schedule for the liquidation of
delinquencies. The Bank will use its best efforts, consistent with the
procedures that the Bank would use in servicing loans for its own account, to
foreclose upon or otherwise comparably convert the ownership of properties
securing such of the Commercial Mortgage Loans as come into and continue in
default and as to which no satisfactory agreements can be made for collection of
delinquent payments. The Bank also will 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 customary,
reasonable and necessary expenses related to the performance of its duties under
such Servicing Agreement, including, but not limited to, costs associated with
the preservation of mortgaged property and enforcement of any required judicial
proceedings. The Bank generally will be reimbursed before us from the proceeds
related to such Commercial Mortgage Loan. The Bank also will be entitled to
reimbursement by us 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.
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If claims are not made or paid under applicable insurance policies or if
coverage thereunder has ceased, we 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 is responsible to us 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 is not 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 us 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 our best interests 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 our interest to take such actions with respect to the mortgage property.
We may terminate the Commercial Servicing Agreement upon the happening of
one or more events specified in such Commercial Servicing Agreement. Such events
relate generally to (i) the Bank's proper and timely performance of its duties
and obligations under the Commercial Servicing Agreement or (ii) the appointment
of a conservator, receiver or liquidator in any insolvency, bankruptcy or
similar proceeding. In addition, we 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 1.5%
of the aggregate outstanding principal amount of the loans then serviced under
the Commercial Servicing Agreement. As long as any Series A or Series B
Preferred Shares remain outstanding, we may not terminate or elect not to renew,
the Commercial Servicing Agreement without the approval of a majority of our
Independent Directors.
The Bank will be entitled to retain any late payment charges, 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 us 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 us 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
Commercial Mortgage Loans serviced by it on the last day of the immediately
preceding month.
When any mortgage property underlying a Commercial Mortgage Loan is conveyed
by a mortgagor, the Bank generally will enforce any "due-on-sale" clause
contained in the Commercial Mortgage Loan, including collection of any mortgage
prepayment penalties, to the extent permitted under applicable law, governmental
regulations and the loan documents.
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ACQUISITION OF THE PROPOSED PORTFOLIO
Simultaneously with the consummation of the Offering, we will acquire the
Proposed Portfolio pursuant to the terms of two mortgage purchase agreements
with the Bank which were executed in connection with the Series A Offering: the
Residential Mortgage Purchase Agreement and the Commercial Mortgage Purchase
Agreement. The Residential Mortgage Loans in the Proposed Portfolio will be sold
to us pursuant to the Residential Mortgage Purchase Agreement. The Commercial
Mortgage Loans in the Proposed Portfolio will be sold to us pursuant to the
Commercial Mortgage Purchase Agreement. Each Mortgage Loan will be identified in
a schedule appearing as an exhibit to its respective Mortgage Purchase Agreement
(each, a "Mortgage Loan Schedule"). Each Mortgage Loan Schedule will specify,
among other things, with respect to each Mortgage Loan: the applicable loan
type, the applicable interest rate, the original principal balance and the
unpaid principal balance as of the purchase date, the monthly payment, the
maturity date, the mortgagor, the type of mortgaged property, the location of
the mortgaged property and the current interest rate.
At or as soon as practicable following the consummation of the Offering, the
Bank will deliver or cause to be delivered to us or our designee 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 us. Although we will have the right to record the blanket assignment of
mortgages at any time, we do not currently anticipate doing so. We believe 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 our
interests in such Mortgage Loans. However, the Bank will be obligated at our
written request, 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 us.
The Bank will make certain representations and warranties with respect to
the Mortgage Loans in the Proposed Portfolio for our benefit of us and will be
obligated to repurchase any Mortgage Loan sold by it to us 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 us 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.
EMPLOYEES
We have four officers, each of whom is described further below under
"Management." We do not anticipate that we will require any additional employees
because we have retained the Advisor to perform certain functions pursuant to
the Advisory Agreement described below under "Management-- The Advisor." All of
our officers are also officers or employees of PBOC and/or the Bank. We maintain
corporate records and audited financial statements that are separate from those
of the Bank. None of our officers, employees or directors will have any direct
or indirect pecuniary interest in any Mortgage Asset to be acquired or disposed
of by us or in any transaction in which we have an interest or will engage in
acquiring, holding and managing Mortgage Assets.
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COMPETITION
We do not anticipate that we will engage in the business of originating
Mortgage Loans. We do anticipate that we will continue to purchase Mortgage
Loans in addition to those in the Current Portfolio and the Proposed Portfolio
and that substantially all of these Mortgage Loans will be purchased from the
Bank, although we may purchase Mortgage Loans from unaffiliated third parties.
Accordingly, we do 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
We are not the subject of any litigation. None of us, the Advisor or the
Bank is currently involved in nor, to our knowledge, currently threatened with
any material litigation with respect to the Mortgage Loans included in the
Current Portfolio or expected to be included in the Proposed Portfolio, other
than routine litigation arising in the ordinary course of business, most of
which is expected to be covered by liability insurance.
BENEFICIAL OWNERSHIP OF OUR COMMON STOCK
As of June 30, 1999, there were 10,000 shares of our Common Stock issued and
outstanding, all of which were owned by the Bank. The following table sets forth
certain information concerning the ownership of our outstanding Common Stock as
of that date.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------ ------------------------------------ --------------------- -------------------
<S> <C> <C> <C>
Common Stock People's Bank of California 5900 10,000 100%
Wilshire Boulevard Los Angeles,
California 90036
</TABLE>
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our Board of Directors is composed of six members, two of whom are
Independent Directors. An "Independent Director" is a director who is not a
current officer or employee of us 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 our
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 and Series B Preferred Shares, in determining whether any
proposed action requiring their approval is in our best interests. We currently
have four officers, all of whom are Bank officers. We have no other employees
and do not anticipate that we will require additional employees.
The persons who were our directors and executive officers as of June 30,
1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE(1) POSITION AND OFFICES HELD
- ---------------------------------------------------- ----------- ----------------------------------------------------
<S> <C> <C>
Rudolf P. Guenzel................................... 59 President, Chief Executive Officer and Director
J. Michael Holmes................................... 53 Executive Vice President, Chief Financial Officer,
Secretary and Director
John F. Davis....................................... 52 Director
David S. Honda...................................... 48 Director
Robert W. MacDonald................................. 52 Director
Timothy B. Matz..................................... 55 Director
William W. Flader................................... 50 Executive Vice President
Michael R. Hilton................................... 48 Vice President
</TABLE>
- ------------------------
(1) As of June 30, 1999.
Except as set forth below, our directors and officers are also directors
and/or officers of the Bank. See the "Management" section of the Offering
Circular included as Annex I hereto for information with respect to their
principal occupations during the last five years.
DAVID S. HONDA. Mr. Honda, a director since our inception, has since 1980
been President of D.S. Honda Construction, Inc., a general contracting,
construction, interior design and space planning firm located in Northridge,
California. Mr. Honda has been responsible for the creation or renovation of
millions of square feet of commercial real estate in Los Angeles and he is
actively involved with economic development and small business organizations
generally and with Asian business associations in particular throughout the
city. Mr. Honda has been extensively involved with civic and service
organizations in the community for many years. His firm has been recognized by
local County Boards of Supervisors and Chambers of Commerce. As a result of the
Northridge earthquake in 1994, an office building personally owned by Mr. Honda
and his wife was severely damaged, resulting in a complete tenant vacancy of the
property. Because Mr. Honda was unable to obtain additional financing or an
acceptable work-out program on the damaged property, Mr. Honda filed for
personal bankruptcy under the federal bankruptcy laws in 1995 which was fully
discharged in July 1996.
TIMOTHY B. MATZ. Mr. Matz, a director since July 1999, has been the
Managing Partner since 1980 of Elias, Matz, Tiernan & Herrick L.L.P. ("EMTH"), a
Washington D.C. based corporate and securities law firm specializing in the
representation of publicly traded bank and thrift holding companies and other
diversified financial institutions. EMTH serves as special counsel to PBOC, the
Bank and us.
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Mr. Matz is a graduate of the University of Virginia (B.A.), George Washington
University Law School (J.D.) and Georgetown University Law School (L.L.M.).
MICHAEL R. HILTON. Mr. Hilton is our Vice President, a position he has held
since August 1998. Mr. Hilton has extensive management experience in both
accounting and finance at a number of financial institutions. Mr. Hilton has
served as Vice President and Controller of the Bank since July 1997. Prior to
that position, Mr. Hilton was the Vice President and Controller of Ventura
County National Bancorp, a multiple bank holding company.
INDEPENDENT DIRECTORS
Our Articles of Incorporation require that, so long as any Series A or
Series B Preferred Shares are outstanding, certain actions by us be approved by
a majority of our Independent Directors. See "Description of Series B Preferred
Shares--Independent Director Approval." In addition, although not restricted
from doing so, our Board of Directors does not currently intend to approve the
following transactions without the approval of a majority of our 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 our Preferred Stock and our Common Stock would exceed an amount
equal to the sum of 105% of our REIT taxable income (excluding capital gains)
for such year plus our net capital gains for that year and (ii) the redemption
of any shares of Common Stock. Messrs. Honda and Matz are our current
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 B Preferred Shares shall not have been
paid for six Dividend Periods, the maximum authorized number of our directors
shall thereupon be increased by two. See "Description of Series B Preferred
Shares--Voting Rights."
AUDIT COMMITTEE
We have established an audit committee which will review the engagement and
independence of our auditors. The audit committee will also review the adequacy
of our internal accounting controls. The audit committee currently consists of
Messrs. Matz and Honda.
COMPENSATION OF DIRECTORS AND OFFICERS
We pay our Independent Directors fees for their services as directors. The
Independent Directors receive a fee of $1,000 for attendance (in person or by
telephone) at each meeting of our 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. We do not pay any compensation to our officers or employees or to
directors who are not Independent Directors.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
Our Articles of Incorporation eliminate, to the fullest extent permitted by
the MGCL, the personal liability of a director to us or our stockholders for
monetary damages for breach of such director's fiduciary duty. Our Articles of
Incorporation empower us to indemnify, to the fullest extent permitted by the
MGCL, any of our directors or officers. Our Articles of Incorporation also
empower us 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.
Our bylaws (the "Bylaws") require indemnification of our directors and
officers and specify that the right to indemnification is a contract right,
setting forth certain procedural and evidentiary
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standards applicable to the enforcement of a claim under our Bylaws. Our 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.
Our Bylaws also provide that we may enter into contracts with any director or
officer in furtherance of the indemnification provisions contained in our Bylaws
and allow us to create a trust fund to ensure payment of amounts indemnified.
THE ADVISOR
In connection with the Series A Offering, we entered into the Advisory
Agreement with the Bank to administer our day-to-day operations. The Advisor is
responsible for, among other things: (i) monitoring the credit quality of our
Mortgage Assets and Other Authorized Investments; (ii) advising us with respect
to the acquisition, management, financing and disposition of our Mortgage Assets
and Other Authorized Investments; and (iii) representing us in our day-to-day
dealings with persons with whom we interact. In performing its duties under the
Advisory Agreement, the Advisor is required to act in a manner that is
consistent with maintaining our 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 our Board of Directors as well as
a majority of our 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, we will
control the activities of the Advisor and our directors will maintain the
continuing and exclusive authority to manage our operations.
The Advisor has substantial experience in the mortgage lending industry,
both in the origination and in the servicing of Mortgage Loans. At June 30,
1999, the Advisor held approximately $1.5 billion of single-family residential
mortgage loans and approximately $352.9 million and $273.9 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 typically services the commercial mortgage
loans in its portfolio and a portion of the residential mortgage loans in its
portfolio.
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 us. The Advisory Agreement may be
terminated by us at any time upon 90 days' prior notice. As long as any Series A
or Series B Preferred Shares remain outstanding, any decision by us either not
to renew the Advisory Agreement or to terminate the Advisory Agreement must be
approved by a majority of our Board of Directors, as well as by a majority of
our Independent Directors. The Advisor will be entitled to receive an annual
advisory fee equal to $200,000.
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<PAGE>
DESCRIPTION OF SERIES B PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Series B Preferred Shares, and is qualified in its entirety by reference to the
terms and provisions of our Articles of Incorporation. Except with respect to
the dividend rate, the Series A Preferred Shares have terms which are
substantially identical to the Series B Preferred Shares. Our Articles of
Incorporation have been filed with the Commission as an exhibit to the
registration statement of which this prospectus forms a part. See "Description
of Capital Stock" below.
GENERAL
The Series B Preferred Shares form a series of our Preferred Stock, 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 our Board of
Directors or, if then constituted, a duly authorized committee thereof. Our
Board of Directors has authorized us to issue the Series B Preferred Shares.
When issued, the Series B Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the Series B Preferred Shares will have
no preemptive rights with respect to any shares of our capital stock or any of
our other securities convertible into or carrying rights or options to purchase
any such shares. The Series B Preferred Shares are perpetual and will not be
convertible into shares of Common Stock or any other class or series of our
capital stock and will not be subject to any sinking fund or other obligation
for its repurchase or retirement.
The transfer agent, registrar and dividend disbursement agent for the
Preferred Stock will be Registrar and Transfer Company, Cranford, New Jersey.
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 or to vote on any other matter.
DIVIDENDS
Holders of Series B Preferred Shares will be entitled to receive, if, when
and as authorized and declared by our Board of Directors out of our assets
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 B 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 (a "Dividend Period"), commencing on , 1999. 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 B Preferred Shares and shall end on and include ,
1999. Each authorized and declared dividend will be payable to holders of record
as they appear on our stock register on such record dates, not exceeding 45 days
nor less than 10 days preceding the Dividend Payment Dates thereof, as shall be
fixed by our Board of Directors or a duly authorized committee thereof.
Dividends payable on the Series B 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 B Preferred Shares as of the Time of Exchange (as
defined herein) shall be deemed to be accrued and unpaid dividends on the Series
B Bank Preferred Shares.
The right of holders of Series B Preferred Shares to receive dividends is
noncumulative. If our 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 B Preferred Shares will have no right to
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<PAGE>
receive a dividend for that Dividend Period, and we 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 or
Series B Preferred Shares or the Common Stock. If we fail to pay or declare and
set aside for payment full dividends on the Series A and Series B Preferred
Shares for six Dividend Periods, holders of the Series A and Series B Preferred
Shares will be entitled to elect two directors. See "--Voting Rights."
If any Series A or Series B 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 and Series B 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 B
Preferred Shares for any Dividend Period and the shares of any equity securities
designated as being on a parity with the Series B Preferred Shares ("Parity
Stock"), including the Series A Preferred Shares, all dividends authorized and
declared on the Series B 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 B Preferred Shares and any shares of Parity
Stock had dividends been authorized and declared in full.
In addition to the foregoing restriction, we shall not authorize, declare,
pay or set apart funds for any dividends or other distributions (other than in
Common Stock or other equity securities designated as being junior with the
Series B Preferred Shares ("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 and Series B Preferred Shares for the four most
recent preceding Dividend Periods (or such lesser number of Dividend Periods
during which shares of Series A and Series B Preferred Shares have been
outstanding) are authorized and declared and paid or a sum sufficient for
payment has been paid over to the dividend disbursing agent for payment of such
dividends and (ii) we have authorized and declared a cash dividend on the Series
A and Series B 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 and Series B
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 and Series B Preferred Shares as to dividends for
such Dividend Period.
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 our Articles of Incorporation 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.
Regulations of the OTS 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
our payment of dividends on the Series A and Series B Preferred Shares under
this provision if the Bank were to fail to be "adequately capitalized."
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Currently, an institution is considered "adequately capitalized" if it has a
total risk-based capital ratio of at least 8.0%, a Tier 1 risk-based capital
ratio of at least 4.0% and a leverage (or core capital) ratio of at least 4.0%.
At June 30, 1999, the Bank's total risk-based capital ratio was 11.98%, its Tier
1 risk-based capital ratio was 11.12.% and core capital (or leverage) ratio was
6.16%. The Bank currently intends to maintain its capital ratios in excess of
the "well-capitalized" levels under the prompt corrective action regulations.
However, there can be no assurance that the Bank will be able to maintain such
capital levels. See "Risk Factors-Acquisition Strategy" in the Bank's Offering
Circular set forth in Annex I for the pro forma impact of the Bank's recent
acquisitions and the Offering.
AUTOMATIC EXCHANGE
Each Series B Preferred Share will be exchanged automatically for one newly
issued Series B Bank Preferred Share if the appropriate federal regulatory
agency directs in writing (the "Directive") that an exchange of the Series B
Preferred Shares for Series B 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 B Preferred Shares shall be
unconditionally obligated to surrender to the Bank the certificates representing
each Series B Preferred Share of such holder, and the Bank shall be
unconditionally obligated to issue to such holder in exchange for each such
Series B Preferred Share a certificate representing one Series B Bank Preferred
Share. Any Series B Preferred Shares purchased or redeemed by us 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 B Preferred Shares will be deemed cancelled
without any further action by us, all rights of the holders of Series B
Preferred Shares as our stockholders will cease, and such persons shall
thereupon and thereafter be deemed to be and shall be for all purposes the
holders of Series B Bank Preferred Shares. We will mail notice of the occurrence
of an Exchange Event to each holder within 30 days, and the Bank will deliver to
each such holder certificates for Series B Bank Preferred Shares upon surrender
of certificates for Series B Preferred Shares. Until such replacement stock
certificates are delivered (or in the event such replacement certificates are
not delivered), certificates previously representing Series B Preferred Shares
shall be deemed for all purposes to represent Series B Bank Preferred Shares.
All corporate action necessary for the Bank to issue the Series B Bank Preferred
Shares as of the Time of Exchange will be completed prior to or upon completion
of the Offering. Accordingly, once the Directive is issued, no action will be
required to be taken by holders of Series B Preferred Shares, by the Bank or by
us in order to effect the Automatic Exchange as of the Time of Exchange.
Holders of Series B 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 B Preferred Shares for Series B Bank Preferred Shares upon the
occurrence of an Exchange Event. Our Articles of Incorporation provide that the
holders of Series B Preferred Shares shall be unconditionally obligated to
surrender such shares and the Bank shall be unconditionally obligated to issue
Series B Bank Preferred Shares in exchange for Series B Preferred Shares.
Absent the occurrence of an Exchange Event, no shares of Series B Bank
Preferred Shares will be issued. Holders of Series B Preferred Shares cannot
exchange their Series B Preferred Shares for Series B Bank Preferred Shares
voluntarily. Upon the occurrence of an Exchange Event, the Series B
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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 B Preferred Shares, except that the Series B Bank Preferred Shares
would not be listed on any national securities exchange or national quotation
system. Any accrued and unpaid dividends on the Series B Preferred Shares as of
the Time of Exchange would be deemed to be accrued and unpaid dividends on the
Series B Bank Preferred Shares. The Series B Bank Preferred Shares would rank on
an equal basis in terms of dividend payment and liquidation preference with any
then-outstanding shares of preferred stock of the Bank. The Bank has registered
the Series B 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 Series B 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 Series B Bank Preferred Shares, although the Bank will
be able to issue preferred stock in series other than that of the Series B Bank
Preferred Shares. There can be no assurance as to the liquidity of the trading
markets for the Series B Bank Preferred Shares, if issued, or that an active
public market for the Series B Bank Preferred Shares would develop or be
maintained.
Absent the occurrence of the Automatic Exchange, holders of Series B
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 B Preferred Shares exist solely as to us.
The Series A Preferred Shares have substantially identical provisions
providing for an Automatic Exchange in the event of an Exchange Event.
RANK
The Series B Preferred Shares will rank prior to the Common Stock and to all
of our other Junior Stock, other than Parity Stock and any other class or series
of our equity securities expressly designated as being senior to the Series B
Preferred Shares as to dividend rights and rights upon liquidation, winding up
or dissolution (the "Senior Stock"). The Series A Preferred Shares constitute
Parity Stock with respect to the Series B Preferred Shares. We have the power to
create and issue additional Preferred Stock or other classes of stock ranking on
a parity with the Series A and Series B Preferred Shares, or that constitute
Junior Stock, without any approval or consent of the holders of Series A and
Series B Preferred Shares. So long as any Series A and Series B 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 and Series B
Preferred Shares. See "--Voting Rights." So long as any Series A and Series B
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 B Preferred Shares, like the holders of the
Series A Preferred Shares and any other holders of Parity Stock, will not be
entitled to vote. In the event the holders of Series A and Series B Preferred
Shares are entitled to vote, each Series A and Series B Preferred Share will be
entitled to one vote.
If full dividends on the Series A and Series B Preferred Shares have not
been paid for six Dividend Periods (whether or not consecutive), the maximum
authorized number of our directors 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 and Series B Preferred
Shares, voting together as a class with the holders of any other Parity Stock
upon which the same
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voting rights as those of the Series B Preferred Shares have been conferred and
are irrevocable, shall have the exclusive right to elect the two additional
directors at our 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 and Series B Preferred Shares and any other Parity
Stock 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 and Series B Preferred Shares and any other Parity Stock for four
consecutive Dividend Periods. Thereafter, the holders of the Series A and Series
B Preferred Shares and the holders of any other Parity Stock will not be able to
elect directors unless dividends on the Series A and Series B Preferred Shares
and any other Parity Stock 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 and Series B Preferred
Shares and any other Parity Stock entitled to vote, voting together as a single
class without regard to series, at a meeting of our stockholders called for that
purpose. As long as dividends on the Series A and Series B Preferred Shares and
any other Parity Stock 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 us, 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 and Series B Preferred Shares and any other 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 Series B Preferred Shares are outstanding, we shall not,
without the consent or vote of the holders of at least two-thirds of the
outstanding Series B Preferred Shares, voting separately as a class, (i) amend,
alter or repeal or otherwise change any provision of our Articles of
Incorporation, including the terms of the Series B 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 B Preferred Shares, or (ii) authorize,
create or increase the authorized amount of or issue any class or series of any
of our equity securities, or any warrants, options or other rights exercisable
for or convertible or exchangeable into any class or series of any of our equity
securities, ranking senior to the Series B Preferred Shares, either as to
dividend rights or rights on liquidation, dissolution or winding up of us or
(iii) merge, consolidate, reorganize or effect any other business combination
involving us, unless the resulting corporation will thereafter have no class or
series of equity securities either authorized or outstanding ranking senior to
the Series B 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 our equity securities that are authorized and outstanding immediately prior
to such transaction, and each holder of Series B 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 B Preferred Shares held by
such holder immediately prior thereto. So long as any Series A Preferred Shares
are outstanding, a two-thirds vote of the holders of the Series A Preferred
shares is necessary to take the actions described above.
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 B
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 B
Preferred Shares.
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REDEMPTION
The Series B Preferred Shares will not be redeemable prior to ,
2004 (except upon the occurrence of a Tax Event or a Change of Control (as
defined below)). On or after such date, the Series B Preferred Shares may be
redeemable for cash by us or our successor or any acquiring or resulting entity
with respect to us, including by any parent or subsidiary of us, any such
successor, or any such acquiring or resulting entity as applicable, at its
option, in whole or in part, at any time and from time to time, at the
redemption price of $25.00 per share, plus authorized, declared and unpaid
dividends to the date of redemption, without interest. The Series A Preferred
Shares have similar terms except that such shares may not be redeemed prior to
October 15, 2002.
In the event that fewer than all the outstanding Series B Preferred Shares
are to be redeemed, the number of Series B Preferred Shares to be redeemed shall
be determined by our Board of Directors, and the shares to be redeemed shall be
determined by lot, PRO RATA or by such other method as may be determined by our
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 B Preferred Shares are then listed.
Upon the occurrence of a Tax Event, we will have the right to redeem the
Series B 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 us 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 B Preferred Shares, there is more than an
insubstantial risk that: (a) dividends paid or to be paid by us with respect to
our stock are not, or will not be, fully deductible by us for United States
federal income tax purposes or (b) we are, or will be, subject to more than a DE
MINIMIS amount of other taxes, duties or other governmental charges as a result
of dividends paid or to be paid by us.
Upon a Change of Control, the Series B Preferred Shares are redeemable on or
prior to , 2004, at the option of us or our successor or any
acquiring or resulting entity with respect to us, including by any parent or
subsidiary of us, 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 B 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.
We or any such successor or any acquiring or resulting entity will be
entitled to issue a notice of redemption after we or our 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.
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"Applicable Premium" means an amount equal to (A) the present value of (1)
the dividends that would be payable on the Series B Preferred Shares in respect
of the period from the date fixed for redemption through , 2004
(assuming all such dividends were to be authorized and declared) plus (2) $25.00
(assuming such $25.00 is paid on , 2004), computed using a discount rate
equal to the Treasury Rate plus 75 basis points, divided by (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 PBOC, whether as a result of the issuance of
securities of the Bank or PBOC, any merger, consolidation,
liquidation or dissolution of the Bank or PBOC, 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 , 2004; 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 us, on and as of the date fixed for
redemption, dividends shall cease to accrue on the Series A and Series B
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 us, on and as of the redemption date such entity shall be
deemed to own the Series A and Series B Preferred Shares being redeemed for all
purposes of our 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 and Series B
Preferred Shares to be redeemed at such holder's registered address.
Our ability to redeem any Series A and Series B 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 PBOC 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 us, the holders of the Series A and Series B Preferred Shares at
the time outstanding will be entitled to receive in respect of each share, out
of our assets legally available for distribution to our 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 our
general creditors, liquidating distributions in the amount of $25 per share,
plus the authorized, declared and unpaid dividends, 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 and Series B Preferred Shares will
have no right or claim to any of our remaining assets. In the event that, upon
any such voluntary or involuntary liquidation, dissolution or winding up, our
available assets are insufficient to pay the amount of the liquidation
distributions on all outstanding Series A and Series B Preferred Shares and the
corresponding amounts payable on any other Parity Stock, then the holders of the
Series A and Series B Preferred Shares and any other 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 us with or into any other
entity, the consolidation or merger of any other entity with or into us or the
sale of all or substantially all of the property or business of us, shall not be
deemed to constitute a liquidation, dissolution or winding up of us.
INDEPENDENT DIRECTOR APPROVAL
Our Articles of Incorporation require that, so long as any Series A and
Series B Preferred Shares are outstanding, certain actions by us be approved by
a majority of the Independent Directors. For so long as there are only two
Independent Directors, any action that requires the approval of a majority of
Independent Directors must be approved by both Independent Directors. Messrs.
Honda and Matz are our current Independent Directors. See
"Management--Independent Directors." In order to be considered "independent," a
director must not be a current director, officer or employee of us, or a current
director, officer or employee of the Bank or any affiliate of the Bank. In
addition, any members of our Board of Directors elected by holders of Preferred
Stock, including the Series A and Series B 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 our
Independent Directors include: (i) the issuance of additional Preferred Stock
ranking on a parity with the Series A and Series B Preferred Shares, (ii) the
incurrence of debt for borrowed money in excess of 20% of our 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 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 our REIT status or (vii)
any dissolution, liquidation or termination of us prior to , 2004. Our
Articles of Incorporation require that, in assessing the benefits to us 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 and Series B
Preferred Shares. Our Articles of Incorporation provide that in considering the
interests of the holders of Preferred Stock, including, without limitation, the
holders of the Series A and Series B 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 and
Series B 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 our capital stock does not
purport to be complete and is subject in all respects to the applicable
provisions of the MGCL and our Articles of Incorporation and Bylaws.
COMMON STOCK
GENERAL. We are authorized by our Articles of Incorporation to issue up to
4,000,000 shares of Common Stock. We currently have outstanding 10,000 shares of
Common Stock, all of which are held by the Bank. In addition, the Bank currently
intends that, so long as any Series A or Series B Preferred Shares are
outstanding, it will maintain direct or indirect ownership of at least a
majority of the outstanding shares of our Common Stock.
DIVIDENDS. Holders of Common Stock are entitled to receive dividends when,
as and if authorized and declared by our 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, we
must distribute annually at least 95% of our annual REIT taxable income (not
including capital gains) to our stockholders. Several limitations exist which
may restrict our 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 and Series B 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 our outstanding shares of Common Stock, the Bank
will be able, subject to the terms of the Series A and Series B Preferred Shares
and of any other class or series of stock subsequently issued by us, to elect
and remove directors, amend our 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 us, whether voluntary or involuntary, after there have been paid
or set aside for the holders of all series of Preferred Stock the full
preferential amounts to which such holders are entitled, the holders of Common
Stock will be entitled to share equally and ratably in any assets remaining
after the payment of all debts and liabilities.
PREFERRED STOCK
We are authorized by our Articles of Incorporation to issue up to 4,000,000
shares of Preferred Stock. Subject to limitations prescribed by Maryland law and
our Articles of Incorporation, our Board of Directors or, if then constituted, a
duly authorized committee thereof is authorized to issue, from the authorized
but unissued shares of our capital stock, Preferred Stock in such classes or
series as our 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 our Board of Directors.
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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
our Articles of Incorporation or in supplementary articles relating to that
class or series.
Our 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 our status as a REIT
or as otherwise deemed appropriate by our 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 our affairs, (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 our affairs, and (xi) any other
specific terms, preferences, rights, limitations or restrictions of such class
or series.
As of the date of this prospectus, 1,426,000 shares of Series A Preferred
Shares are outstanding and we have no present plans to issue any other Preferred
Stock other than the Series B Preferred Shares.
ABILITY TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
We believe 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 us to issue such classified or reclassified shares of stock
will provide us 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 our stockholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which our
securities may be listed or traded, except that as long as any Series A or
Series B Preferred Shares remain outstanding, additional shares of Preferred
Stock ranking senior to the Series A or Series B Preferred Shares may not be
issued without the approval of the holders of at least two-thirds of the Series
A and Series B 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 our outstanding shares of
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year, other than the first year (the "Five or Fewer Test"). The Code
requires that the Five or Fewer Test be applied using constructive ownership
rules which treat certain organizations as one individual.
Consistent with our intention to reduce the likelihood that our status as a
REIT is jeopardized, our 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. The term "Ownership Limit" means the provisions in the
Company's
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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 8.25% of the aggregate initial liquidation value of the
issued and outstanding shares of Preferred Stock, including the Series A and
Series B Preferred Shares.
Although the Five or Fewer Test references the aggregate value of all shares
of our capital stock, 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 our Common Stock and any
outstanding shares of Preferred Stock, 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 we believe 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.
The ownership of our Common Stock or the transfer of shares of common and/or
preferred stock of PBOC to an entity which is considered an individual for
purposes of the Five or Fewer Test could, in certain circumstances, cause us to
fail the Five or Fewer Test and, consequently, to fail to qualify as a REIT.
Our 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 our status
as a REIT. The transfer of any shares of Preferred Stock, including Series B
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 us. All rights to dividends to such Excess Shares
will be held by such trust.
Our capital stock 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"). Our Articles of
Incorporation contains restrictions on the acquisition of Preferred Stock
intended to ensure compliance with the One Hundred Persons Test. Such provisions
include a restriction that if any transfer of shares of our Preferred Stock
would cause us 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 PBOC will be deemed to own a proportionate share of our Common
Stock owned by the Bank. As a result, the acquisition by an individual or entity
of our stock 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.
Our 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 us as of the day prior to the day the prohibited
transfer took place. Any dividends paid on the Series B Preferred Shares prior
to the discovery of the prohibited transfer are to be repaid by the original
transferee to us and by us to the trustee; subject to applicable law, any vote
of the shares while the shares were held by the original transferee prior to our
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
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transferee will be rescinded as VOID AB INITIO. In liquidation, the original
transferee stockholder's ratable share of our 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 within 20 days 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 us.
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. Our 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 our Independent Directors. The foregoing restrictions on
transferability and ownership will not apply, however, if our Board of
Directors, including a majority of Independent Directors, determines that it is
no longer in the best interests of us and our stockholders to attempt to
qualify, or continue to qualify, as a REIT. See "Business and
Strategy--Management Policies and Programs."
Our 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 our Preferred
Stock must provide certain information to us within 30 days of June 30 and
December 31 of each year. In addition, each stockholder shall upon demand be
required to disclose to us in writing such information as we may request in
order to determine the effect, if any, of such stockholder's actual and
constructive ownership on our 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 our voting shares and would, therefore, together with its
affiliates (including PBOC) be subject to the business combination provision of
the MGCL. However, pursuant to the statute, we have 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
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business combinations between any of them and us. As a result, the Bank and any
present or future affiliate thereof may be able to enter into business
combinations with us that may not be in the best interest of our stockholders
without compliance by us with the super-majority vote requirements and the other
provisions of the statute.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights, except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror, by officers or by directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
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. Our Articles of Incorporation contain a provision
exempting from the control share acquisition statute any and all acquisitions of
our shares of stock by the Bank and any present or future affiliates thereof
(including PBOC). Consequently, the prohibition on voting control shares will
not apply to the Bank or to any present or future affiliates thereof (including
PBOC).
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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 EMTH, 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. Timothy B. Matz, one of our directors, is a partner with EMTH. 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 SERIES
B PREFERRED SHARES AND OF OUR 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. In the opinion of EMTH, commencing with our taxable year ended
December 31, 1997, we have been organized and are operating in such a manner as
to qualify for taxation as a REIT under the Code (the "REIT Requirements" or the
"REIT Provisions"), and our proposed method of operation will enable us to
continue to satisfy the REIT Requirements. The REIT Requirements are technical
and complex. Our qualification and taxation as a REIT depends on our ability to
meet, through actual annual operating results, the REIT Requirements.
Accordingly, while we intend to continue to operate in a manner that would
enable us to qualify to be taxed as a REIT, no assurance can be given that the
actual results of our operations for any particular year will satisfy the REIT
Requirements. The following discussion sets forth only a summary of the material
aspects of those requirements.
A REIT generally will not be subject to federal corporate income taxes on
that portion of our ordinary income or capital gain that is currently
distributed to stockholders. Such treatment substantially eliminates the federal
"double taxation" of earnings (at the corporate and the stockholder levels) that
generally results from investment in a corporation.
Despite the REIT election, we may be subject to federal income and excise
tax as follows:
(1) we will be taxed at regular corporate rates on any REIT taxable
income, including net capital gains, less distributions to stockholders.
(2) 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.
(3) under certain circumstances, we may be subject to the "alternative
minimum tax" on certain of our items of tax preferences, if any.
(4) if we have (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
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nonqualifying net income from foreclosure property, it will be subject to
tax at the highest corporate rate on such income.
(5) if we have 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.
(6) if we should fail to satisfy the 75% gross income test or the 95%
gross income test (as discussed below), but have nonetheless maintained our
qualifications as a REIT because certain other requirements have been met,
we will be subject to a 100% tax on the net income attributable to the
greater of the amount by which we fail the 75% or 95% test, multiplied by a
fraction intended to reflect our profitability.
(7) if we should fail to distribute, or fail to be treated as having
distributed, during each calendar year at least the sum of (i) 85% of our
REIT ordinary income for such year, (ii) 95% of our REIT capital gain net
income for such year and (iii) any undistributed taxable income from prior
periods, we would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
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 Sections 856 through 859 of the Code; (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 (the "Five or
Fewer Test") (as defined in the Code to include private foundations and certain
pension trusts and other entities) at any time during the last half of each
taxable year; and (vii) meets certain other tests, described below, regarding
the nature of its income and assets. The Code provides that conditions (i)
through (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) will not apply until after the first taxable year for
which an election is made to be taxed as a REIT. For purposes of condition (vi),
certain tax-exempt entities described in Sections 501(c)(17) and 509(a) of the
Code or a portion of a trust permanently set aside or used for purposes
described in Section 642(c) of the Code, are generally treated as individuals,
stock owned by a corporation is treated as if owned by the shareholders of the
organization, 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."
We have satisfied conditions (i) through (v), and we believe we have also
satisfied condition (vi). In addition, our Articles of Incorporation provides
for restrictions regarding the ownership and transfer of our shares, which
restrictions are intended to assist us in continuing to satisfy the share
ownership requirements described in (v) and (vi) above. The ownership and
transfer restrictions are described above under the headings "Description of
Capital Stock-Restrictions on Ownership and Transfer."
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. We satisfy this requirement.
INCOME TESTS. In order to maintain qualification as a REIT, we must
annually satisfy three gross income requirements. First, at least 75% of our
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating to
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real property or mortgages on real property (including interest on obligations
secured by mortgages on real property, certain "rents from real property" or
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 our
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 our gross income
(including gross income from prohibited transactions) for each taxable year. The
Taxpayer Relief Act of 1997 repealed the 30-percent gross income test
requirement for tax years beginning after August 5, 1997.
For interest to qualify as "interest on obligations secured by mortgages on
real property or on interests in real property," the obligation must be secured
by real property having a fair market value at the time of acquisition at least
equal to the principal amount of the loan. The term "interest" includes only an
amount that constitutes compensation for the use or forbearance of money. For
example, a fee received or accrued by a lender which is in fact a charge for
services performed for a borrower rather than a charge for the use of borrowed
money is not includible as interest; amounts earned as consideration for
entering into agreements to make loans secured by real property, although not
interest, are otherwise treated as within the 75% and 95% classes of gross
income so long as the determination of those amounts does not depend on the
income or profits of any person. By statute, the term interest does not include
any amount based on income or profits of any person except that the Code
provides that (i) interest "based on a fixed percentage or percentages of
receipts or sales" is not excluded and (ii) when the REIT makes a loan that
provides for interest based on the borrower's receipts or sales and the borrower
leases substantially all of its interest in the property securing the loan under
one or more leases based on income or profits, only a portion of the contingent
interest paid by the borrower will be disqualified as interest.
Rents received or deemed to be received by us 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 three
years following the taxable year in which the trust acquires the property (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.
We expect to satisfy these requirements.
RELIEF PROVISIONS. If we fail to satisfy one or both of the 75% and 95%
gross income tests for any taxable year, we may nevertheless qualify as a REIT
for such year if we are entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if our failure to meet such
tests was due to reasonable cause and not due to willful neglect, we attach a
schedule of the sources of our income to our 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 we would be
entitled to the benefit of these relief provisions. As discussed above in
"--Taxation of the
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Company--General," even if these relief provisions were to apply, a tax would be
imposed based upon the greater of the amount by which we failed either the 75%
or 95% gross income test for that year.
ASSET TESTS. At the close of each quarter of each taxable year, we must
satisfy three tests relating to the nature of our assets. First, at least 75% of
the value of our 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 us), cash, cash items and government securities. Second,
not more than 25% of our 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 us may not exceed
5% of the value of our total assets and we 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, we will
not lose our status as a REIT if we fail 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. We intend
to maintain adequate records of the value of our assets to ensure compliance
with the asset tests and to take such action within 30 days after the close of
any quarter as may be required to cure any noncompliance but no assurance can be
given that such asset tests will be met.
ANNUAL DISTRIBUTION REQUIREMENTS. In order to be treated as a REIT, we are
required to distribute dividends (other than capital gain dividends) to our
stockholders in an amount at least equal to (A) the sum of (i) 95% of our "REIT
taxable income" (computed without regard to the dividends paid deduction and our
net capital gain) plus (ii) 95% of our 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 we timely file our tax return for such year and if paid on or
before the first regular dividend payment after such declaration. To the extent
that we do not distribute (or are not treated as having distributed) all of our
net capital gain or distribute (or are treated as having distributed) at least
95%, but less than 100% of our "REIT taxable income," as adjusted, we will be
subject to tax thereon at regular ordinary and capital gains corporate tax
rates, as the case may be. For tax years beginning after August 5, 1997, if we
elect to retain, rather than distribute, our net long-term capital gains and to
pay the tax on such gains, then each stockholder must treat a designated amount
of undistributed capital gains as long-term capital gains for his tax year in
which the last day of our tax year falls. The stockholder, however, is treated
as having paid the capital gains tax imposed on us on the designated amounts
included in their long-term capital gains, is allowed a credit or refund for the
tax deemed paid and increases the basis in such stockholder's shares of the REIT
by the difference between the amount included in their gains and the tax deemed
paid in respect thereof. Moreover, if we should fail to distribute during each
calendar year at least the sum of (i) 85% of our REIT ordinary income for such
year, (ii) 95% of our REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior periods, we would be subject to a 4%
excise tax on the excess of such required distribution over the amounts actually
distributed. We intend 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.
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It is possible that, from time to time, we 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 our taxable income. In the event that such an
insufficiency or such timing differences occur, in order to meet the 95%
distribution requirement we 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, we 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 our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, we will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
FAILURE TO QUALIFY. If we fail to qualify for taxation as a REIT in any
taxable year, and the relief provisions described above do not apply, we will be
subject to tax (including any applicable alternative minimum tax) on our taxable
income at regular corporate rates. Distributions to stockholders in any year in
which we fail to qualify will not be deductible by us 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, we also will 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 we distribute any
earnings and profits attributable to the period during which we failed to
qualify. In addition, we would be subject to tax on any built-in gains on
property held during the period during which we did not qualify if we sold such
property within 10 years of requalification. It is not possible to state whether
in all circumstances we would be entitled to such statutory relief.
TAXATION OF UNITED STATES STOCKHOLDERS
DISTRIBUTIONS GENERALLY. As long as we qualify as a REIT, distributions to
a United States Stockholder up to the amount of our 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 us as capital gain dividends will be treated as long-term capital gain (to
the extent they do not exceed our actual net capital gain) for the taxable year
without regard to the period for which the stockholder has held its stock.
However, corporate stockholders may be required to treat up to 20% of certain
capital gains dividends as ordinary income, pursuant to Section 291(d) of the
Code. A distribution in excess of current or accumulated earnings and profits
first will be treated as a tax-free return of capital, reducing the tax basis in
the United States Stockholder's Series B Preferred Shares, and a distribution in
excess of the United States Stockholder's tax basis in its Series B Preferred
Shares will be taxable gain realized from the sale of such shares. Dividends
declared by us 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 us and received by the stockholder on December 31 of such year,
provided that the dividend actually is paid by us during January of the
following calendar year. Stockholders may not claim the benefit of any of our
tax losses on their own income tax returns.
We will be treated as having sufficient earnings and profits to treat as a
dividend any distribution by us 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 otherwise would result in tax-free
returns of capital. Moreover, any
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"deficiency dividend" will be treated as a "dividend" (an ordinary dividend or a
capital gain dividend, as the case may be), regardless of our earnings and
profits.
Losses incurred on the sale or exchange of Series B 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.
TAX TREATMENT OF AUTOMATIC EXCHANGE. Upon the occurrence of an Exchange
Event, the outstanding Series B Preferred Shares automatically will be exchanged
on a one-for-one basis for Series B Bank Preferred Shares. The Automatic
Exchange will be a taxable exchange with respect to which each holder of the
Series B 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 B Preferred
Shares and the fair market value of the Series B Bank Preferred Shares received
in the Automatic Exchange. Provided that such holder's Series B Preferred Shares
were held as capital assets for more than 12 months 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 Series B Bank Preferred Shares will be the shares' fair market
value at the time of the Automatic Exchange.
TREATMENT OF TAX-EXEMPT STOCKHOLDERS. Distributions from us to a tax-exempt
employee pension trust or other domestic tax-exempt stockholder generally will
not constitute "unrelated business taxable income" ("UBTI") unless the
stockholder has borrowed to acquire or carry its Series B Preferred Shares. For
tax-exempt shareholders that are social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and qualified group legal
services plans exempt from Federal income taxation under Section 501(c)(7),
(c)(9), (c)(19) and (c)(20) of the Code, respectively, income from an investment
in Series B Preferred Shares will constitute UBTI unless the organization is
able to properly deduct amounts set aside or placed in reserve for certain
purposes so as to offset the income generated by its Series B Preferred Shares.
Such investors should consult their own tax advisors concerning the "set aside"
and reserve requirements.
Notwithstanding the foregoing, however, qualified trusts that hold more than
10% (by value) of the shares of certain REITs, however, may be required to treat
a certain percentage of such REIT's distributions as UBTI. This requirement will
apply only if (i) the REIT would not qualify as such for federal income tax
purposes but for the application of the "look-through" exception to the Five or
Fewer Test applicable to shares held by qualified trusts and (ii) the REIT is
"predominantly held" by qualified trusts. A REIT is predominantly held by
qualified trusts if either (i) a single qualified trust holds more than 25% by
value of the interests in the REIT or (ii) one or more qualified trusts, each
owning more than 10% by value of the interests in the REIT, hold in the
aggregate more than 50% by value of the interests in the REIT. The percentage of
any REIT dividend treated as UBTI is equal to the ratio of (a) the UBTI earned
by the REIT (treating the REIT as if it were qualified trust and therefore
subject to tax on UBTI) to (b) the total gross income (less certain associated
expenses) of the REIT. If we were to incur indebtedness to acquire property, the
percentage of any REIT dividend treated as UBTI would be increased to reflect
any UBTI earned by us from "debt-financed property." A DE MINIMIS exception
applies where the ratio set forth above is less than 5% for any year. For these
purposes, a qualified trust is any trust described in Section 401(a) of the Code
and exempt from tax under Section 501(a) of the Code. The provisions requiring
qualified trusts to treat a portion of REIT distributions as UBTI will not apply
if the REIT is able to satisfy the Five or Fewer Test without relying upon the
"look-through" exception.
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TAXATION OF FOREIGN STOCKHOLDERS
The following is a discussion of certain anticipated U.S. federal income tax
consequences of the ownership and disposition of our stock applicable to
Non-U.S. Holders of such stock. The discussion is based on current law and is
for general information only. The discussion addresses only certain and not all
aspects of U.S. federal income taxation.
ORDINARY DIVIDENDS. The portion of dividends received by Non-United States
Holders payable out of our earnings and profits (which are not attributable to
capital gains of the Company, which are not designated as capital gains
dividends 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 our stock. In cases where the dividend income from a
Non-United States Holder's investment in our stock 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 States 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 us that are not dividends out
of our earnings and profits 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, then 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 our current and accumulated earnings and
profits.
CAPITAL GAIN DIVIDENDS. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a distribution made by us to a Non-United States Holder,
to the extent attributable to gains from dispositions of United States Real
Property Interests ("USRPIs") will be considered effectively connected with a
U.S. trade or business of the Non-United States Holder and subject to U.S.
income tax at the rate applicable to U.S. individuals or corporations, without
regard to whether such distribution is designated as a capital gain dividend. We
believe that it is unlikely that we will derive significant gain from USRPIs,
although whether we derive gain from USRPIs will depend on the facts as they
ultimately develop. We will be required to withhold tax equal to 35% of the
amount of dividends to the extent we pay dividends that are attributable to
gains from dispositions of USRPIs. Distributions subject to FIRPTA may also be
subject to a 30% branch profits tax in the hands of a foreign corporate
stockholder that is not entitled to treaty exemption.
DISPOSITION OF STOCK OF THE COMPANY. Unless our 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. Shares of a corporation are treated as USRPIs
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 our shares, the Series B
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. Although 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. We
believe that it is unlikely that our shares will constitute USRPIs. The stock
will not constitute a USRPI if we are 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. We believe that we are, and we expect
to continue to be, a domestically controlled REIT, and therefore that the
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sale of our stock will not be subject to taxation under FIRPTA. Because our
stock will be publicly traded, however, no assurance can be given that we will
continue to be a domestically controlled REIT.
If we do not constitute a domestically controlled REIT and if our stock
constitutes USRPIs, 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
we expect to list the Series B Preferred Shares) and (ii) the selling Non-United
States Holder held 5% or less of our outstanding stock at all times during a
specified testing period.
If the gain on the sale of our stock 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 our stock is effectively connected with a U.S.
trade or business conducted by such Non-United States Holder, the Non-United
States Holder will be subject to the same treatment as a United States
Stockholder with respect to such gain, or (ii) if the Non-United States Holder
is a nonresident alien individual who was present in the United States for 183
days or more during the taxable year and has a "tax home" in the United States,
the nonresident alien individual will be subject to a 30% tax on the
individual's capital gain.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
We will report to our 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 B 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 B Preferred Shares. Backup withholding will apply only if
the holder (i) fails to furnish the person required to withhold with its
Taxpayer Identification Number ("TIN") which, for an individual, would be his or
her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is notified
by the IRS that it has failed to properly report payments of interest and
dividends, or (iv) under certain circumstances, fails to certify, under penalty
of perjury, that it has furnished a correct TIN and has not been notified by the
IRS that it is subject to backup withholding for failure to report interest and
dividend payments. Backup withholding will not apply with respect to payments
made to certain exempt recipients, such as corporations and tax-exempt
organizations. A United States Stockholder should consult with a tax advisor
regarding qualification for exemption from backup withholding and the procedure
for obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
United States Stockholder will be allowed as a credit against such United States
Stockholder's United States federal income tax liability and may entitle such
United States Stockholder to a refund, provided that the required information is
furnished to the IRS.
FOREIGN STOCKHOLDERS. Additional issues may arise pertaining to information
reporting and backup withholding with respect to a Non-United States Holder. 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
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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
We and our stockholders may be subject to state or local taxation in various
state or local jurisdictions, including those in which we or they transact
business or reside. The state and local tax treatment of us and our 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 our 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 us.
ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series B Preferred Shares, a fiduciary of a
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 B Preferred Shares is in accordance
with the documents and instruments governing such Plan; (b) whether the
ownership of Series B 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 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 our 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 B Preferred Shares
should consider whether the ownership of Series B 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 B 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." If our assets were
deemed to be Plan Assets, transactions between us and parties in interest or
disqualified persons with respect to the investing Plan or IRA could be
prohibited transactions unless a statutory or administrative exemption is
available. In addition, investment authority would also have been improperly
delegated to such fiduciaries, and,
67
<PAGE>
under certain circumstances, Plan fiduciaries who make the decision to invest in
the Series B Preferred Shares could be liable as co-fiduciaries for actions
taken by us that do not conform to the ERISA standards for investments under
Part 4 of Title I of ERISA.
For purposes of the Plan Asset Regulation, a "publicly-offered security" is
a security that is (a) "freely transferable", (b) part of a class of securities
that is "widely held," and (c) sold to the Plan or IRA as part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act and part of a class of securities that is registered under
the Exchange Act within 120 days (or such later time as may be allowed by the
Commission) after the end of the fiscal year of the issuer during which the
Offering of such securities to the public occurred. The Series B 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. We expect the Series B 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."
We believe that any restrictions imposed on the transfer of the Series B
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 B Preferred Shares to be "freely transferable."
A Plan should not acquire or hold the Series B Preferred Shares if our
underlying assets will be treated as the assets of such Plan. However, we
believe that under the Plan Asset Regulation, the Series B Preferred Shares
should be treated as "publicly-offered securities" and, accordingly, our
underlying assets should not be considered to be assets of any Plan or IRA
investing in the Series B Preferred Shares.
UNRELATED BUSINESS TAXABLE INCOME
Plan fiduciaries should also consider the consequences of holding more than
10% of the Series B Preferred Shares if we are "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
As an integral part of this prospectus, a copy of the Bank's Offering
Circular filed with the OTS relating to the Series B Bank Preferred Shares to be
issued upon the occurrence of an Exchange Event, is attached hereto as Annex I
and is incorporated by reference herein. All material information relating to
the Bank, including information relating to the Bank's financial position, can
be found in the Offering Circular. There has been no material change in the
Bank's affairs since the conclusion of the quarter ended June 30, 1999 which has
not otherwise been disclosed by the Bank in the Offering Circular.
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
dated , 1999 (the "Underwriting Agreement") among us, the Bank and
Sandler O'Neill & Partners, L.P., as representative (the "Representative") of
the underwriters named herein (the "Underwriters"), we have agreed that we will
sell to the Underwriters, and the Underwriters have severally agreed to purchase
from us, the number of shares set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- -------------------------------------------------------------------------------- ------------
<S> <C>
Sandler O'Neill & Partners, L.P.................................................
------------
------------
------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the Series B Preferred Shares
offered hereby, if any are taken.
The Underwriters propose initially to offer the Series B Preferred Shares
directly to the public at the price to public 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 B 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.
We have granted the Underwriters an option exercisable for 30 days after the
date of this prospectus to purchase up to an aggregate of additional
Series B Preferred Shares solely to cover over-allotments, if any.
We have agreed to pay certain expenses of the Underwriters in connection
with the Offering, including, without limitation, the Underwriters' legal fees
and expenses, travel costs and other fees and expenses incident to the
performance of the Underwriters' obligations under the Underwriting Agreement.
Pursuant to the Underwriting Agreement, the Underwriters' legal fees and all
other expenses of the Underwriters to be paid by us and the Bank shall not
exceed $ in the aggregate.
We have 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, we will not offer, sell, contract to sell or otherwise dispose
of our securities which are substantially similar to the Series B Preferred
Shares (i.e., the Series A Preferred Shares) or which are convertible or
exchangeable into securities which are substantially similar to the Series B
Preferred Shares without the prior written consent of the Representative, except
for the Series B Preferred Shares offered in connection with the Offering.
Prior to the Offering, there has been no public market for the Series B
Preferred Shares. The public offering price was determined by negotiations
between us and the Representative. Among the factors considered in determining
the public offering price of the Series B Preferred Shares, in addition to
prevailing market conditions, were the estimate of our financial condition and
earnings prospects, an assessment of our management, limitations on the voting
rights of the Series B 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.
We have applied for quotation of the Series B Preferred Shares on the Nasdaq
National Market. The Representative has advised us that it intends to make a
market in the Series B Preferred Shares,
69
<PAGE>
but it is not obligated to do so and may discontinue any such market making at
any time without notice.
We and the Bank have agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
In connection with the Offering, the Underwriters may purchase and sell
Series B Preferred Shares in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the Offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the Series B Preferred Shares while
the Offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Series B Preferred Shares. As a result, the price
of the Series B Preferred Shares may be higher than the price that otherwise
might exist in the open market. If these activities are commenced, they may be
discontinued by the Underwriters at any time. These transactions may be effected
on the Nasdaq National Market, in the over-the-counter market or otherwise. In
general, purchases of a security for the purpose of stabilization or to reduce a
short position could cause the price of the security to be higher than it might
be in the absence of such purchases. The imposition of a penalty bid might also
have an effect on the price of a security to the extent that it were to
discourage resales of the security.
Neither we nor the Underwriters makes any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the Series B Preferred Shares. In addition, neither we
nor the Underwriters makes any representation that the Underwriters will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Representative has provided from time to time, and expects to provide in
the future, investment banking services to us and to our affiliates, for which
the Representative has received or will receive customary fees and commissions.
EXPERTS
The financial statements of People's Preferred Capital Corporation as of
December 31, 1998 and 1997, and for the year ended December 31, 1998 and for the
period from inception, June 19, 1997 through December 31, 1997 have been
included herein and in the Registration Statement in reliance upon the report of
KPMG LLP, independent auditors, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
VALIDITY OF THE SERIES B PREFERRED SHARES
The validity of the Series B Preferred Shares offered hereby and certain
other legal and certain tax matters described under "Federal Income Tax
Considerations" will be passed upon for us by Elias, Matz, Tiernan & Herrick
L.L.P., Washington, D.C. Timothy B. Matz, one of our directors, is a partner
with Elias, Matz, Tiernan & Herrick L.L.P. The validity of the Series B
Preferred Shares will be passed upon for the Underwriters by Sullivan &
Cromwell, Los Angeles, California. In rendering its opinion, Sullivan & Cromwell
will rely, as to matters of Maryland law, on the opinion of Elias, Matz, Tiernan
& Herrick L.L.P.
70
<PAGE>
FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus are forward-looking statements.
These forward-looking statements include statements relating to our performance
in the "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and "Business and Strategy" sections of this prospectus. In
addition, we may make forward-looking statements in future filings with the
Commission and in written material, press releases and oral statements issued by
us or on our behalf. Forward-looking statements include statements regarding our
intent, belief or current expectations (including statements preceded by,
followed by or including forward-looking terminology such as "may," "will,"
"should," "believe," "expect," "anticipate," "estimate," "continue" or similar
expressions or comparable terminology) with respect to various matters.
It is important to note that our actual results could differ materially from
those anticipated from the forward-looking statements depending on various
important factors. These important factors include a possible decline in asset
quality, the possible adverse effects of unexpected changes in the interest rate
environment, increasing competition and regulatory changes. See "Risk Factors"
for more information on these and other risks we face.
All forward-looking statements in this prospectus are based on information
available to us on the date of this prospectus. We do not undertake to update
any forward-looking statements that may be made by us or on our behalf in this
prospectus or otherwise. In addition, please note that matters set forth under
the caption "Risk Factors" constitute cautionary statements identifying
important factors with respect to the forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
ADDITIONAL INFORMATION
We have 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 B Preferred Shares offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. For
further information regarding us and the Series B 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, 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 Northwest Atrium 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.
Our Articles of Incorporation provide that we shall maintain our status as a
reporting company under the Exchange Act for as long as the Series A and Series
B Preferred Shares are outstanding, and pursuant thereto, we intend to furnish
our 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.
71
<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.
"Automatic Exchange" means the automatic exchange on a share-for-share basis
of Series B Preferred Shares for Series B Bank Preferred Shares upon the
occurrence of the Exchange Event.
"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.
"Dividend Payment Date" means each quarterly date upon which dividends are
paid by the Company to the holders of the Series B Preferred Shares.
"Dividend Period" means any quarterly dividend period.
"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 Event" means the appropriate federal regulatory agency directs in
writing an exchange of the Series B Preferred Shares for Series B Bank Preferred
Shares because (i) the Bank becomes "undercapitalized" under prompt corrective
action regulations established pursuant to FDICIA, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate federal regulatory
agency, in its sole discretion, anticipates the Bank becoming "undercapitalized"
in the near term.
"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).
"Independent Directors" means the members of the Board of Directors who are
not current directors, officers or employees of the Company, PBOC, the Bank or
any affiliate of the Bank.
"Initial Dividend Period" means the first Dividend Period.
"Interested Stockholder" means any person who beneficially owns, directly or
indirectly, 10% or more of the aggregate voting power of a Maryland corporation.
"Junior Stock" means Common Stock and all other classes and series of stock
which rank below the Series B 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.
"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.
72
<PAGE>
"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.
"One Hundred Persons Test" means the Code requirement that the capital stock
of the Company be owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year.
"Other Authorized Investments" means non-mortgage-related securities
authorized by Section 856(c)(5)(B) of the Code, in an amount which shall not
exceed 20% of the value of the Company's total assets. Non-mortgage related
security is defined in the Investment Company Act. Under the Investment Company
Act, the term "security" means, in part, any note, stock, treasury stock,
debenture, evidence of indebtedness, or certificate of interest or participation
in any profit sharing agreement or a group or index of securities.
"Parity Stock" means any class and series of equity securities of the
Company expressly designated at being on a parity with the Series B Preferred
Shares as to dividend rights and rights upon liquidation, winding up or
dissolution. The Series A Preferred Shares constitutes Parity Stock with respect
to the Series B Preferred Shares.
"Portfolio" means the Current Portfolio of Mortgage Loans held by the
Company.
"Proposed Portfolio" means the Proposed Portfolio of Mortgage Loans expected
to be purchased by the Company from the Bank.
"REIT" means a real estate investment trust as defined pursuant to the REIT
Provisions, or any successor provisions thereof.
"REIT Provisions" and "REIT Requirements" means Sections 856 through 860 of
the Code and the applicable Treasury Regulations.
"REIT taxable income" means the taxable income of a REIT, which generally is
computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded and (iv)
certain other adjustments are made.
"Residential Mortgage Loan" means a whole loan secured by a first mortgage
or deed of trust on a single-family (one-to four-unit) residential real estate
property.
"Senior Stock" means any class and series of securities of the Company
expressly designated as being senior to the Series B Preferred Shares.
"Significant Stockholders" mean the Bishop Estate, BIL Securities and Arbur,
or any entity controlled, directly, or indirectly by the Bishop Estate, BIL
Securities and Arbur, or their respective successors. Furthermore, any Person
which owns or is deemed to own shares of the Company by reason of the
attribution of shares of the Company (under certain attribution provisions of
the Code) to a Material Stockholder shall be treated as a Material Stockholder.
73
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Statements of Financial Condition--December 31, 1998 and 1997 and June 30, 1999 (unaudited)................ F-3
Statements of Earnings--For the year ended December 31, 1998 and for the period from inception, June 19,
1997 through December 31, 1997 and the six month period ended June 30, 1999 and 1998 (unaudited)......... F-4
Statements of Changes in Stockholders' Equity--For the Year ended December 31, 1998 and for the period from
inception, June 19, 1997 through December 31, 1997 and the six month period ended June 30, 1999 and 1998
(unaudited).............................................................................................. F-5
Statements of Cash Flows--For the Year ended December 31, 1998 and for the period from inception, June 19,
1997 through December 31, 1997 and the six month period ended June 30, 1999 and 1998 (unaudited)......... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
People's Preferred Capital Corporation:
We have audited the accompanying statements of financial condition of
People's Preferred Capital Corporation as of December 31, 1998 and 1997, and the
related statements of earnings, changes in stockholders' equity and cash flows
for the year ended December 31, 1998, and for the period from inception, June
19, 1997 through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of People's Preferred Capital
Corporation as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for the year ended December 31, 1998 and for the period from
inception, June 19, 1997 through December 31, 1997 in conformity with generally
accepted accounting principles.
KPMG LLP
Los Angeles, California
January 25, 1999
F-2
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997 AND JUNE 30, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER DECEMBER
JUNE 30, 31, 31,
ASSETS: 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Cash and cash equivalents................................ $ 2,911 $ 1,301 $ 44
Mortgage loans, net (Note 3)............................. 68,527 69,457 70,423
Due from affiliate (Note 5).............................. 620 1,277 1,723
Accrued interest receivable.............................. 373 370 407
Other assets............................................. 6 -- --
----------- ----------- -----------
Total assets....................................... $ 72,437 $ 72,405 $ 72,597
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued liabilities................. $ 31 $ 42 $ --
Dividends payable to the Bank (Notes 4 and 5)............ -- -- 460
----------- ----------- -----------
Total liabilities.................................. 31 42 460
----------- ----------- -----------
Commitments and contingencies............................ -- -- --
Stockholders' Equity:
Preferred stock, par value $.01 per share, 4,000,000
shares authorized: Preferred stock series A, issued and
outstanding 1,426,000 shares, liquidation value
$35,650................................................ 14 14 14
Common stock, par value $.01 per share, 4,000,000 shares
authorized: 10,000 shares issued and outstanding....... -- -- --
Additional paid-in capital............................... 72,075 72,075 72,075
Retained earnings........................................ 317 274 48
----------- ----------- -----------
Total stockholders' equity......................... 72,406 72,363 72,137
----------- ----------- -----------
Total liabilities and stockholders' equity......... $ 72,437 $ 72,405 $ 72,597
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998 AND FOR THE
PERIOD FROM INCEPTION, JUNE 19, 1997 THROUGH DECEMBER 31, 1997 AND
THE SIX MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1999 1998 1998 1997
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Interest on mortgage loans................................................. $ 2,718 $ 2,819 $ 5,497 $ 1,460
Interest on deposits....................................................... 77 115 283 16
--------- --------- --------- ---------
Total revenues:.......................................................... 2,795 2,934 5,780 1,476
--------- --------- --------- ---------
EXPENSES:
Loan servicing fees........................................................ 87 86 170 46
Management fees (Note 6)................................................... 100 100 200 50
Professional fees.......................................................... 38 58 125 11
Other...................................................................... 15 11 35 2
--------- --------- --------- ---------
Total expenses........................................................... 240 255 530 109
--------- --------- --------- ---------
Net earnings............................................................. $ 2,555 $ 2,679 $ 5,250 $ 1,367
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM INCEPTION,
JUNE 19, 1997 THROUGH DECEMBER 31, 1997 AND FOR THE SIX MONTH PERIOD ENDED JUNE
30, 1999 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NUMBER OF
PREFERRED NUMBER OF
SHARES PAR COMMON
VALUE, SERIES A SHARES PAR ADDITIONAL TOTAL
$.01 PREFERRED VALUE, $.01 COMMON PAID-IN RETAINED STOCKHOLDERS'
PER SHARE STOCK PER SHARE STOCK CAPITAL EARNINGS EQUITY
---------- ------------- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 19, 1997...... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of preferred stock,
Series A.................... 1,426,000 14 -- -- 33,236 -- 33,250
Issuance of common stock...... -- -- 10,000 -- 38,839 -- 38,839
Net earnings.................. -- -- -- -- -- 1,367 1,367
Preferred dividends........... -- -- -- -- -- (859) (859)
Common dividends.............. -- -- -- -- -- (460) (460)
---------- --- ----------- --- ----------- ----------- ------------
Balance at December 31,
1997........................ 1,426,000 14 10,000 -- 72,075 48 72,137
Net earnings.................. -- -- -- -- -- 5,250 5,250
Preferred dividends........... -- -- -- -- -- (3,476) (3,476)
Common dividends.............. -- -- -- -- -- (1,548) (1,548)
---------- --- ----------- --- ----------- ----------- ------------
Balance at December 31,
1998........................ 1,426,000 $ 14 10,000 $ -- $ 72,075 $ 274 $ 72,363
Net earnings.................. -- -- -- -- -- 2,555 2,555
Preferred dividends........... -- -- -- -- -- (1,738) (1,738)
Common dividends.............. -- -- -- -- -- (774) (774)
---------- --- ----------- --- ----------- ----------- ------------
Balance as of June 30, 1999
(unaudited)................. 1,426,000 $ 14 10,000 $ -- $ 72,075 $ 317 $ 72,406
---------- --- ----------- --- ----------- ----------- ------------
---------- --- ----------- --- ----------- ----------- ------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM INCEPTION,
JUNE 19, 1997 THROUGH DECEMBER 31, 1997 AND THE SIX MONTH PERIOD
ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1999 1998 1998 1997
--------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................................ $ 2,555 $ 2,679 $ 5,250 $ 1,367
Adjustments to reconcile net earnings to net cash provided by operating
activities:
(Increase) decrease in accrued interest receivable.................... (3) 18 37 114
(Increase) decrease in due from affiliates............................ 657 1,035 446 (1,723)
Increase in other assets.............................................. (6) (5)
Increase (decrease) in accrued expenses............................... (11) -- 42 --
Decrease in dividends payable......................................... -- (460) -- --
--------- --------- --------- ---------
Net cash (used in) provided by operating activities................... 3,192 3,267 5,775 (242)
--------- --------- --------- ---------
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage loans............................................ (10,401) (8,100) (23,080) (73,952)
Mortgage loan principal repayments.................................... 11,376 10,358 24,142 3,529
Purchase of accrued interest receivable............................... (45) -- (96) (521)
--------- --------- --------- ---------
Net cash (used in) provided by investing activities................... 930 2,258 966 (70,944)
--------- --------- --------- ---------
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from preferred stock offering............................ -- -- -- 33,250
Net proceeds from capital contribution from Bank...................... -- -- -- 38,839
Preferred stock dividends paid........................................ (1,738) (1,738) (3,476) (859)
Common stock dividends paid........................................... (774) (48) (2,008) --
--------- --------- --------- ---------
Net cash (used in) provided by financing activities................... (2,512) (1,786) (5,484) 71,230
--------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................... 1,610 3,739 1,257 44
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................ 1,301 44 44 --
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................ $ 2,911 $ 3,783 $ 1,301 $ 44
--------- --------- --------- ---------
--------- --------- --------- ---------
Supplemental schedule of non-cash financing activities:
Common stock dividends declared and unpaid............................ $ -- $ -- $ -- $ 460
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
The Company is a Maryland corporation incorporated on June 19, 1997 which
was created for the purpose of acquiring, holding and managing mortgage loans
secured by real estate assets. The Company's outstanding common stock is wholly
owned by People's Bank of California (the "Bank"), a federal savings bank.
On October 3, 1997, the Company commenced its operations with the
consummation of an initial public offering of 1,426,000 shares of Series A
Preferred Shares, $0.01 par value, which raised $33,250,000, net of underwriting
and offering expenses of $2,400,000. The Series A Preferred Shares are traded on
the NASDAQ National Market. Additional expenses incurred relative to the
offering and the formation of the Company were borne by the Bank. Concurrent
with the issuance of the Series A Preferred Shares, the Bank contributed
additional capital of $38,839,000 after reimbursement for offering expenses of
$426,000 to the Company.
Each Series A Preferred Share will be exchanged automatically (the
"Automatic Exchange") for one newly issued preferred share of the Bank, if the
appropriate federal regulatory agency directs that the exchange occur. The
instances in which this might occur are as follows: (i) the Bank becomes
undercapitalized under the prompt corrective action regulations under the
Federal Deposit Insurance Corporation Improvements Act of 1991, (ii) the Bank is
placed into conservatorship or receivership, or (iii) the appropriate federal
agency anticipates the bank becoming "undercapitalized" in the near future. In
the event of the Automatic Exchange, the Bank preferred shares would constitute
a new series of preferred shares of the Bank, and 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 listed on a national stock exchange or national quotation system, and would
rank on an equal basis in terms of cash dividend payments and liquidation
preference with any shares of preferred stock of the Bank outstanding at the
time of the Automatic Exchange.
The Company used the proceeds raised from the initial public offering of the
Series A Preferred Shares and the additional capital contributed by the Bank to
purchase from the Bank the Company's initial portfolio of residential and
commercial mortgage loans at the Bank's carrying value of $71.3 million. The
mortgage loans were recorded in the accompanying financial statements at the
Bank's historical cost basis which approximated their estimated fair values. The
Company has entered into servicing agreements with the Bank and Temple Inland
Mortgage Corporation to service the Company's mortgage assets.
As the Company's common stock is wholly owned by the Bank, earnings per
share data is not presented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Residential and Commercial Mortgage Loans:
Residential and commercial mortgage loans are carried at the principal
amount outstanding, net of unamortized deferred loan fees and direct
origination costs and purchase discounts and premiums. Deferred loan fees
and direct origination costs and discounts or premiums on one-to-four-family
residential mortgage loans are accreted or amortized to income using the
interest method over the contractual term of the loans. Unaccreted or
unamortized discounts or premiums on loans sold or paid in full are
recognized in income at the time of sale or payoff. The initial portfolio of
loans was purchased from the Bank at its principal amount without adjustment
F-7
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for deferred fees or costs and discounts or premiums due to immateriality.
The Company purchased additional single family residential loans from the
Bank during 1997, 1998 and 1999. It is the Company's policy to place a loan
on non-accrual status in the event that a borrower is 90 days or more
delinquent. When a loan is placed on non-accrual status, the accrued and
unpaid interest receivable is reversed. Amortization of premiums, discounts,
and deferred fees, net of deferred direct origination costs, associated with
loans that are on non-accrual status are discontinued. Income is
subsequently recognized only to the extent that cash payments are received.
When, in management's judgment, the borrower's ability to make periodic
interest and principal payments resumes, the loan is returned to accrual
status.
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan" ("SFAS No. 114"), as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures" ("SFAS No. 118"), 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 (i) the present
value of the expected future cash flows of the impaired loan discounted at
the loan's original effective interest rate, (ii) the observable market
price of the impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. SFAS No. 114 does not apply to large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment. The Company collectively reviews its portfolio of residential
mortgage loans for impairment. The Company reviews its commercial loans
individually for impairment. There were no impaired loans included in the
Company's loan portfolio at December 31, 1998 and 1997 and at June 30, 1999
(unaudited).
Residential and commercial mortgages consist of fixed rate mortgages.
The Company's commercial loan portfolio includes fixed rate mortgages which
do not fully amortize and have a balloon payment due.
(b) Allowance for Loan Losses:
The allowance for loan losses is a general allowance which is increased
by charges to income and decreased by charge-offs (net of recoveries).
Management's periodic valuation of the adequacy of the allowance is based on
such factors as the Bank's and the Company's past loan loss experience,
delinquency trends, known and inherent risks in the portfolio, potential
adverse situations that may affect the borrower's ability to repay, the
estimated value of underlying collateral, and current economic conditions.
Although management believes that its present allowance for loan losses
is adequate, it will continue to review its loan portfolio to determine the
extent to which any changes in loss experience may require additional
provisions in the future.
(c) Cash and Cash Equivalents:
For purposes of the statement of cash flows, cash and cash equivalents
include cash and amounts due from banks, and all other highly liquid debt
investments with original maturities of three months or less.
F-8
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) Income Taxes:
The Company has elected to be treated as a REIT for Federal income tax
purposes and intends to comply with the provisions of the Code. Accordingly,
the Company will not be subject to Federal income tax to the extent it
distributes its earnings to stockholders and as long as certain asset,
income and stock ownership tests are met in accordance with the Code. As the
Company expects to qualify as a REIT for Federal income tax purposes, no
provision for income taxes is included in the accompanying financial
statements.
(e) Use of Estimates:
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and reported amounts of
revenues and expenses and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
NOTE 3--MORTGAGE LOANS AND ALLOWANCE FOR LOAN LOSSES
At June 30, 1999 (unaudited) December 31, 1998 and 1997, mortgage loans, net
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Single-family mortgage loans................................................... $ 59,163 $ 58,126 $ 58,142
Multifamily loans.............................................................. 4,171 4,919 5,548
Commercial loans............................................................... 5,446 6,665 6,986
----------- --------- ---------
68,780 69,710 70,676
Allowance for loan losses...................................................... (253) (253) (253)
----------- --------- ---------
$ 68,527 $ 69,457 $ 70,423
----------- --------- ---------
----------- --------- ---------
</TABLE>
There was no activity in the allowance for loan losses which had a balance
of $253,000 at the beginning and end of each period.
As of June 30, 1999 and December 31, 1998, all of the real estate properties
underlying the mortgage loans included in the Company's portfolio are located in
California. Of the residential mortgage loans included in the Company's
portfolio, as of June 30, 1999 and December 31, 1998, approximately 4.0% and
4.8%, respectively are secured by real estate located in northern California and
96.0% and 95.2%, respectively, are secured by real estate located in southern
California. Of the multi-family and commercial mortgage loans included in the
Company's portfolio, approximately 1.4% and 1.4% are secured by real estate
located in northern California and 98.6% and 98.6% are secured by real estate
located in southern California, respectively.
Consequently, these 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 and natural hazards (earthquakes, wild fires
and mud slides, for example) in California that may affect the ability of
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 mortgage loans held
F-9
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--MORTGAGE LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
by the Company may not protect the Company against losses occurring from
earthquakes and other natural disasters.
NOTE 4--DIVIDENDS
Holders of Series A Preferred Shares are entitled to receive, if, when and
as authorized and declared by the Board of Directors of the Company out of funds
legally available, noncumulative dividends at a rate of 9.75% per annum of the
initial liquidation preference ($25.00 per share). Dividends on the Series A
Preferred Shares, if authorized and declared, are payable quarterly in arrears
on the last day of March, June, September and December. Dividends for the six
months ended June 30, 1999 (unaudited) and the year ended December 31, 1998 and
for the period from June 19, 1997 to December 31, 1997 to holders of the Series
A Preferred Shares totaled approximately, $1,738,000, $3,476,000 and $859,000,
respectively.
No cash dividends or other distributions may be paid on common stock unless
(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 Company is in compliance with
the terms of all stock ranking senior to the common stock.
Dividends on common stock are paid when, as and if authorized and declared
by the Board of Directors out of funds legally available after all preferred
dividends have been paid. There were $774,000, and $1,548,000 common dividends
paid for the six months ended June 30, 1999 (unaudited) and the year ended
December 31, 1998. There were $460,000 common dividends declared during the
period from June 19, 1997 to December 31, 1997 which were paid in 1998.
NOTE 5--RELATED PARTY TRANSACTIONS
The Company entered into servicing agreements with the Bank pursuant to
which the Bank performs the servicing of the commercial mortgage and certain
single family residential loans held by the Company in accordance with normal
industry practice. The servicing fee the Bank charges is 0.25% per year of the
outstanding principal balances of the commercial and single family residential
mortgages. Servicing fee expense paid to the Bank totaled $49,000 and $47,000
for the six months ended June 30, 1999 (unaudited) and the year ended December
31, 1998 compared to $8,000 for the year ended December 31, 1997. A portion of
the Company's residential mortgage loans are serviced by Temple Inland Mortgage
Corporation through a subservicing arrangement at the Bank. The loans are
serviced in accordance with normal industry practice. The servicing fee is 0.25%
per year of the outstanding principal balances. Servicing fee expense paid to
Temple Inland Mortgage Corporation for the six month period ended June 30, 1999
(unaudited) was $38,000 compared to $123,000 for the year ended December 31,
1998 and $38,000 for the period from October 3, 1997 to December 31, 1997.
In its capacity as servicer, the Bank holds in custodial accounts at the
Bank mortgage loan payments received on behalf of the Company. The Bank also
receives funds due to the Company from Temple Inland Mortgage Corporation via
wire transfer and remits them to the Company. The balance of such accounts
totaled $620,000, $1,277,000 and $1,723,000 at June 30, 1999 (unaudited),
December 31, 1998 and 1997, respectively, and was recorded as Due From
Affiliates. Such payments were passed through to the Company in January as
provided in the servicing agreement. At June 30,
F-10
<PAGE>
PEOPLE'S PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--RELATED PARTY TRANSACTIONS (CONTINUED)
1999 (unaudited), December 31, 1998 and 1997, trust funds of approximately
$6,000, $5,000 and $5,000, respectively, representing escrows advanced by the
Company, are on deposit in a trust account at the Bank and are not included in
the accompanying financial statements.
As the owner of 100% of the outstanding common stock of the Company, the
Bank is the sole shareholder entitled to receive common dividends. There were
$774,000 common dividends paid for the six months ended June 30, 1999
(unaudited) and $1,548,000 common dividends paid for the year ended December 31,
1998. At December 31, 1997 the Company had dividends payable to the Bank of
$460,000. This amount was paid on January 14, 1998.
NOTE 6--MANAGEMENT/ADVISORY FEES
The Company has an advisory contract with the Bank for an initial term of
five years which will be renewed automatically for additional five-year periods
unless notice of nonrenewal is delivered to the advisor by the Company. The
annual advisory fee is $200,000. As long as any Series A Preferred Shares remain
outstanding, a decision by the Company to terminate the advisory contract must
be approved by a majority of the Board of Directors, as well as by a majority of
the Independent Directors. Total advisory fees of $100,000, $200,000 and $50,000
were paid to the Bank during the six months ended June 30, 1999 (unaudited) and
the years ended 1998 and 1997, respectively.
NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of the Company's financial instruments
consisted of the following at June 30, 1999 (unaudited) and December 31, 1998
and 1997 (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents................................ $ 2,911 $ 2,911 $ 1,301 $ 1,301 $ 44 $ 44
Mortgage loans, net...................................... 68,527 67,466 69,457 70,054 70,423 71,134
Due from Affiliate....................................... 620 620 1,277 1,277 1,753 1,753
--------- --------- --------- --------- --------- ---------
$ 72,058 $ 70,997 $ 72,035 $ 72,632 $ 72,220 $ 72,931
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
The following methods and assumptions were used to estimate the fair value
of the each type of financial instrument.
Cash and cash equivalents--The carrying value approximates the fair value
for cash and short-term investments.
Mortgage loans--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 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.
Due from affiliates--The carrying value approximates the fair value for due
from affiliates.
F-11
<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 AUGUST 9, 1999
OFFERING CIRCULAR
Shares
PEOPLE'S BANK OF CALIFORNIA
% Noncumulative (Liquidation Preference $25.00 Per Share) Preferred Stock,
Series B
People's Bank of California (the "Bank") is offering shares of its %
Noncumulative Preferred Stock, Series B, liquidation preference $25.00 per share
(the "Series B Bank Preferred Shares"). The Series B Bank Preferred Shares are
to be issued, if ever, in connection with an exchange (the "Automatic Exchange")
of the % Noncumulative Exchangeable Preferred Stock, Series B (the "Series B
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 B Preferred Shares at the time of the exchange will be
deemed to be accrued and unpaid dividends on the Series B Bank Preferred Shares.
Dividends on the Series B 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 Series B Bank Preferred Shares by the
Bank for a dividend period, holders of the Series B Bank Preferred Shares will
have no right to receive a dividend for that period. The Bank's ability to pay
cash dividends is subject to regulatory and other restrictions.
The Company has granted to the underwriters with respect to the initial
public offering of the Series B Preferred Shares (the "Underwriters") an option
for 30 days to purchase up to an additional Series B Preferred Shares at
the initial public offering price to public, 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 Series B Bank
Preferred Shares which is equal to the number of Series B Preferred Shares
issued upon such exercise.
Except in the case of a Change of Control (as defined herein), the Bank may
not redeem the Series B Bank Preferred Shares prior to , 2004. On and
after , 2004, the Series B Bank Preferred Shares may be redeemed for cash
at the option of the Bank, in whole or in part, at the redemption price of
$25.00 per share, plus declared and unpaid dividends, if any, thereon without
interest. Upon a Change of Control, the Series B Bank Preferred Shares are
redeemable on or prior to , 2004, 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 Series B 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). Under current regulations, any redemption of Series B Bank Preferred
Shares is subject to the prior approval of the Office of Thrift Supervision
("OTS"). The Series B Bank Preferred
<PAGE>
Shares are not subject to any sinking fund or mandatory redemption and are not
convertible into any other securities of the Bank.
The Series B 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. In October 1997, the Company
completed the sale of 1,426,000 shares of 9.75% Noncumulative Preferred Stock,
Series A (the "Series A Preferred Shares"), at an offering price of $25.00 per
share. In connection with the sale, the Bank established a series of 9.75%
Noncumulative Preferred Stock, Series A (the "Series A Bank Preferred Shares"),
which would be issued, if ever, in connection with an exchange of the Series A
Preferred Shares for Series A Bank Preferred Shares. The Series B Bank Preferred
Shares rank with respect to dividend rights and rights upon voluntary or
involuntary dissolution, liquidation or winding up of the Bank, (i) on equal
terms with the issued and outstanding Series A Bank Preferred Shares, (ii)
superior and prior to the issued and outstanding common stock, par value $.01
per share, of the Bank (the "Common Stock"), and (iii) superior and prior 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 a parity with or
senior to the Series B Bank Preferred Shares. The Common Stock of the Bank is
the only class of equity securities of the Bank currently outstanding.
The Series B Preferred Shares have been registered with the Securities and
Exchange Commission (the "SEC"), and the Series B Preferred Shares have been
approved for listing on the Nasdaq National Market under the symbol " ." In
the event the Series B Preferred Shares are exchanged for Series B Bank
Preferred Shares, the Bank does not intend to apply for listing of the Series B
Bank Preferred Shares on any national securities exchange or for quotation on
the Nasdaq National Market.
SEE "RISK FACTORS" COMMENCING ON PAGE OC- OF THIS OFFERING
CIRCULAR FOR A DISCUSSION OF CERTAIN RISKS RELATING TO
THE SERIES B BANK PREFERRED SHARES.
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 OTHER GOVERNMENTAL AGENCY
OR OTHERWISE.
THE 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 , 1999.
OC-2
<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 Series B Bank Preferred Shares offered by this
Offering Circular, reference is made to the Form OC, including the exhibits
filed as a part thereof. Statements contained in this Offering Circular as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed or incorporated by reference as an exhibit to the Form OC,
each such statement being qualified in all respects by such reference. The Form
OC and the exhibits thereto may be inspected without charge at the public
reference facilities of the OTS located at 1700 G Street, N.W., Washington, D.C.
20552, or at the OTS West Regional Office, located at One Montgomery Street,
Suite 400, San Francisco, California 94104. Copies of such materials may be
obtained from the OTS at prescribed rates.
The Bank has requested and received a waiver from the OTS as to the
informational requirements of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), during the period in which the Company's Series B
Preferred Shares are outstanding. The Bank agrees to become subject to such
informational requirements of the Exchange Act in the event of an Automatic
Exchange of the Company's Series B Preferred Shares for the Series B Bank
Preferred Shares. So long as the Company is subject to the periodic reporting
requirements of the Exchange Act, it will furnish the reports and other
information required thereby to the OTS. Such reports and other information can
be inspected and copied at the public reference facilities maintained by the OTS
at 1700 G Street, N.W., Washington, D.C. 20552, or at the OTS West Regional
Office located at One Montgomery Street, Suite 400, San Francisco, California
94104.
OC-3
<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 B PREFERRED SHARES IS NOT EXERCISED.
THE BANK
GENERAL. The Bank is a federally chartered savings bank, originally founded
in 1887 under California law, which conducts business from its executive offices
located in Los Angeles, California and 23 full-service branch offices located in
Los Angeles, Orange and Ventura Counties in Southern California. The Bank's
branch system includes two branches purchased in August 1999 with approximately
$137.3 million of deposits. The Bank is a wholly-owned subsidiary of PBOC
Holdings, Inc. ("PBOC"). At June 30, 1999, the Bank had total assets of $3.5
billion, total deposits of $1.6 billion and total stockholder's equity of $168.9
million.
BUSINESS STRATEGY. The Bank experienced financial difficulties in the early
1990s due in part to local economic conditions and the 1994 Northridge
earthquake, which resulted in significant increases in non-performing assets and
substantial losses. The Bank was required to be recapitalized in 1992 and again
in 1995. 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 resolution.
The Bank's new management team initially adopted a business strategy
designed to enhance the Bank's internal controls and underwriting standards,
reduce problem assets, increase net interest income, reduce operating expenses
and cost of funds and maximize profitability while limiting interest rate and
credit risk. With the reduction in PBOC's non-performing assets and PBOC's
return to profitability in 1996, the Bank was able to actively resume the
origination and purchase of residential, commercial and consumer loans. In order
to fund the Bank's increased lending activities, in October 1997, the Bank
raised approximately $33.3 million in net proceeds in connection with the
Company's sale of the Series A Preferred Shares (the "Series A Offering") and,
in May 1998, PBOC raised approximately $129.6 million in net proceeds in
connection with an initial public offering of common stock of PBOC (the "IPO"),
a substantial portion of which was contributed as equity to the Bank. With the
funds raised in the Series A Offering and the IPO, management has been able to
focus on the following elements of its business strategy:
- SIGNIFICANTLY GROW THE BANK'S LOAN PORTFOLIO. The Bank leveraged the
proceeds raised in the Series A Offering and the IPO through wholesale
purchases of $408.8 million and $876.9 million of primarily single-family
residential loans, respectively. The Bank has since been shifting the
composition of its assets toward the types of commercial loans
traditionally associated with commercial banks. Accordingly, the Bank is
replacing its wholesale loan purchases with internally originated loans,
primarily of a commercial nature, and, since June 1995, has hired over 20
individuals with significant expertise in commercial and consumer lending.
The increase in staffing has enabled the Bank to increase its multi-family
residential, commercial real estate, commercial business and consumer loan
originations (including loans secured by deposits), which during the six
months ended June 30, 1999 and the years ended December 31, 1998 and 1997,
amounted in the aggregate to $257.9 million, $218.1 million and $72.6
million or 65.3%, 35.9% and 45.2% of total loans originations,
respectively. Substantially all of such loans are secured by property or
made to customers located within the Bank's primary market area.
Management intends to continue to place increased emphasis on commercial
and consumer lending, with a corresponding decrease in emphasis on
single-family residential lending. Commercial and
OC-4
<PAGE>
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.
- EXPAND THE BANK'S BRANCH NETWORK. Management is enhancing the Bank's
branch network by opening new facilities and acquiring other banking
institutions and branches in strategic locations within its primary market
area. Since December 31, 1998, the Bank has acquired three branches with
approximately $154.6 million of deposits, which includes two branches with
approximately $137.3 million in deposits which were acquired in August
1999. In addition, in June 1999, PBOC entered into a definitive agreement
to acquire The Bank of Hollywood ("BOH"), a California commercial bank
headquartered in Hollywood, California with $138.3 million of assets,
$124.7 million of deposits and $13.3 million of stockholders' equity at
June 30, 1999. The BOH acquisition will permit the Bank to expand into a
high growth market for the individuals and small-to-medium sized
businesses the Bank is seeking to attract as customers. The Bank focuses
on acquiring branches or whole institutions when such acquisitions are
expected to be accretive to earnings, when such acquisitions will reduce
the Bank's cost of funds through a lower rate paid on the deposits
acquired, or when the deposit mix of the branches so acquired will further
the Bank's strategy of shifting the composition of its assets and
liabilities closer to that of a commercial bank.
- REDUCE FUNDING COSTS. The Bank leveraged the proceeds raised in the Series
A Offering and the IPO through the use of reverse repurchase agreements
and Federal Home Loan Bank ("FHLB") advances. The Bank is currently
replacing such wholesale borrowings with lower cost deposits. The Bank has
reduced its overall cost of funds by promoting retail deposit growth
(particularly transaction accounts) and by allowing its out-of-market,
institutional jumbo certificates of deposit to run off as they mature. The
Bank's transactional accounts (passbook, checking and money market
accounts) have increased from $183.2 million or 13.2% of total deposits at
December 31, 1994 to $484.1 million or 30.0% of total deposits at June 30,
1999.
- IMPROVE OPERATING EFFICIENCY. The Bank has significantly reduced its
operating expenses through the consolidation of certain of its operations
and, to a lesser extent, reducing its staff levels. 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 1.11% during the
year ended December 31, 1998 (excluding nonrecurring IPO-related expenses)
and 1.03% during the six months ended June 30, 1999. 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 ratio of operating expenses to average total assets to
increase by a corresponding amount.
- MANAGE THE BANK'S CAPITAL. A substantial portion of the net proceeds in
connection with the Series A Offering and the IPO was contributed by PBOC
to the Bank in order to enhance its capital and fund its growth strategy.
PBOC has not paid dividends on its common stock and instead has retained
its earnings in furtherance of its overall business objectives. Management
of the Bank has established a targeted minimum level of core capital of
6.0% of adjusted total assets. At June 30, 1999 the Bank's core capital
amounted to $218.0 million or 6.16% of adjusted total assets. See "Risk
Factors--Acquisition Strategy" for the pro forma impact of both the Bank's
recent acquisitions and the Offering.
- MAINTAIN A COMMUNITY FOCUS. The Bank's growth strategy is focused on
individuals and businesses located in Los Angeles, Orange and Ventura
Counties in Southern California. Management of the Bank believes that the
recent consolidation of financial institutions within Southern California
has resulted in a decline in product offerings and attention paid to the
individuals and small-to-medium sized businesses which the Bank focuses
on. The Bank intends to fill this void by offering a community banking
alternative and by instilling a sales and service
OC-5
<PAGE>
oriented culture in its personnel in order to build customer relationships
and maximize cross-selling opportunities.
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 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 FHLB of San Francisco, which is one of the 12 regional banks which comprise
the FHLB System. The Bank is also subject to the 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 its telephone number is (323)
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. In October 1997, the Company completed the Series A Offering. The
Series A Preferred Shares are quoted on the Nasdaq National Market under the
symbol "PPCCP." The Company used the proceeds from the Series A Offering and the
concurrent contribution of capital by the Bank to purchase from the Bank the
Company's initial portfolio of residential and commercial mortgage loans. The
Company has purchased additional mortgage loans from the Bank from time to time.
The Company is operating in a manner so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year
ended December 31, 1997. All of the Company's common stock is owned by the Bank.
The Company expects that all of its 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 B Preferred Shares. Each Series B Preferred Share will be exchanged
automatically for one newly issued Series B Bank Preferred Shares being
registered by this Offering Circular if the appropriate federal regulatory
agency directs in writing an exchange of the Series B Preferred Shares for
Series B 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 (an "Exchange Event"). The exchange feature has been required
by the OTS to eliminate the prior claim the holders of the Series B 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
in the event the Bank experiences financial difficulties. The Series A Preferred
Shares also have a similar exchange feature whereby under the circumstances
described above, the appropriate federal regulatory agency can require an
exchange of the Series A Preferred Shares for Series A Bank Preferred Shares.
The Company is undertaking the offering of its Series B Preferred Shares and
the Bank is undertaking the offering of its Series B Bank Preferred Shares for
three principal reasons: (i) the Series B Offering will strengthen the Bank's
regulatory capital position because a portion of the Series B Preferred Shares
will qualify as core capital of the Bank under relevant regulatory capital
guidelines, (ii) the Series B Offering will support the Bank's internal growth
and implementation of its business strategy, providing the Bank with the
opportunity to increase its earnings capacity by the expansion of its current
business, thereby accelerating the use of the Bank's net operating loss carry
forwards ("NOLs") and (iii) the dividends paid on the Series B Preferred Shares
will, as a result of the Company's qualification as a REIT for federal income
tax purposes, be tax deductible in computing the Company's taxable income.
OC-6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.............. shares of the Bank's % Noncumulative Preferred Stock,
Series B, which may be increased by up to an additional
shares if the Underwriters of the Company's Series B
Preferred Shares exercise an over-allotment option granted
to them by the Company.
Exchange........................ The Series B Bank Preferred Shares are to be issued, if
ever, in connection with an exchange of Series B Preferred
Shares. See "Exchange."
Ranking......................... The Series B Bank Preferred Shares rank on a parity with
the Series A Bank Preferred Shares, senior to the Bank's
Common Stock and junior to all existing and future
liabilities of the Bank, including deposits, indebtedness
and trade payables.
Dividends....................... Dividends on the Series B Bank Preferred Shares are
payable at the rate of % per annum of the initial
liquidation preference (an amount equal to $ per
annum per share), if, when and as authorized and declared
by the Board of Directors of the Bank. If authorized and
declared, dividends are payable quarterly in arrears on
March 31, June 30, September 30 and December 31 in each
year. Dividends will accrue in each quarterly period from
the first day of such period, whether or not dividends are
paid with respect to the preceding period. Dividends on
the Series B Bank Preferred Shares are not cumulative.
Because the Series B Bank Preferred Shares rank equal with
the Series A Bank Preferred Shares, if no dividend is
declared on the Series A or Series B Bank Preferred Shares
by the Bank for a dividend period, holders of the Series A
or Series B 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 B Preferred Shares for
Series B Bank Preferred Shares, any accrued and unpaid
dividends on the Series B Preferred Shares at the time of
the exchange will be deemed to be accrued and unpaid
dividends on the Series B Bank Preferred Shares. The
Bank's ability to pay cash dividends is subject to
regulatory and other restrictions described elsewhere in
this Offering Circular.
Liquidation Preference.......... The liquidation preference for each Series B Bank
Preferred Share is $25.00, plus an amount equal to
declared and unpaid dividends, if any, thereon.
Redemption...................... Except in the case of a Change of Control, the Bank may
not redeem the Series B Bank Preferred Shares before
, 2004. After that date, the Series B Bank Preferred
Shares may be redeemed for cash at the option of the Bank,
in whole or in part, at any time and from time to time, at
the redemption price of $25.00 per share, plus declared
and unpaid dividends, if any,
</TABLE>
OC-7
<PAGE>
<TABLE>
<S> <C>
thereon. Upon a Change of Control, the Series B Bank
Preferred Shares are redeemable on or prior to ,
2004, 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 Series B 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 Series B
Bank Preferred Shares is subject to the prior approval of
the OTS. The Series B 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. The Series A Bank Preferred Shares have redemption
features substantially similar to the Series B Bank
Preferred Shares except that the Series A Bank Preferred
Shares may not be redeemed, except in the case of a Change
of Control, before October 15, 2002.
Voting Rights................... Holders of Series B Bank Preferred Shares will not have
any voting rights, except as expressly provided herein and
under applicable laws. On any matter on which holders of
the Series B Bank Preferred Shares may vote, each share of
Series B Bank Preferred Shares will be entitled to one
vote. See "Description of the Series B Bank Preferred
Shares--Voting Rights."
Use of Proceeds................. The Series B Bank Preferred Shares will only be issued in
connection with an exchange for the Series B Preferred
Shares. The proceeds from the sale of the Series B
Preferred Shares will be used by the Company to purchase a
portfolio of mortgage assets from the Bank. The Bank will
not receive any proceeds, directly or indirectly, from the
exchange of Series B Preferred Shares for Series B Bank
Preferred Shares. See "Use of Proceeds."
Absence of a Public Market...... In the event the Series B Preferred Shares are exchanged
for Series B Bank Preferred Shares, the Bank has no
intention to list the Series B Bank Preferred Shares on a
national securities exchange or national quotation system.
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of the risks you should consider
relating to the Series B Bank Preferred Shares.
OC-8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
(Dollars in Thousands)
The following selected historical consolidated financial data at and for the
five years ended December 31, 1998 is derived in part from the audited
consolidated financial statements of the Bank. The historical consolidated
financial data at and for the six months ended June 30, 1999 and 1998 is derived
from unaudited consolidated financial statements. The unaudited consolidated
financial statements include all adjustments, consisting of normal recurring
accruals, which management of the Bank considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for any other interim
period or the entire year ending December 31, 1999. 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,
-----------------------------------------------------
1998 1997 1996 1995 1994
JUNE 30, --------- --------- --------- --------- ---------
1999
---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets....................................... $3,524,460 $3,335,027 $2,213,054 $1,747,871 $1,579,751 $1,720,293
Cash and cash equivalents.......................... 22,660 22,401 14,113 14,673 7,249 10,960
Federal funds sold................................. -- 24,000 7,004 7,200 11,800 --
Securities purchased under agreements to resell.... -- -- -- -- 35,000 --
Securities available-for-sale...................... 1,038,165 1,004,937 571,160 502,301 241,645 7,677
Loans held for sale................................ -- -- -- -- -- 28,946
Mortgage-backed securities held-to-maturity........ 5,214 6,282 9,671 10,971 -- 304,620
Loans receivable, net.............................. 2,325,241 2,148,857 1,533,212 1,141,707 1,228,152 1,306,057
Real estate held for investment and sale, net...... 4,051 2,723 15,191 22,561 16,288 17,514
Deposits........................................... 1,611,261 1,543,966 1,266,770 1,371,243 1,473,318 1,384,218
Securities sold under agreements to repurchase..... 434,947 364,000 340,788 192,433 -- --
FHLB advances...................................... 1,259,000 1,198,000 472,000 80,000 31,746 310,000
Total non-performing assets and troubled debt
restructurings(1)................................ 15,359 14,806 33,123 46,218 52,640 78,737
Minority interest (2).............................. 33,250 33,250 33,250 -- -- 23,324
Stockholder's equity(3)............................ 168,905 179,357 90,571 76,610 67,449 17,348
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996 1995 1994
-------- ------- -------- -------- -------- -------- --------
(UNAUDITED)
SELECTED OPERATING DATA:
Interest, fees and dividend income...... $109,576 $76,093 $180,725 $130,979 $122,896 $122,926 $116,261
Interest expense........................ 78,782 59,161 140,023 95,934 89,631 94,994 88,238
-------- ------- -------- -------- -------- -------- --------
Net interest income..................... 30,794 16,932 40,702 35,045 33,265 27,932 28,023
Provision for losses.................... 2,100 900 2,000 2,046 2,884 8,823 24,443
-------- ------- -------- -------- -------- -------- --------
Net interest income after provision for
losses................................ 28,694 16,032 38,702 32,999 30,381 19,109 3,580
Gain on mortgage-backed securities
sales, net............................ 197 323 1,746 1,275 3,638 641 485
Gain (loss) on loan and servicing sales,
net................................... 49 -- 613 3,413 (53) (166) 2,712
Income (loss) from other real estate
operations, net....................... 115 1,785 1,479 (1,805) 1,946 (2,067) (5,398)
Other noninterest income................ 1,339 1,161 2,662 2,234 2,593 2,095 2,328
Operating expenses...................... 17,180 30,932 46,679 29,513 27,923 30,906 40,878
-------- ------- -------- -------- -------- -------- --------
Earnings (loss) before income taxes
(benefit) and minority interest....... 13,214 (11,631) (1,477) 8,603 10,582 (11,294) (37,171)
Income tax provision (benefit).......... (2,000) (9,391) (16,390) (4,500) (3,016) (2,646) 11,356
Minority interest....................... 1,738 1,738 3,476 859 -- -- --
-------- ------- -------- -------- -------- -------- --------
Net earnings (loss)..................... $ 13,476 $(3,978) $ 11,437 $ 12,244 $ 13,598 $ (8,648) $(48,527)
-------- ------- -------- -------- -------- -------- --------
-------- ------- -------- -------- -------- -------- --------
</TABLE>
OC-9
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- ------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS:
PERFORMANCE RATIO (4):
Return on assets (5).................... 0.81% (0.34)% 0.41% 0.64% 0.78% (0.49)% (2.54)%
Return on equity (5).................... 15.65 (7.43) 8.14 14.80 20.20 (16.73) (89.49)
Interest-earning assets to
interest-bearing liabilities.......... 107.72 103.85 104.15 101.32 100.91 100.97 99.69
Interest rate spread(6)................. 1.45 1.23 1.28 1.84 1.94 1.57 1.54
Net interest margin(6).................. 1.86 1.47 1.49 1.91 1.99 1.62 1.53
Operating expenses to assets(5)......... 1.03 2.63 1.66 1.54 1.61 1.75 2.14
Efficiency ratio(5) (7)................. 52.87 153.12 98.89 73.49 67.47 108.69 145.22
ASSET QUALITY RATIOS:
Non-performing loans as a percent of
loans, net............................ 0.27 0.50 0.40 0.65 1.60 2.90 2.10
Non-performing assets as a percent of
total assets(1)....................... 0.30 0.61 0.34 1.05 2.21 2.94 2.21
Non-performing assets and troubled debt
restructurings as a percent of total
assets(1)............................. 0.44 0.89 0.44 1.50 2.64 3.33 4.58
Allowance for loan losses as a percent
of total loans........................ 0.81 0.86 0.86 1.15 1.99 2.50 2.18
Allowance for loan losses as a percent
of non-performing loans and troubled
debt restructurings(1)................ 171.33 93.27 156.39 89.84 90.30 75.67 43.66
Net charge-offs to average loans, net... 0.07 0.02 0.05 0.63 0.95 0.55 0.95
THE BANK'S REGULATORY CAPITAL RATIOS(8):
Core leverage capital ratio............. 6.16 6.31 6.30 5.43 4.57 4.18 1.08
Tier 1 risk-based capital ratio......... 11.12 11.42 11.48 10.74 9.15 7.56 2.01
Total risk-based capital ratio.......... 11.98 12.31 12.36 11.99 10.38 8.43 2.76
</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 restructurings on nonaccrual status are
reported in the nonaccrual loan category.
(2) Minority interest consists of the interest in the Company held by persons
other than the Bank. See "Business--Subsidiaries."
(3) At June 30, 1999 and December 31, 1998, 1997, 1996 and 1995 stockholder's
equity is net of $32.5 million, $13.6 million, $2.0 million, $6.1 million
and $1.6 million of unrealized losses on securities available-for-sale,
respectively.
(4) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods. Operating data are annualized
where appropriate.
(5) During 1998, the Bank recognized non-recurring expenses related to PBOC's
IPO consisting of: (i) $11.1 million ($6.5 million net of applicable income
tax benefits) for employment agreement benefits due to certain executive
officers of the Bank and (ii) $4.5 million ($2.7 million net of applicable
income tax benefits) for a special FDIC assessment which the Bank had
deferred from paying in prior years. Without such non-recurring expenses,
the Bank's return on assets, return on equity, operating expenses to assets
and efficiency ratios would have been 0.44%, 9.75%, 1.97% and 114.83%,
respectively, during the six months ended June 30, 1998, and 0.74%,
14.69%,1.11% and 65.84%, respectively, during the year ended December 31,
1998.
(6) 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.
(7) Efficiency ratio represents operating expenses as a percent of the aggregate
of net interest income and non-interest income.
(8) For information on the Bank's regulatory capital requirements, see
"Regulation--Regulation of Federal Savings Banks-- Regulatory Capital
Requirements."
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<PAGE>
RISK FACTORS
PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE HOLDERS OF SERIES B BANK
PREFERRED SHARES SHOULD CONSIDER CAREFULLY ALL OF THE INFORMATION SET FORTH IN
THIS OFFERING CIRCULAR AND THE PROSPECTUS FOR THE SERIES B PREFERRED SHARES 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," "PLANS," "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 Series B Bank Preferred Shares will be issued in an automatic exchange
for the Series B 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 B Preferred Shares would become
holders of Series B 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 the 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 Series B 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 Series B Bank Preferred Shares. As a result, the holders of the
Series B Bank Preferred Shares likely would receive, if anything, substantially
less than the holders of the Series B Preferred Shares would have received had
the Series B Preferred Shares not been exchanged for Series B Bank Preferred
Shares. The Series A Preferred Shares also have a similar exchange feature
whereby under the circumstances described above, the appropriate federal
regulatory agency can require an exchange of the Series A Preferred Shares for
Series A Bank Preferred Shares.
PAYMENT OF DIVIDENDS
There is no obligation to declare dividends on the Series B Bank Preferred
Shares. Because the Series B Bank Preferred Shares rank equal with the Series A
Bank Preferred Shares, if the Board of Directors of the Bank does not declare
the quarterly dividend payable on the Series A or Series B Bank Preferred
Shares, the holders of the Series A and Series B Bank Preferred Shares will have
no right to receive a dividend for such period, whether or not dividends on the
Series A and Series B Bank Preferred Shares are declared by the Board of
Directors for any future period. The Bank's ability to pay dividends on Series A
and Series B 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.
Applicable federal laws and regulations limit the Bank's ability to pay
dividends on its capital stock, including the Series B Bank Preferred Shares.
The Bank generally may not declare dividends or
OC-11
<PAGE>
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"). In addition, every
savings association subsidiary of a savings and loan holding company is required
to give the OTS at least 30 days' advance notice of any proposed dividends to be
made on its capital 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 June 30, 1999, the Bank met the capital requirements of a "well
capitalized" institution under the FDICIA prompt corrective action standards.
There can be no assurance that the Bank will continue to be "well capitalized"
under applicable OTS regulations.
SERIES B BANK PREFERRED SHARES WILL NOT BE QUOTED ON THE NASDAQ NATIONAL MARKET
Although the Company has applied to have the Series B Preferred Shares
quoted on the Nasdaq National Market, the Bank does not intend to apply for
quotation of the Series B Bank Preferred Shares, for which the Series B
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 on the Nasdaq National Market. Consequently, there can be no assurance
as to the liquidity of the trading markets for the Series B Bank Preferred
Shares, if issued, or that an active public market for the Series B Bank
Preferred Shares would develop or be maintained.
INTEREST RATE AND CONCERNS
It is expected that the Bank will continue to realize income primarily from
the differential or "spread" between the interest earned on loans, securities
and other interest-earning assets, and interest paid on deposits, borrowings and
other interest-bearing liabilities. Net interest spreads are affected by the
difference between the maturities and repricing characteristics of
interest-earning assets and interest-bearing liabilities. In addition, loan
volume and yields are affected by market interest rates on loans, and rising
interest rates generally are associated with a lower volume of loan
originations. It is expected that a substantial majority of the Bank's assets
will continue to be indexed to changes in market interest rates and a
substantial majority of its liabilities will continue to be short-term, which
will mitigate the negative effect of a decline in yield on its assets. At June
30, 1999, the Bank had $1.5 billion in assets maturing or repricing within one
year and $1.8 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."
In addition to affecting net interest income, changes in interest rates also
can affect the value of the Bank's interest-earning assets, which are comprised
of fixed and adjustable-rate instruments. Generally, the value of fixed-rate
instruments declines when interest rates rise and, conversely, increases when
interest rates fall. At June 30, 1999, $1.0 billion or 99.5% of the Bank's
mortgage-backed and investment securities were classified as available for sale.
Securities classified as available for sale are reported at fair value with
unrealized gains and losses excluded from earnings and reported net of taxes as
a separate component of stockholder's equity. At June 30, 1999, the Bank had
$32.5 million of unrealized losses with respect to its available for sale
securities, as compared to $13.6 million of unrealized losses at December 31,
1998. Although the Bank will not be required to include any such losses in its
earnings until it disposes of all or a portion of such securities, no
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<PAGE>
assurance can be made that such unrealized losses will decline in the future or
that the Bank will not be required to dispose of any such securities in the
future. See "Business of the Bank--Investment Activities."
IMPACT OF OWNERSHIP CHANGE ON USE OF NET OPERATING LOSS CARRYFORWARDS
The Bank had $143.9 million of federal NOLs as of June 30, 1999 which are
scheduled to expire between 2001 and 2013. In the event an "ownership change" of
the Bank was or is deemed to have occurred, an annual limitation (the "Section
382 limitation") would be imposed pursuant to Section 382 of the Code on the
rate at which NOLs may be deducted against taxable income of the Bank in any
post-change taxable year. The Bank's 1992 recapitalization (the "1992
recapitalization") resulted in an ownership change within the meaning of Section
382 of the Code (the "1992 Ownership Change"). The 1992 Ownership Change
resulted in an annual Section 382 limitation on the Bank's ability to utilize
any NOLs created prior to the 1992 Ownership Change in any one year of
approximately $7.7 million. At June 30, 1999, the Bank had $29.8 million of NOLs
which were created prior to the 1992 Ownership Change.
Similarly, the IPO resulted in a second ownership change within the meaning
of Section 382 of the Code (the "1998 Ownership Change"). The 1998 Ownership
Change resulted in an annual Section 382 limitation on the Bank's ability to
utilize any NOLs created prior to the 1998 Ownership Change but after the 1992
Ownership Change in any one year of approximately $21.3 million. At June 30,
1999, the Bank had $103.3 million of NOLs which were created prior to the 1998
Ownership Change but after the 1992 Ownership Change. As a result of the
foregoing limitations on the Bank's ability to fully use its NOLs to offset
future taxable income, the Bank may be unable to fully utilize such tax
benefits. This inability could have an adverse effect on the net earnings and
prospects of the Bank.
CONTROL OF PBOC BY THE SIGNIFICANT STOCKHOLDERS
PBOC is the only stockholder of the Bank. All of PBOC's common stock prior
to the IPO was 100% owned by three stockholders: (i) the Trustees of the Estate
of Bernice Pauahi Bishop (the "Bishop Estate"), a charitable educational trust
established under Hawaii law, (ii) BIL Securities (Offshore) Limited ("BIL
Securities"), a wholly-owned subsidiary of Brierley Investments Limited, a New
Zealand corporation, and (iii) Arbur, Inc. ("Arbur"), a Delaware corporation
(collectively, the "Significant Stockholders"). As a result of the IPO (which
included the sale of a portion of the shares of PBOC common stock owned by the
Significant Stockholders in the IPO), at June 30, 1999, the Significant
Stockholders owned in the aggregate 33.41% of PBOC's outstanding common stock.
In addition, in connection with the IPO, PBOC and the Significant Stockholders
entered into the 1998 Stockholders' Agreement (the "Stockholders' Agreement"),
pursuant to which PBOC agreed to use all authority under applicable law to cause
the Significant Stockholders' nominees (which could amount to up to three
individuals depending on the Significant Stockholders' percentage ownership of
PBOC common stock) to be included in the slate of nominees to PBOC's Board of
Directors and agreed to use all practical efforts to cause the election of such
slate. PBOC presently has six directors, two of whom are affiliated with or
serve at the direction of the Significant Stockholders. As a result of the
foregoing, the Significant Stockholders will continue to be able to influence
the election of the PBOC Board of Directors, and thereby the policies of PBOC
and the Bank, including any possible mergers, sales of assets and similar
transactions.
RISK'S RELATING TO GOODWILL LITIGATION
In connection with PBOC's acquisition of the Bank from the Federal Savings
and Loan Insurance Corporation ("FSLIC") in April 1987, the Bank was permitted
to include in its regulatory capital and recognize as supervisory goodwill
$217.5 million of cash assistance provided to the Bank by the FSLIC (the
"Capital Credit"), as well as $79.7 million of goodwill which was recorded by
the Bank under
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<PAGE>
generally accepted accounting principles ("GAAP"). In August 1989, Congress
enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") which resulted in the Bank being required to write-off its goodwill,
which caused the Bank to fail to comply with its minimum regulatory capital
requirements.
PBOC, the Bank and certain current and former stockholders of PBOC have sued
the U.S. Government with respect to the required write-off of its Capital Credit
and supervisory goodwill in a law suit entitled SOUTHERN CALIFORNIA FEDERAL
SAVINGS AND LOAN ASSOCIATION, ET AL. V. UNITED STATES, No. 93-52-C, which seeks
damages for breach of contract and for deprivation of property without just
compensation and without due process of the law (the "Goodwill Litigation"). In
connection with the IPO, PBOC, the Bank and each of the Significant Stockholders
individually entered into a Shareholder Rights Agreement whereby each
Significant Stockholder received one Contingent Goodwill Participation Right
("Right") for each share of PBOC common stock held by the Material Stockholder.
Each Right entitles such Significant Stockholder to receive 0.0009645% of the
Litigation Recovery (as defined below), or 95% of the Litigation Recovery by all
Significant Stockholders on an aggregate basis. As defined herein, the
Litigation Recovery is the amount, if any, recovered by PBOC and/or the Bank as
a result of a settlement or judgment with respect to such litigation, net of
certain expenses, income taxes and other payments. The remaining 5% of such
Litigation Recovery, if any, will be retained by PBOC and/or the Bank.
Legal, accounting, consulting and other fees and expenses related to the
Goodwill Litigation may become substantial. During the period from the
commencement of the Goodwill Litigation to June 30, 1999, substantially all
legal fees incurred by the Bank have been reimbursed by the Significant
Stockholders. To the extent PBOC and the Bank must continue to engage in
protracted litigation, PBOC and the Bank will incur significant legal,
accounting, consulting and other fees and expenses in the future. The
Significant Stockholders have agreed to reduce the amount of the Litigation
Recovery which is to be paid to them by, among other things, the fees and
expenses incurred in connection with the Goodwill Litigation and any ancillary
litigation. While such agreement does not legally require reimbursement of such
expenses in the event there is no Litigation Recovery, the Significant
Stockholders have advised the Board of Directors of their willingness to
reimburse PBOC and the Bank for such fees and expenses periodically upon request
by PBOC and/or the Bank. No assurance can be made that PBOC and/or the Bank will
prevail in the Goodwill Litigation or that PBOC and/or the Bank will receive
recoveries sufficient to offset the fees and expenses for which PBOC and the
Bank remain responsible. Although the Significant Stockholders have thus far
advanced such fees and expenses, no assurance can be made that the Significant
Stockholders will in fact reimburse PBOC or the Bank for any fees and expenses
incurred with respect to the Goodwill Litigation and any ancillary litigation.
RISK THAT RIGHTS ARE TREATED AS DEBT ON THE BANK'S ABILITY TO USE NOLS
KPMG LLP has issued an opinion to PBOC and the Bank to the effect that, for
federal income tax purposes, the Rights evidenced by the terms of the
Shareholder Rights Agreement should be treated as stock of PBOC for purposes of
Sections 382(e), 311(a) and 305(a) of the Code. Such opinion is not binding on
the Internal Revenue Service ("IRS") and no assurance can be made that the IRS
will treat the Shareholder Rights Agreement as stock of PBOC for federal income
tax purposes. If the Shareholder Rights Agreement is treated other than as stock
in PBOC (i.e., as debt of PBOC), the value of the Shareholder Rights Agreement
would reduce the value of PBOC's stock, and, correspondingly, the amount of the
Section 382 limitation with respect to the 1998 Ownership Change. Such a
reduction in the amount of the Section 382 limitation would significantly impair
the ability of the Bank to use its NOLs existing at the time of the 1998
Ownership Change and could have a material adverse effect on the net earnings
and prospects of PBOC and the Bank.
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<PAGE>
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. 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. These problem
assets reached $78.7 million or 4.6% of total assets at December 31, 1994. Since
the change in senior management in 1995, the Bank improved 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. The Bank currently takes title to non-performing assets as promptly as
practicable and improves the properties' physical condition where appropriate so
that marketing efforts may be commenced. In the case of commercial properties,
management takes steps to enhance net operating income with respect to its
properties in order to command the best sales price possible. Management's
actions, together with improved economic conditions in California, have resulted
in a substantial decline in non-performing assets and troubled debt
restructurings, as such problem assets amounted to $15.4 million or 0.44% of
total assets at June 30, 1999. See "Business of the Bank--Asset Quality--
Non-Performing Assets."
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. Although
management utilizes its best judgment in providing for losses with respect to
its non-performing assets, there can be no assurance that the Bank will be able
to dispose of such non-performing assets without establishing additional
provisions for losses on loans or further reductions in the carrying value of
its real estate owned.
MULTI-FAMILY RESIDENTIAL, COMMERCIAL REAL ESTATE, COMMERCIAL BUSINESS AND
CONSUMER LENDING
At June 30, 1999, the Bank's multi-family residential and commercial real
estate loans amounted to $626.8 million in the aggregate or approximately 26.2%
of the Bank's total loans receivable. In addition, while commercial business and
consumer loans (including loans secured by deposits) amounted to only $242.2
million in the aggregate at June 30, 1999 (which represented 10.1% of the Bank's
total loans receivable), the Bank intends to increase its emphasis on commercial
business and consumer lending during the next several years. Although
multi-family residential, commercial real estate, commercial business and
consumer loans generally provide for higher interest rates and shorter terms
than single-family residential real estate loans, such loans generally have a
higher degree of credit risk. At June 30, 1999, an aggregate of $1.8 million and
$3.4 million of the Bank's multi-family residential and commercial real estate
loans were classified non-accrual or included in real estate owned,
respectively.
ECONOMIC CONDITIONS
The Bank's loan portfolio is concentrated in California, particularly
Southern 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. During the early 1990s, the Southern
California economy deteriorated due, in part, to the national recession at the
start of the decade, together with a general decline in market values of
Southern California real estate. Any downturn in the economy generally, and in
California in particular, could affect the ability of the Bank to originate a
sufficient volume of high-quality residential mortgage loans or maintain its
asset quality, and could reduce real estate values. Real estate values in
California could also be affected by earthquakes or other natural disasters.
OC-15
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The recent success of PBOC and the Bank has been dependent on Rudolf P.
Guenzel, the President and Chief Executive Officer of PBOC and the Bank, J.
Michael Holmes, Executive Vice President and Chief Financial Officer of PBOC and
the Bank, and William W. Flader, Executive Vice President of PBOC and the Bank.
The Bank's future success will also depend, to a significant extent, upon the
services of Messrs. Guenzel, Holmes and Flader. The Bank believes that the
prolonged unavailability or the unexpected loss of the services of any of
Messrs. Guenzel, Holmes and Flader could have a material adverse effect upon
PBOC and the Bank. During 1998, PBOC and the Bank entered into three-year
employment agreements with Messrs. Guenzel, Holmes and Flader. Neither PBOC nor
the Bank maintains key man life insurance policies with respect to Messrs.
Guenzel, Holmes and Flader.
LEVERAGE STRATEGY
The Bank intends to leverage a portion of the proceeds expected to be raised
in the offering of Series B Preferred Shares through the purchase of
single-family residential loans and U.S. Government agency obligations and U.S.
Government agency mortgage-backed securities, which purchases are expected to be
funded primarily through increases in deposits, short- to intermediate-term
reverse repurchase agreements and FHLB advances. Management's leverage strategy
is premised on the assumption that it will earn a positive spread on the yield
generated from its purchased loans and 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 NOLs. 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. For
information concerning the Bank's leveraging of its balance sheet during prior
periods, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ACQUISITION STRATEGY
An important element of the Bank's strategy is the acquisition of branch
offices and whole institutions in locations within the Bank's primary market
area. No assurance can be given that the Bank will be able to identify
attractive acquisition candidates, that acquisitions can be completed at
reasonable prices or that acquisitions can be completed in a timely manner or at
all. In addition, no assurance can be given that the Bank will be able to
successfully integrate acquisitions with the Bank's existing systems and
operations without substantial costs, delays or other problems. Finally, the
acquisition of branch offices and/or whole institutions may result in the
creation of intangibles which will be required to be amortized in future
periods. If the BOH acquisition and the Bank's pending branch acquisitions had
been completed as of June 30, 1999, PBOC would have had, on a pro forma basis,
$20.9 million of intangibles which would be amortized over a period of eight to
15 years. The amortization of intangibles recognized in the BOH acquisition and
the Bank's branch acquisitions completed in August 1999 will reduce the Bank's
net income in future periods and could adversely impact the Bank's ability to
satisfy internal and regulatory capital requirements. If the BOH acquisition and
the Bank's recently completed branch acquisitions had been completed as of June
30, 1999, the Bank would have had, on a pro forma basis, $197.0 million of
leverage capital representing 5.56% of the Bank's adjusted total assets. If the
issuance of the Series B Preferred Shares, together with the BOH acquisition and
the Bank's recently completed branch acquisitions had been completed as of June
30, 1999, the Bank would have had, on a pro forma basis, $ million of leverage
capital representing % of the Bank's adjusted total assets. See "Pro forma
Regulatory Capital."
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<PAGE>
YEAR 2000 COMPLIANCE ISSUES
The Bank has adopted a plan to address Year 2000 data processing issues. The
plan includes the assessment of all internal systems, programs and data
processing applications as well as those provided to the Bank by third-party
vendors. A significant portion of the Bank's data processing and loan servicing
is performed by third-party vendors from which the Bank has received written
confirmation that they expect to be compliant with Year 2000 issues on a timely
basis. As of June 30, 1999, the Bank had incurred approximately $714,000 of
total costs associated with its Year 2000 issues, and expects to incur total
expenses of $770,000 through 1999 with respect thereto. Management is currently
monitoring the Bank's third party vendors' efforts with respect to compliance
with Year 2000 issues. No assurance can be made that such third party vendors'
efforts will be successful or that the Bank's costs associated therewith will be
as estimated. However, the Bank does not believe any Year 2000 issues will
materially affect the Bank's products, services or competitive conditions. In
addition, the Bank does not believe that the cost of addressing the Year 2000
issues is a material event or uncertainty that would cause reported financial
information not to be necessarily indicative of future operating results or
financial condition, and the costs or the consequences of incomplete or untimely
resolution of its Year 2000 issues does not represent a known material event or
uncertainty that is reasonably likely to affect its future financial results or
cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition.
COMPETITION
The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans.
The Bank competes with other thrift institutions, commercial banks,
insurance companies, credit unions, thrift and loan associations, money market
mutual funds and brokerage firms in attracting and retaining deposits.
Competition for deposits from large commercial banks is particularly strong.
Many of the nation's thrift institutions and many large commercial banks have a
significant number of branch offices in the areas in which the Bank operates.
In addition, there is strong competition in originating and purchasing real
estate and consumer loans, principally from other savings and loan associations,
commercial banks, mortgage banking companies, insurance companies, consumer
finance companies, pension funds and commercial finance companies. The primary
factors in competing for loans are the quality and extent of service to
borrowers and brokers, economic factors such as interest rates, interest rate
caps, rate adjustment provisions, loan maturities, loan-to-value 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 PBOC 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.
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<PAGE>
USE OF PROCEEDS
The Series B Bank Preferred Shares are to be issued, if ever, in connection
with an exchange of the Series B Preferred Shares, which shares were sold
pursuant to an effective registration statement filed with the SEC. The proceeds
from the sale of the Series B Preferred Shares will be used by the Company to
purchase a portfolio of mortgage assets from the Bank. The proceeds from the
sale of mortgage assets to the Company will be used to enhance the Bank's
capital and support its growth strategy, including loan originations as well as
possible future acquisitions of additional branch offices and whole
institutions. The Bank intends to initially leverage a portion of the proceeds
received from the sale of the mortgage assets to the Company through the
purchase of single-family residential loans, U.S. Government agency obligations
and U.S. Government agency mortgage-backed securities and intends to fund such
purchases through increases in deposits, short- to intermediate-term reverse
repurchase agreements and FHLB advances. Management believes 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 NOLs.
The Bank will not receive any proceeds, directly or indirectly, from the
exchange of the Series B Preferred Shares for Series B Bank Preferred Shares.
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<PAGE>
CAPITALIZATION
The following table sets forth the actual consolidated capitalization of the
Bank at June 30, 1999 and as adjusted to give effect to the issuance of the
Series B 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,
AS
THE BANK ADJUSTED
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deposits............................................................. $1,611,261 $1,611,261
--------- ---------
--------- ---------
Borrowings:
Securities sold under agreements to repurchase..................... $ 434,947 $ 434,947
FHLB advances...................................................... 1,259,000 1,259,000
--------- ---------
Total............................................................ $1,693,947 $1,693,947
--------- ---------
--------- ---------
Minority interest--Series A and Series B Preferred Shares............ $ 33,250 $
--------- ---------
--------- ---------
Stockholder's equity:
Preferred Stock (par value, $0.01 per share; 1,000,000 shares
authorized, no shares issued and outstanding).................... -- --
Common Stock (par value, $0.01 per share; 1,000,000 shares
authorized, 100,000 shares issued and outstanding)............... 1 1
Additional paid-in capital......................................... 231,845 231,845
Net unrealized gain (loss) on securities available for sale.......... (32,539) (32,539)
Minimum pension liability, net (1)................................... (414) (414)
Accumulated deficit.................................................. (29,988) (29,988)
--------- ---------
Total stockholder's equity....................................... (168,905) (168,905)
--------- ---------
Total capitalization................................................. $ 202,155 $
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Reference is made to Note 15 of the Notes to Consolidated Financial
Statements.
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<PAGE>
PRO FORMA REGULATORY CAPITAL
Under regulations adopted by the OTS, each savings institution is currently
required to maintain tangible and core (or Tier 1 leverage) capital equal to at
least 1.5% and 3.0%, respectively, of its adjusted total assets, and total
capital equal to at least 8.0% of its risk-weighted assets. At June 30, 1999,
the Bank's tangible, Tier 1 leverage capital and total risk-based capital
amounted to $218.0 million or 6.16% of adjusted total assets, $218.0 million or
6.16% of adjusted total assets, and $234.9 million or 11.98% of risk-weighted
assets, respectively.
The following tables reconcile the Bank's pro forma stockholder's equity to
regulatory capital as of June 30, 1999, assuming completion of the sale of the
Series B Preferred Shares and the consummation of the BOH acquisition and the
Bank's recently completed branch acquisitions, and illustrate the percentage by
which the Bank will exceed, on a pro forma basis, its minimum capital
requirements. For further information on the Bank's capital requirements, see
"Regulation--Regulation of Federal Savings Banks -Regulatory Capital
Requirements."
<TABLE>
<CAPTION>
TIER 1 TOTAL
TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL
--------------- --------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Stockholder's equity of the Bank................ $ $ $
Minority interest--Series A and Series B
Preferred Shares(1)...........................
Unrealized losses on securities available for
sale..........................................
Non-allowable capital:
Direct real estate investments................
Intangible assets.............................
Supplemental capital:
Allowance for loan losses.....................
------ ------ ------
Regulatory capital of the Bank.................. $ $ $
------ ------ ------
------ ------ ------
</TABLE>
- ------------------------
(1) The OTS has indicated that the Series A and Series B Preferred Shares cannot
exceed in the aggregate 25% of the Bank's core capital (including the Series
A and Series B Preferred Shares) and 33 1/3% of the Bank's core capital
(excluding the Series A and Series B Preferred Shares). Consequently, on a
pro forma basis as of June 30, 1999, $ million of the proceeds of the
Series B Offering will constitute tangible, core and risk-based capital of
the Bank.
<TABLE>
<CAPTION>
RISK-BASED
------------------------
TANGIBLE TIER 1 TOTAL
CAPITAL LEVERAGE TIER 1 CAPITAL
RATIO CAPITAL RATIO RATIO
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Regulatory capital of the Bank.............................................. % % % %
Well-capitalized ratio...................................................... 1.50 5.00 6.00 10.00
--- --- --- -----
Excess above well-capitalized ratio......................................... % % % %
--- --- --- -----
--- --- --- -----
</TABLE>
The amount of adjusted total assets used for the tangible and core (or Tier
1 leverage) capital ratios was approximately $3.5 billion. Risk-weighted assets
used for the risk-based capital ratios amounted to approximately $2.0 billion.
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<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 its overall business strategy, the Bank has
sought to develop a wide variety of products and services which meet the needs
of its retail and commercial customers. On the asset side of the Bank's balance
sheet, management is emphasizing commercial real estate, commercial business and
consumer lending which complements the Bank's residential lending operations. In
addition, the Bank has increased its investment in corporate trust preferred
obligations and U.S. Government agency mortgage-backed securities, which
investments enhance net interest income while limiting credit and interest rate
risk. On the liability side of the Bank's balance sheet, the Bank has been
accessing cost-efficient funding sources, including retail deposits, FHLB
advances and securities sold under agreements to repurchase.
The Bank's business strategy focuses on achieving attractive returns
consistent with the Company's risk management objectives. The Bank has
implemented this strategy by (i) significantly growing its loan portfolio, with
a particular emphasis on commercial and consumer lending; (ii) expanding the
Bank's branch network through the acquisition of branch offices and whole
institutions; (iii) reducing funding costs through the utilization of retail
deposits; (iv) improving operating efficiency by maintaining a low level of
operating expenses relative to interest-earning assets; (v) managing the Bank's
capital in order to support its growth strategy; (vi) taking advantage of recent
consolidation in its market area by promoting the Bank as a community banking
alternative to individuals and small-to-medium sized businesses in Southern
California.
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets increased by $189.4 million or 5.7% to $3.5 billion
during the six months ended June 30, 1999. The increase in total assets during
the period reflected an increase in the Bank's loans receivable, net, as well as
investments in U.S. Government agency debt securities and mortgage-backed
securities. The foregoing increases reflected the Bank's continuing growth
strategy. Total assets increased by $1.1 billion or 50.7% to $3.3 billion during
the year ended December 31, 1998. The increase in total assets during 1998
primarily reflected an increase in the Bank's loans receivable, net, as well as
investments in U.S. Government agency debt securities, corporate trust preferred
securities and mortgage-backed securities. During 1998, the Bank took advantage
of the leverage opportunities presented as a result of the capital raised from
the IPO, originating $607.6 million of loans and purchasing $876.9 million of
loans, which were funded by intermediate-term FHLB advances. In addition, total
investments increased by $430.4 million during 1998. These assets were funded
primarily through the use of short- and intermediate-term borrowings, consisting
of reverse repurchase agreements and FHLB advances.
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 and federal funds sold) amounted to
$22.7 million, $46.4 million and $21.1 million at June 30, 1999 and December 31,
1998 and 1997, respectively. The Bank manages its cash, cash equivalents and
other short-term investments based upon the Bank's operating, investing and
financing activities. The Bank generally attempts to invest its excess liquidity
into higher yielding assets such as loans or securities. At June 30, 1999, the
Bank's regulatory liquidity exceeded the minimum OTS requirements. See
"--Liquidity And Capital Resources."
SECURITIES. At June 30, 1999, the Bank's securities portfolio (both
held-to-maturity and available-for-sale) amounted to $1.0 billion or 29.6% of
the Bank's total assets, as compared to
OC-21
<PAGE>
$1.0 billion or 30.3% and $580.8 million or 26.2% at December 31, 1998 and 1997,
respectively. At June 30, 1999 and December 31, 1998 and 1997, $659.5 million,
$590.8 million and $428.1 million, or 63.2%, 58.4% and 73.7% of the Bank's
securities portfolio consisted of mortgage-backed securities, $247.3 million,
$325.0 million and $0 million, or 23.7%, 32.1% and 0% of such portfolio,
consisted of investment-grade trust preferred obligations, and $65.2 million,
$37.0 million and $139.7 million, or 6.2%, 3.7% and 24.1% of such portfolio,
consisted of U.S. Government agency securities, respectively. Although
mortgage-backed securities often carry lower yields than traditional mortgage
loans, such securities generally increase the credit quality of the Bank's
assets because they have underlying insurance or guarantees, 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. At
June 30, 1999, $5.2 million of the Bank's securities portfolio was classified as
held-to-maturity and reported at historical cost and $1.0 billion 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. Historically, the Bank has
classified substantially all of its securities purchases as available-for-sale
except for certain mortgage-backed securities which are qualifying for purposes
of the Community Reinvestment Act of 1978, as amended ("CRA"). At June 30, 1999,
the Bank's securities classified as available-for-sale had in the aggregate
$32.5 million of unrealized losses, which represents a substantial increase from
the $13.6 million of unrealized losses at December 31, 1998. See "Business of
the Bank--Investment Activities."
LOANS RECEIVABLE. Net loans receivable increased by $176.4 million or 8.2%
and $615.6 million or 40.2% during the six months ended June 30, 1999 and the
year ended December 31, 1998, respectively. The increase during the six months
ended June 30, 1999 reflected the $588.0 million of loan originations and
purchases, which were partially offset by $284.9 million of repayments during
the period. The significant increase during the year ended December 31, 1998 was
directly attributable to management's strategy of leveraging the capital
generated from the IPO. The Bank purchased $821.7 million of single-family
residential mortgage loans in 1998 on a servicing retained basis. The Bank also
increased its loan originations to $607.6 million in 1998 compared to $160.7
million in 1997.
NON-PERFORMING LOANS AND TROUBLED DEBT RESTRUCTURINGS. Management has
successfully reduced the level of the Bank's non-performing assets, which has
resulted in a substantial decline in non-performing loans and troubled debt
restructurings (troubled debt restructurings consist of loans with respect to
which the Bank has agreed to grant an interest rate concession or defer
principal or interest payments), from an aggregate of $25.8 million at December
31, 1996 to an aggregate of $12.1 million at December 31, 1998 and $11.3 million
at June 30, 1999.
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 is
included in total non-performing assets. At June 30, 1999, the Company's real
estate held for investment and sale was $4.1 million as compared to $2.7 million
at December 31, 1998 and $15.2 million at December 31, 1997.
DEPOSITS. Total deposits increased by $67.3 million or 4.4% and $277.2
million or 21.9% during the six months ended June 30, 1999 and the year ended
December 31, 1998 respectively. The Bank's aggregate certificates of deposit
increased from $932.8 million or 73.6% of total deposits at December 31, 1997 to
$1.1 billion or 71.9% of total deposits at December 31, 1998 and remained
relatively constant at $1.1 billion or 70.0% of total deposits at June 30, 1999.
Certificates of deposit of $100,000 and over increased during these periods from
$138.2 million or 10.9% of total deposits at December 31, 1997 to $316.3 million
or 20.5% of total deposits at December 31, 1998 to $322.6 million or 20.0% of
total deposits at June 30, 1999. These increases in deposits were primarily due
to the acquisition of two branch offices as well as their related deposits and
expanded business customer deposit base. The Bank has offered a wide array of
deposit products through its branch system in order to foster retail deposit
growth. Transaction accounts (consisting of passbook, checking and money
OC-22
<PAGE>
market accounts) increased from $333.9 million or 26.4% of total deposits at
December 31, 1997 to $434.8 million or 28.2% of total deposits at December 31,
1998 to $484.1 million or 30.0% of total deposits at June 30, 1999.
BORROWINGS. Other than deposits, the Bank's primary sources of funds
consist of reverse repurchase agreements and advances from the FHLB of San
Francisco. At June 30, 1999, reverse repurchase agreements amounted to $434.9
million, compared to $364.0 million and $340.8 million at December 31, 1998 and
1997, respectively. The Bank has been utilizing reverse repurchase agreements as
part of its overall asset growth and leverage strategy. As of June 30, 1999, the
weighted average remaining term to maturity of the Bank's reverse repurchase
agreements amounted to 3.21 years, compared to 3.73 years and 2.71 years at
December 31, 1998 and 1997, respectively, and such reverse repurchase agreements
had a weighted average interest rate of 5.52% at June 30, 1999 as compared to
5.61% and 5.76% at December 31, 1998 and 1997, respectively. See "Business of
the Bank--Sources Of Funds--Borrowings."
Advances from the FHLB of San Francisco amounted to $1.3 billion, $1.2
billion and $472.0 million at June 30, 1999 and December 31, 1998 and 1997,
respectively. The significant increase in FHLB advances during 1998 is directly
attributable to management's strategy of leveraging the capital raised in the
IPO. Fixed-rate FHLB advances of intermediate-term maturities were used to fund
the wholesale purchase of loans and securities and loan originations. Of the
Bank's FHLB advances outstanding as of June 30, 1999, $75.0 million is scheduled
to mature during 1999 and the remaining $1.2 billion matures between the years
of 2000 and 2008. As of June 30, 1999, the weighted average remaining term to
maturity of the Bank's FHLB advances amounted to 4.68 years, compared to 5.01
years and 1.61 years at December 31, 1998 and 1997, and had a weighted average
interest rate of 5.36% at June 30, 1999, compared to 5.38% and 5.87% at December
31, 1998 and 1997. At June 30, 1999, the Bank had a collateralized available
line of credit of approximately $1.4 billion with the FHLB of San Francisco.
STOCKHOLDER'S EQUITY. Stockholder's equity increased from $90.6 million at
December 31, 1997 to $179.4 million at December 31, 1998 and declined to $168.9
million at June 30, 1999. The $88.8 million or 98.0% increase in stockholder's
equity during the year ended December 31, 1998 was mainly due to the
contribution by PBOC of $89.3 million of the proceeds of the IPO to the Bank.
The $10.5 million or 5.8% decrease in stockholder's equity during the six months
ended June 30, 1999 reflected the $18.9 million increase in unrealized losses
with respect to the Bank's available for sale securities plus the $5.0 million
in dividends paid on the Series A Preferred Shares, which were partially offset
by the $13.5 million in 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 Bank's provisions for loan losses resulting from
the Bank's assessment of the adequacy of its allowance for loan losses; the
level of its other income, including loan service and related fees, net gains on
sales of securities, loans and loan servicing, and net earnings 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 taxes and benefits.
The Bank reported net earnings (loss) of $13.5 million, $(4.0) million,
$11.4 million, $12.2 million and $13.6 million during the six months ended June
30, 1999 and 1998 and the years ended December 31, 1998, 1997 and 1996,
respectively.
The net loss recognized during the six months ended June 30, 1998 was
primarily the result of a non-recurring expense of $11.1 million ($6.5 million
net of applicable tax benefits) relating to
OC-23
<PAGE>
employment agreement benefits due to certain senior executive officers of the
Bank in connection with the IPO. The Bank also paid a one-time special FDIC
assessment, which it had deferred from paying in prior years, of $4.5 million
($2.7 million net of applicable tax benefits). Without the effect of such
one-time payments, the Bank would have reported net earnings of $5.2 million for
the six months ended June 30, 1998. Net earnings increased by $17.5 million for
the six months ended June 30, 1999, compared to the same period in the prior
year, due to the foregoing non-recurring expenses recognized during the 1998
period and a $13.9 million or 81.9% increase in net interest income during the
1999 period, which was partially offset by a $1.6 million or 48.0% decrease in
total other income and a $1.2 million or 133.3% increase in the provision for
loan losses.
The results for the year ended December 31, 1998 were significantly impacted
by the non-recurring expenses referenced above. Without the effect of such
one-time payments, the Bank would have reported net earnings of $20.6 million
for the year ended December 31, 1998. Net earnings decreased by $807,000 or 6.6%
for the year ended December 31, 1998, compared to the same period in the prior
year, due to the foregoing non-recurring expenses, which was partially offset by
a $5.7 million or 16.1% increase in net interest income, a $1.4 million or 27.0%
increase in total other income and a $11.9 million increase in income tax
benefit recognized during the year.
Net earnings decreased by $1.4 million during the year ended December 31,
1997 compared to the prior year, due to a $3.0 million or 37.0% decrease in
total other income and a $1.6 million or 5.7% increase in total operating
expenses, which were partially offset by a $1.8 million or 5.4% increase in net
interest income, a $838,000 or 29.1% decline in the provision for loan losses
and a $1.5 million or 49.2% increase in income tax benefit recognized during the
year.
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 $30.8 million, $16.9 million, $40.7 million,
$35.0 million and $33.3 million during the six months ended June 30, 1999 and
1998 and the years ended December 31, 1998, 1997 and 1996, respectively.
Net interest income increased $13.9 million or 81.9% for the six months
ended June 30, 1999, compared to the same period in the prior year, due to a
$1.0 billion or 43.9% increase in the average balance of interest-earning assets
(comprised primarily of a $624.0 million increase in the average balance of
loans receivable and a $324.0 million increase in the average balance of other
interest-earning assets) and an increase in the interest rate spread of 22 basis
points. Net interest income increased by $5.7 million or 16.1% for the year
ended December 31, 1998, compared to the prior year, due to a $886.8 million or
48.3% increase in the average balance of interest-earning assets (consisting
primarily of a $614.2 million increase in the average balance of loans
receivable and a $216.8 million increase in the average balance of other
interest-earning assets), which was partially offset by a decrease in the
interest rate spread of 56 basis points. Net interest income increased by $1.8
million or 5.4% during the year ended December 31, 1997, compared to the year
ended December 31, 1996, due a $167.2 million increase in the average balance of
total interest earning assets.
The Bank's net interest margin for the six months ended June 30, 1999 and
1998 was 1.86% and 1.47% and amounted to 1.49%, 1.91% and 1.99% for the years
ended December 31, 1998, 1997 and 1996, respectively. The increase in net
interest margin during the six months ended June 30, 1999 reflected the increase
in the weighted average yield earned by the Bank on its loan portfolio together
with the decrease in the weighted average rate paid by the Bank on it's
deposits, while the decrease in net interest margin during the years ended
December 31, 1998 and 1997 reflected the decrease in yields on earning assets,
primarily due to accelerated premium amortization on the Bank's purchased
adjustable-rate single-family residential loan portfolio.
OC-24
<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>
YEAR
ENDED
DECEMBER
SIX MONTHS ENDED JUNE 30, 31,
---------------------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1998
----------------------------------- --------------------------------- ---------
<CAPTION>
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE
--------- ----------- ----------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)................... $2,189,445 78,222 7.15% $1,565,453 $ 53,915 6.89% $1,814,376
Mortgage-backed securities(2).......... 619,336 16,832 5.44 556,725 14,534 5.22 557,038
Other earning assets(3)................ 501,941 14,522 5.79 177,978 7,644 8.60 352,710
--------- ----------- --- --------- --------- --- ---------
Total interest-earning assets...... 3,310,722 109,576 6.62% 2,300,156 76,093 6.62% 2,724,124
--- ---
--- ---
Noninterest-earning assets............... 65,754 72,030 84,019
--------- --------- ---------
Total assets....................... $3,376,476 $2,372,186 $2,808,143
--------- --------- ---------
--------- --------- ---------
Interest-bearing liabilities:
Deposits:
Transaction accounts(4).............. 363,276 6,099 3.39% 353,362 6,214 3.55% 369,208
Term certificates of deposit......... 1,126,361 29,590 5.30 969,361 27,470 5.71 1,010,307
--------- ----------- --- --------- --------- --- ---------
Total deposits..................... 1,489,637 35,689 4.83 1,322,723 33,684 5.14 1,379,515
Total borrowings....................... 1,583,812 43,012 5.48 892,155 25,367 5.73 1,236,120
Hedging costs.......................... -- 81 -- 110 --
--------- ----------- --------- --------- ---------
Total interest-bearing
liabilities...................... 3,073,449 78,782 5.17% 2,214,878 59,161 5.39 2,615,635
----------- --- --------- ---
--- --------- ---
Noninterest bearing liabilities.......... 129,371 49,338 51,979
--------- --------- ---------
Total liabilities.................. 3,202,820 2,264,216 2,667,614
Stockholder's equity..................... 173,656 107,970 140,529
--------- --------- ---------
Total liabilities and stockholder's
equity........................... $3,376,476 $2,372,186 $2,808,143
--------- --------- ---------
--------- --------- ---------
Net interest-earning assets.............. $ 237,273 $ 85,278 $ 108,489
--------- --------- ---------
--------- --------- ---------
Net interest income/interest rate
spread................................. $ 30,794 1.45% $ 16,932 1.23%
----------- --- --------- ---
----------- --- --------- ---
Net interest margin...................... 1.86% 1.47%
--- ---
--- ---
Ratio of average interest-earning assets
to average interest-bearing
liabilities............................ 107.72% 103.85%
----------- ---------
----------- ---------
<CAPTION>
<S> <C>
1997 1996
----------------------------------- ----------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE
INTEREST COST BALANCE INTEREST COST BALANCE INTEREST
--------- ----------- --------- ----------- ----------- --------- -----------
<S> <C>
Interest-earning assets:
Loans receivable (1)................... $ 125,809 6.93% $1,200,137 $ 89,938 7.49% $1,176,944 $ 89,020
Mortgage-backed securities(2).......... 32,439 5.82 501,261 32,672 6.52 387,603 26,136
Other earning assets(3)................ 22,477 6.37 135,949 8,369 6.16 105,583 7,740
--------- --- --------- ----------- --- --------- -----------
Total interest-earning assets...... 180,725 6.63% 1,837,347 130,979 7.13% 1,670,130 122,896
--- ---
--- ---
Noninterest-earning assets............... 74,487 67,179
--------- ---------
Total assets....................... $1,911,834 $1,737,309
--------- ---------
--------- ---------
Interest-bearing liabilities:
Deposits:
Transaction accounts(4).............. 12,896 3.49% 340,430 12,476 3.66% $ 352,853 12,737
Term certificates of deposit......... 57,141 5.66 966,863 54,771 5.66 1,069,484 62,399
--------- --- --------- ----------- --- --------- -----------
Total deposits..................... 70,037 5.08 1,307,293 67,247 5.14 1,422,337 75,136
Total borrowings....................... 69,772 5.64 506,077 28,420 5.62 232,668 14,108
Hedging costs.......................... 214 -- 267 -- 387
--------- --------- ----------- --------- -----------
Total interest-bearing
liabilities...................... 140,023 5.35% 1,813,370 93,934 5.29% 1,655,005 89,631
--------- --- ----------- --- -----------
--------- --- ----------- --- -----------
Noninterest bearing liabilities.......... 15,713 12,998
--------- ---------
Total liabilities.................. 1,829,083 1,668,003
Stockholder's equity..................... 82,751 67,306
--------- ---------
Total liabilities and stockholder's
equity........................... $1,911,834 $1,735,309
--------- ---------
--------- ---------
Net interest-earning assets.............. $ 23,977 $ 15,125
--------- ---------
--------- ---------
Net interest income/interest rate
spread................................. $ 40,702 1.28% $ 35,045 1.84% $ 33,265
--------- --- ----------- --- -----------
--------- --- ----------- --- -----------
Net interest margin...................... 1.49% 1.91%
--- ---
--- ---
Ratio of average interest-earning assets
to average interest-bearing
liabilities............................ 104.15% 101.32% 100.91%
--------- ----------- -----------
--------- ----------- -----------
<CAPTION>
AVERAGE
YIELD/
COST
-----------
Interest-earning assets:
Loans receivable (1)................... 7.56%
Mortgage-backed securities(2).......... 6.74
Other earning assets(3)................ 7.33
---
Total interest-earning assets...... 7.36%
---
---
Noninterest-earning assets...............
Total assets.......................
Interest-bearing liabilities:
Deposits:
Transaction accounts(4).............. 3.61%
Term certificates of deposit......... 5.83
---
Total deposits..................... 5.28
Total borrowings....................... 6.06
Hedging costs..........................
Total interest-bearing
liabilities...................... 5.42%
---
---
Noninterest bearing liabilities..........
Total liabilities..................
Stockholder's equity.....................
Total liabilities and stockholder's
equity...........................
Net interest-earning assets..............
Net interest income/interest rate
spread................................. 1.94%
---
---
Net interest margin...................... 1.99%
---
---
Ratio of average interest-earning assets
to average interest-bearing
liabilities............................
</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, Checking and money market accounts.
OC-25
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
net interest income of the Bank. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (change in rate multiplied by change in volume).
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX YEAR ENDED DECEMBER 31, 1998
MONTHS ENDED JUNE 30, 1998 COMPARED TO 1997
---------------------------------------------------- ---------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------------- TOTAL NET ---------------------------------
RATE/ INCREASE RATE/
RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME
--------- --------- ----------- ----------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable........... $ 2,014 $ 21,490 $ 803 $ 24,307 $ (6,720) $ 46,031 $ (3,440)
Mortgage-backed
securities............... 597 1,634 67 2,298 (3,481) 3,636 (388)
Other earning assets....... (2,521) 14,261 (4,862) 6,878 722 10,668 2,718
--------- --------- ----------- ------- --------- --------- -----------
Total net change in
income on
interest-earning
assets................. 90 37,385 (3,992) 33,483 (9,479) 60,335 (1,110)
--------- --------- ----------- ------- --------- --------- -----------
Interest-bearing
liabilities:
Deposits:
Transaction accounts....... (282) 175 (8) (115) (585) 1,055 (50)
Term certificates of
deposit.................. (2,004) 4,449 (325) 2,120 (87) 2,461 (4)
--------- --------- ----------- ------- --------- --------- -----------
Total deposits........... (2,286) 4,624 (333) 2,005 (672) 3,516 (54)
Borrowings................. (1,139) 19,667 (883) 17,645 145 40,997 210
Hedging costs.............. -- -- (29) (29) -- -- (53)
--------- --------- ----------- ------- --------- --------- -----------
Total net change in
expense on interest-
bearing liabilities.... (3,425) (24,291) (1,245) 19,621 (527) 44,513 103
--------- --------- ----------- ------- --------- --------- -----------
Change in net interest
income................... $ 3,515 $ 13,094 $ (2,747) $ 13,862 $ (8,952) $ 15,822 $ (1,213)
--------- --------- ----------- ------- --------- --------- -----------
--------- --------- ----------- ------- --------- --------- -----------
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
COMPARED TO 1996
----------------------------------------------------
INCREASE (DECREASE) DUE TO
TOTAL NET --------------------------------- TOTAL NET
INCREASE RATE/ INCREASE
(DECREASE) RATE VOLUME VOLUME (DECREASE)
----------------- --------- --------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable........... $ 35,871 $ (820) $ 1,754 $ (16) $ 918
Mortgage-backed
securities............... (233) (872) 7,664 (256) 6,536
Other earning assets....... 14,108 (1,240) 2,226 (357) 629
------- --------- --------- ----------- -------
Total net change in
income on
interest-earning
assets................. 49,746 (2,932) 11,644 (629) 8,083
------- --------- --------- ----------- -------
Interest-bearing
liabilities:
Deposits:
Transaction accounts....... 420 194 (448) (7) (261)
Term certificates of
deposit.................. 2,370 (1,815) (5,987) 174 (7,628)
------- --------- --------- ----------- -------
Total deposits........... 2,790 (1,621) (6,435) 167 (7,889)
Borrowings................. 41,352 (1,042) 16,578 (1,224) 14,312
Hedging costs.............. (53) -- -- (120) (120)
------- --------- --------- ----------- -------
Total net change in
expense on interest-
bearing liabilities.... 44,089 (2,663) 10,143 (1,177) 6,303
------- --------- --------- ----------- -------
Change in net interest
income................... $ 5,657 $ (269) $ 1,501 $ 548 $ 1,780
------- --------- --------- ----------- -------
------- --------- --------- ----------- -------
</TABLE>
OC-26
<PAGE>
INTEREST INCOME. Total interest income increased by $33.5 million or 44.0%,
$49.7 million or 38.0% and $8.1 million or 6.6% during the six months ended June
30, 1999 and the years ended December 31, 1998 and 1997, respectively, as
compared to the prior periods in the previous year. Interest income on loans
receivable, the largest component of interest-earning assets, increased by $24.3
million or 45.1%, $35.9 million or 39.9%, and $918,000 or 1.0% during the six
months ended June 30, 1999 and the years ended December 31,1998 and 1997,
respectively, as compared to the same periods in the prior year. The increase
during the six months ended June 30, 1999 was due to loan growth and, to a
lesser extent, a shift in the portfolio to a greater proportion of commercial
and consumer loans, which has resulted in an increase in the weighted average
yield earned on the loan portfolio. The increase in interest income on loans
receivable during the year ended December 31, 1998 was primarily due to loan
growth and the investment of funds as a result of the leverage of the capital
raised in the IPO. Loan purchases were funded by FHLB advances with a weighted
average rate of 5.38%. The slight increase in interest income on loans
receivable during the year ended December 31, 1997 was attributable to loan
growth. See "Business of the Bank--Lending Activities--Origination, Purchase and
Sale of Loans."
Interest income on mortgage-backed securities increased by $2.3 million or
15.8% during the six months ended June 30, 1999, decreased slightly by $233,000
or 0.7% during the year ended December 31, 1998 and increased by $6.5 million or
25.0% during the year ended December 31, 1997. The increase during the six
months ended June 30, 1999 reflected the increase in the average balance of such
securities. The small decrease in interest income on mortgage-backed securities
during the year ended December 31, 1998 was mainly due to sales and accelerated
premium amortizations due to prepayments, while the increase in interest income
on mortgage-backed securities during the year ended December 31, 1997 reflected
the increase in the average balance of such securities.
Interest income on other interest-earning assets (which consist of U.S.
Government agency securities, trust preferred securities, FHLB stock and other
short-term investments) increased by $6.9 million or 90.0%, $14.1 million or
168.6% and $629,000 or 8.1% during the six months ended June 30, 1999 and the
years ended December 31, 1998 and 1997, respectively, over the comparable period
in the prior year. The increase in such interest income during the six months
ended June 30, 1999 was due to a $324.0 million increase in the average balance
of such investments. The increase in such interest income during the year ended
December 31, 1998 was primarily due to a $216.8 million increase in the average
balance of such investments, and an increase in the weighted average yield
earned on such investments of 21 basis points. The increase in such interest
income during the year ended December 31, 1997 was due primarily to a $30.4
million increase in the average balance of such investments, which was partially
offset by a decline in the weighted average yield earned thereon of 117 basis
points. See "Business of the Bank--Investment Activities."
INTEREST EXPENSE. Total interest expense increased by $19.6 million or
33.2%, $44.1 million or 46.0% and $6.3 million or 7.0% during the six months
ended June 30, 1999 and the years ended December 31, 1998 and 1997,
respectively, over the comparable period in the prior year. The increases during
the periods were the result of increases in the average balance of
interest-bearing liabilities (primarily borrowings), reflecting the Bank's
leveraging of its balance sheet. Interest expense on deposits, the largest
component of the Bank's interest-bearing liabilities, increased by $2.0 million
or 6.0% and $2.8 million or 4.1% during the six months ended June 30, 1999 and
the year ended December 31, 1998, as compared to the same periods in the prior
year, and decreased by $7.9 million or 10.5% during the year ended December 31,
1997. The increase in interest expense on deposits during the six months ended
June 30, 1999 was due to a $166.9 million increase in the average balance of
deposits, which was partially offset by a 31 basis point decline in the average
rate paid thereon. The increase in interest expense on deposits during the year
ended December 31, 1998 was primarily due to a $72.2 million increase in the
average balance of deposits. The decrease in interest expense on deposits during
the year ended December 31, 1997 was primarily due to a $115.0 million decline
in the average balance of deposits. See "Business of the Bank--Sources of
Funds--Deposits."
OC-27
<PAGE>
Interest expense on borrowings consists of reverse repurchase agreements and
FHLB advances. Interest expense on borrowings increased by $17.6 million or
69.6%, $41.4 million or 145.5% and $14.3 million or 101.4% during the six months
ended June 30, 1999 and the years ended December 31, 1998 and 1997,
respectively, as compared to the same periods in the prior year. Interest
expense on FHLB advances increased by $16.1 million or 97.9%, $38.8 million or
442.0% and $5.6 million or 173.9% during the six months ended June 30, 1999 and
the years ended December 31, 1998 and 1997, respectively, over the comparable
period in the prior year. Interest expense on securities sold under agreements
to repurchase increased by $1.6 million or 17.8%, $2.5 million or 12.9% and $8.7
million or 80.1% during the six months ended June 30, 1999 and the years ended
December 31, 1998 and 1997, respectively, over the comparable period in the
prior year. The Bank has increased its use of FHLB advances and reverse
repurchase agreements in order to fund its leverage strategy.
The Bank's interest expense during the six months ended June 30, 1999 and
1998 and the years ended December 31, 1998, 1997 and 1996 included the costs of
hedging the Bank's interest rate exposure. Such hedging costs amounted to
$81,000, $110,000, $214,000, $267,000 and $387,000 during such respective
periods. The Bank in the past utilized interest rate swaps, corridors, caps and
floors in order to manage its interest rate risk. However, since the change in
management, the Bank has not entered into any such interest rate contracts and
has allowed its remaining contracts to expire as they mature. The Bank has
instead focused on internal hedging through balance sheet restructuring. At June
30, 1999, the Bank had no remaining interest rate swap contracts and five
remaining interest rate corridors with an aggregate notional contract amount of
$32.0 million.
PROVISION FOR LOAN LOSSES. The Bank established provisions for loan losses
of $2.1 million, $900,000, $2.0 million, $2.0 million and $2.9 million during
the six months ended June 30, 1999 and 1998 and the years ended December 31,
1998, 1997 and 1996, respectively. Management has aggressively charged off
non-performing loans and taken possession of and sold a significant amount of
the assets which collateralized such loans. As a consequence of such actions,
the Bank's non-performing assets have been reduced over the periods presented
and the Bank's provision for loan losses have been reduced to more normalized
levels.
The allowance for loan losses is established through provisions based on
management's evaluation of the risks inherent in the Bank's loan portfolio and
the local real estate economy. The allowance is maintained at amounts management
considers adequate to cover losses which are deemed probable and calculable. The
allowance is based upon a number of factors, including asset classifications,
collateral values, management's assessment of the credit risk inherent in the
portfolio, historical loan loss experience and the Bank's underwriting policies.
Management believes that its allowance for loan losses at June 30, 1999 is
adequate. Nevertheless, there can be no assurance 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. In addition, as a result
of continuing uncertainties in certain real estate markets, increases in the
valuation allowance may be required in future periods. Furthermore, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's valuation allowance. These agencies may require
increases to the allowance, based on their judgments of the information
available to them at the time of the examination.
OTHER INCOME. Total other income decreased by $1.6 million or 48.0% during
the six months ended June 30, 1999, increased by $1.4 million or 27.0% during
the year ended December 31, 1998 and decreased by $3.0 million or 37.0% during
the year ended December 31, 1997, over the comparable period in the prior year.
Loan service and loan related fees amounted to $67,000, $25,000, $111,000,
$481,000 and $1.4 million during the six months ended June 30, 1999 and 1998 and
the years ended December 31, 1998, 1997 and 1996, respectively. The increase in
such fees during the six months ended June 30, 1999 reflected an increase in
prepayment fees as a result of the interest rate environment,
OC-28
<PAGE>
while the decline in such fees during the years ended December 31 1998 and 1997
primarily reflected the sale of residential loan servicing during 1997 and the
reduction in loan balances outstanding in the loan servicing portfolio due to
normal repayments and prepayments. See "Business of the Bank-- Lending
Activities--Single-Family Residential Real Estate Loans."
The Bank recognized net gains on sales of mortgage-backed and other
investment securities of $197,000, $323,000, $1.7 million, $1.3 million and $3.6
million during the six months ended June 30, 1999 and 1998 and the years ended
December 31, 1998, 1997 and 1996, respectively. During such respective periods,
the Bank sold $119.4 million, $156.2 million, $509.2 million, $234.3 million and
$158.4 million of mortgage-backed and other investment securities.
Net gains (losses) on the sale of loans and loan servicing amounted to
$49,000, $0, $613,000, $3.4 million and $(53,000) during the six months ended
June 30, 1999 and 1998 and the years ended December 31, 1998, 1997 and 1996,
respectively. The Bank sold $92.5 million, $357,000, $42.4 million, $85.2
million and $0 of loans during the six months ended June 30, 1999 and 1998 and
the years ended December 31, 1998, 1997 and 1996, respectively, and $868.4
million of loan servicing during the year ended December 31, 1997. In connection
with the sale of loan servicing during 1997, the Bank recognized a gain of $3.2
million during the year and an additional $5.3 million was deferred and is being
recognized over a period corresponding with the estimated lives of the related
loans. See "Business of the Bank--Lending Activities--Single-Family Residential
Real Estate Loans."
Income (loss) from real estate operations amounted to $115,000, $1.8
million, $1.5 million, $(1.8) million and $1.9 million during the six months
ended June 30, 1999 and 1998 and the years ended December 31, 1998, 1997 and
1996, respectively. Income (loss) from real estate operations consists of (i)
losses from real estate operations (rental income less operating expenses), (ii)
gains on sales of real estate owned and real estate held for investment, and
(iii) provisions for losses on real estate owned and real estate held for
investment. During the six months ended June 30, 1999 and 1998 and the years
ended December 31, 1998, 1997 and 1996, losses from real estate operations
amounted to $(27,000), $(578,000), $(701,000), $(1.3) million and $(634,000),
respectively. Gains on sales of real estate owned and real estate held for
investment amounted to $142,000, $2.4 million, $2.2 million, $2.2 million and
$3.3 million during such respective periods, and provisions for losses on real
estate owned and real estate held for investment amounted to $0, $0, $0, $2.8
million and $766,000, for the respective periods. The improving economy in
Southern California since 1996 has assisted in management's efforts to dispose
of the Bank's real estate holdings and has facilitated sales.
Miscellaneous other income (consisting primarily of fees on deposit
accounts) amounted to $1.3 million, $1.1 million, $2.6 million, $1.8 million and
$1.2 million during the six months ended June 30, 1999 and 1998 and the years
ended December 31, 1998, 1997 and 1996, respectively.
OPERATING EXPENSES. Total operating expenses decreased by $13.8 million or
44.5% during the six months ended June 30, 1999, and increased by $17.2 million
or 58.2% and $1.6 million or 5.7% during the years ended December 31, 1998 and
1997. The decrease in operating expenses during the six months ended June 30,
1999 and the increase in operating expenses during the year ended December 31,
1998 were primarily attributable to non-recurring payments of $15.6 million
($9.2 million net of applicable tax benefits) which were incurred in connection
with the IPO. During the six months ended June 30,1999 and 1998 and the years
ended December 31, 1998, 1997 and 1996, total operating expenses as a percentage
of average assets amounted to 1.03%, 2.63%, 1.66%, 1.54% and 1.61%,
respectively, and the Bank's efficiency ratio amounted to 52.87%, 153.12%,
98.89%, 73.49% and 67.47%, respectively.
The principal category of the Bank's operating expenses is personnel and
benefits expense, which amounted to $7.7 million, $16.9 million, $23.8 million,
$11.8 million and $10.8 million during the six months ended June 30, 1999 and
1998 and the years ended December 31, 1998, 1997 and 1996, respectively. The
decrease during the six months ended June 30, 1999 and the increase during the
year
OC-29
<PAGE>
ended December 31, 1998 were primarily the result of a non-recurring $11.1
million payment of benefits to certain senior executives in connection with the
IPO.
Occupancy expense amounted to $4.5 million, $4.0 million, $8.4 million, $7.1
million and $6.4 million during the six months ended June 30, 1999 and 1998 and
the years ended December 31, 1998, 1997 and 1996, respectively. The increase in
such expense during the six months ended June 30, 1999 was due to the
acquisition of two branch offices in October 1998 and May 1999. The increase in
such expense during the year ended December 31, 1998 was primarily due to the
lease of data processing equipment and expenses associated with security
personnel.
FDIC insurance premiums totaled $673,000, $6.7 million, $7.3 million, $4.9
million and $4.4 million during the six months ended June 30, 1999 and 1998 and
the years ended December 31, 1998, 1997 and 1996, respectively. The decrease
during the six months ended June 30, 1999 and the increase during the year ended
December 31, 1998 was primarily due to a one-time special FDIC assessment, which
the Bank deferred paying in prior years, of $4.5 million. As a result of paying
the one-time special assessment, the Bank lowered its assessment rate from 35.28
basis points to 9.1 basis points, which includes the debt service paid to the
Financing Corporation. FDIC insurance premiums are a function of the size of the
Bank's deposit base.
Professional services expense amounted to $579,000, $460,000, $1.0 million
$517,000 and $771,000 during the six months ended June 30, 1999 and 1998 and the
years ended December 31, 1998, 1997 and 1996, respectively. The increase in such
expense during the six months ended June 30, 1999 reflected expenses related to
the Bank's plan to address Year 2000 data processing issues and expenses related
to outsourcing the Bank's loan review function. The significant increase during
the year ended December 31, 1998 was mainly due to an increase in other
consulting expenses. The expense recognized during the year ended December 31,
1996 reflected legal expenses associated with problem asset resolution.
Office related expenses have remained relatively stable over the periods
presented and amounted to $2.4 million, $2.0 million, $4.4 million, $3.9 million
and $4.0 million during the six months ended June 30, 1999 and 1998 and the
years ended December 31, 1998, 1997 and 1996, respectively.
Miscellaneous other expense (consisting primarily of regulatory assessments
and other operating expenses) amounted to $1.3 million, $792,000, $1.8 million,
$1.3 million and $1.6 million during the six months ended June 30, 1999 and 1998
and the years ended December 31, 1998, 1997 and 1996, respectively.
INCOME TAXES. During the six months ended June 30, 1999 and 1998 and the
years ended December 31, 1998, 1997 and 1996, the Bank recognized $2.0 million,
$9.4 million, $16.4 million, $4.5 million and $3.0 million in income tax
benefits primarily as a result of offsetting available NOLs against taxable
income. At June 30, 1999, the Bank had $143.9 million of federal and state NOLs
which expire between 2001 and 2018.
The Bank had Federal and California alternative minimum tax credit
carryforwards at June 30, 1999 of approximately $1.6 million and $70,000,
respectively. These carryforwards are available to reduce future regular federal
income taxes and California franchise taxes, if any, over an indefinite period.
The 1992 Ownership Change resulted in an annual Section 382 limitation on
the Bank's ability to utilize any NOLs created prior to the 1992 Ownership
Change in any one year of approximately $7.7 million. At June 30, 1999, the Bank
had $29.8 million of NOLs which were created prior to the 1992 Ownership Change.
Similarly, the 1998 Ownership Change resulted in an annual Section 382
limitation on the Bank's ability to utilize any NOLs created prior to the 1998
Ownership Change but after the 1992 Ownership Change in any one year of
approximately $21.3 million. At June 30, 1999, the Bank had $103.3 million of
NOLs which were created prior to the 1998 Ownership Change but after the 1992
Ownership Change.
OC-30
<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 Bank's Asset/Liability Management Committee, which is comprised of senior
officers of the Bank, in accordance with policies approved by the Board of
Directors of the Bank. The Asset/Liability Management Committee meets weekly to
review, among other things, the sensitivity of the Bank's assets and liabilities
to interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and sale activity, and maturities of investments and
borrowings. The Asset/Liability Management Committee also approves and
establishes pricing and funding decisions with respect to overall asset and
liability composition and reports regularly to the full Board of Directors.
One of the primary goals of the Bank's Asset/Liability Management Committee
is to effectively increase the duration of the Bank's liabilities and/or
effectively contract the duration of the Bank's assets so that the respective
durations are matched as closely as possible. This duration adjustment can be
accomplished either internally by restructuring the Bank's balance sheet, or
externally by adjusting the duration of the Bank's assets and/or liabilities
through the use of interest rate contracts, such as interest rate swaps,
corridors, caps and floors. Although the Bank has in the past hedged its
interest rate exposure externally through the use of various interest rate
contracts, the Bank's current strategy is to hedge internally through the use of
core transaction deposit accounts, which are not as rate sensitive as other
deposit instruments, FHLB advances and reverse repurchase agreements, together
with an emphasis on investing in and/or purchasing 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.
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, since the change in the
Bank's management, the Bank has not originated any additional adjustable-rate
mortgage products tied to the FHLB 11th District Cost of Funds ("COFI"), 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). During the year ended December 31, 1997, the Bank
sold $85.2 million of such COFI-based residential mortgage loans and used most
of the sale proceeds to purchase $59.0 million of one-year adjustable-rate loans
tied to the U.S. Treasury index of comparable maturity. See "Business of the
Bank--Lending Activities--Origination, Purchase and Sale of Loans."
The Bank has also significantly increased aggregate purchases of short-term
or adjustable-rate mortgage-backed securities in recent periods. Purchases of
such securities amounted to $202.0 million, $105.7 million, $186.0 million and
$216.8 million during the six months ended June 30, 1999 and the years ended
December 31, 1998, 1997 and 1996, respectively. In 1998 the Bank also purchased
investment grade corporate trust preferred obligations of $378.4 million. At
June 30, 1999, $151.5 million or 23.0% of the Bank's mortgage-backed securities
were adjustable-rate instruments. See "Business of the Bank--Investment
Activities."
OC-31
<PAGE>
During the six months ended June 30, 1999 and the years ended December 31,
1998, 1997 and 1996, the Bank originated in the aggregate $159.0 million, $94.0
million, $32.6 million and $9.8 million, respectively, of commercial business
and consumer loans (including loans secured by deposits), which amounted to
40.2%, 15.5%, 20.3% and 15.8% 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. See "Business of the
Bank--Lending Activities--Commercial Business and Consumer Loans."
On the liability side of the balance sheet, 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 short- and
intermediate-term FHLB advances and reverse repurchase agreements and retail
certificates of deposit. As a result, out-of-market, institutional jumbo
certificates of deposit declined from $2.5 million at December 31, 1997 to
$322,000 at December 31, 1998 and $299,000 at June 30, 1999, and FHLB advances
and reverse repurchase agreements have increased from $812.8 million in the
aggregate at December 31, 1997 to $1.6 billion in the aggregate at December 31,
1998 and $1.7 billion in the aggregate at June 30, 1999.
External hedging involves the use of interest rate swaps, collars,
corridors, caps and floors. The notional amount of interest rate contracts
represents the underlying amount on which periodic cash flows are calculated and
exchanged between counterparties. However, this notional amount does not
represent the principal amount of loans or securities which would effectively be
hedged by that interest rate contract. In selecting the type and amount of
interest rate contract to utilize, the Bank compares the duration of a
particular contract, or its change in value for a 100 basis point movement in
interest rates, to that of the loans or securities to be hedged. An interest
rate contract with the appropriate offsetting duration may have a notional
amount much greater than the face amount of the securities being hedged.
At June 30, 1999 and December 31, 1998, the Bank was not a party to any
interest rate swap agreements. The net expense relating to the Bank's interest
rate swap agreements was $0, $0, $2,000 and $35,000 during the six months ended
June 30, 1999 and the years ended December 31, 1998, 1997 and 1996,
respectively.
At June 30, 1999, the Bank was also a party to five interest rate corridor
agreements, which agreements expire from 2000 through 2001 and cover an
aggregate contract amount of approximately $32.0 million. An interest rate
corridor consists of an agreement whereby the issuer agrees to pay the
purchaser, in exchange for the payment of a premium, the prevailing rate of
interest in the event interest rates rise above a specified rate on a specified
interest rate index and do not exceed a specified upper rate on the same index.
The Bank entered into interest rate corridors as a means to artificially raise
the interest rate cap on certain loans. As of June 30, 1999, the interest rate
corridors have an average strike price of 6.54% and an average limit rate of
8.20% (the Bank's interest rate corridors are based on either three month London
Inter-Bank Offered Rate ("LIBOR") or COFI). The aggregate net expense relating
to the Bank's interest rate corridors and floors was $81,000, $214,000, $265,000
and $352,000 during the six months ended June 30, 1999 and the years ended
December 31, 1998, 1997, and 1996, respectively.
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
OC-32
<PAGE>
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The following table summarizes the anticipated maturities or repricing of
the Bank's interest-earning assets and interest-bearing liabilities as of June
30, 1999, based on the information and assumptions set forth in the notes below.
<TABLE>
<CAPTION>
MORE THAN
WITHIN THREE TO MORE THAN THREE YEARS
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......................................... $ 41,673 $ 185,357 320,887 $ 204,659 $ 353,446 $1,106,022
Adjustable.................................... 176,777 153,697 60,681 23,117 -- 414,272
Multi-family residential:
Fixed......................................... 1,340 3,221 8,798 4,840 12,974 31,173
Adjustable.................................... 314,580 3,816 1,549 -- -- 319,945
Commercial and land:
Fixed......................................... 4,050 19,126 40,729 39,617 82,062 185,584
Adjustable.................................... 66,192 15,770 1,516 2,535 2,199 88,212
Other loans (3)................................. 66,104 70,073 55,537 42,739 7,591 242,044
Mortgage-backed and other securities (4).......... 87,579 65,743 -- 86,534 438,077 677,933
Other interest-earning assets (5)................. 166,335 98,720 30,000 -- 167,763 462,818
--------- --------- ----------- ----------- --------- ---------
Total....................................... $ 924,630 $ 615,523 $ 519,697 $ 404,041 $1,064,112 $3,528,003
--------- --------- ----------- ----------- --------- ---------
--------- --------- ----------- ----------- --------- ---------
Interest-bearing liabilities:
Deposits:
Checking accounts............................. $ 92,165 $ -- $ -- $ -- $ -- $ 92,165
Passbook accounts............................. 136,106 -- -- -- -- 136,106
Money market accounts......................... 141,632 -- -- -- -- 141,632
Certificates of deposit....................... 110,427 900,880 103,594 11,995 288 1,127,184
Borrowings...................................... 145,947 314,000 85,000 789,000 360,000 1,693,947
--------- --------- ----------- ----------- --------- ---------
Total....................................... $ 626,277 $1,214,880 $ 188,594 $ 800,995 $ 360,288 $3,191,034
--------- --------- ----------- ----------- --------- ---------
--------- --------- ----------- ----------- --------- ---------
Excess (deficiency) of interest-earning assets
over interest-bearing liabilities............... $ 298,353 $(599,357) $ 331,103 $(396,954) $ 703,824 $ 336,969
--------- --------- ----------- ----------- --------- ---------
--------- --------- ----------- ----------- --------- ---------
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities........ $ 298,353 $(301,004) $ 30,099 $(336,855) $ 336,969
--------- --------- ----------- ----------- ---------
--------- --------- ----------- ----------- ---------
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities as a
percent of total assets......................... 8.47% (8.54)% 0.85% (10.41 )% 9.56%
--------- --------- ----------- ----------- ---------
--------- --------- ----------- ----------- ---------
</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 $6.4
million at June 30, 1999.
(3) Comprised of commercial and consumer loans and loans serviced by deposits.
(4) Does not include unrealized losses on securities available for sale of $32.5
million.
(5) Comprised of short-term investments, securities purchased under agreements
to resell, investment securities and FHLB stock.
OC-33
<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 June 30, 1999 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 POINTS) IN NET INTEREST INCOME
INTEREST RATES(1) (NEXT EIGHT QUARTERS) NPV
- ---------------------------------------------- ------------------------- -------------------
<S> <C> <C>
(IN THOUSANDS)
+400.......................................... $ 90,439 $ 7,428
+300.......................................... 106,130 54,321
+200.......................................... 121,043 107,791
+100.......................................... 134,008 159,570
0............................................. 143,256 200,674
- -100.......................................... 138,271 187,921
- -200.......................................... 130,725 158,393
- -300.......................................... 120,439 123,118
- -400.......................................... 52,359 92,942
</TABLE>
- ------------------------
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
Management of the Bank believes that the assumptions used by it to evaluate
the vulnerability of the Bank's operations to changes in interest rates
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Bank's assets and liabilities and the estimated
effects of changes in interest rates on the Bank's net interest income and NPV
could vary substantially if different assumptions were used or actual experience
differs from the historical experience on which they are based. See
"Regulation--Regulation of Federal Savings Banks--Regulatory Capital
Requirements" for a discussion of a proposed OTS regulation which would subject
an institution with a greater than "normal" level of interest rate exposure to a
deduction of an interest rate risk ("IRR") component in calculating its total
capital for risk-based capital purposes. Based on the OTS model, at June 30,
1999, the Bank would not have been required to deduct an IRR component in
calculating total risk-based capital had the IRR component of the capital
regulations been in effect.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity refers to the Bank's ability to generate sufficient
cash to meet the funding needs of current loan demand, savings deposit
withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required by the OTS 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
OC-34
<PAGE>
limited control. The Bank derives its liquidity from both its assets and
liabilities. Liquidity is derived from assets by receipt of interest and
principal payments and prepayments, by the ability to sell assets at market
prices and by utilizing unpledged assets as collateral for borrowings. Liquidity
is derived from liabilities by maintaining a variety of funding sources,
including deposits, advances from the FHLB of San Francisco and other short and
long-term borrowings.
The Bank's liquidity management is both a daily and long-term function of
funds management. Liquid assets are generally invested in short-term investments
such as securities purchased under agreements to resell, federal funds sold and
certificates of deposit in other financial institutions. If the Bank requires
funds beyond its ability to generate them internally, various forms of both
short and long-term borrowings provide an additional source of funds. At June
30, 1999, the Bank had $1.4 billion 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. During 1998, the Bank began
extending the maturities of both its FHLB advances and reverse repurchase
agreements.
Certificates of deposit which are scheduled to mature within one year
totaled $1.0 billion at June 30, 1999, and borrowings that are scheduled to
mature within the same period amounted to $459.9 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 June 30, 1999.
<TABLE>
<CAPTION>
REQUIRED ACTUAL EXCESS
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
----------- ---------- ----------- ---------- ----------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital................................. 1.50% $ 53,111 6.16% $ 217,968 4.66% $ 164,857
Tier 1 leverage capital.......................... 4.00 141,630 6.16 217,968 2.16 76,338
Tier 1 risk-based capital(1)..................... 4.00 78,398 11.12 217,968 7.12 139,570
Risk-based capital(1)............................ 8.00 156,795 11.98 234,897 3.98 78,102
</TABLE>
- ------------------------
(1) Tangible and Tier 1 leverage (or core) capital are computed as a percentage
of adjusted total assets of $3.5 billion. Risk-based capital is computed as
a percentage of adjusted risk-weighted assets of $2.0 billion.
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.
OC-35
<PAGE>
YEAR 2000
During 1997, the Bank finalized its plan to address issues related to the
year 2000 ("Y2K") problem. The Y2K issue is primarily a result of computer
software recognizing a two-digit date field rather than the full four digits,
which identify the appropriate year. Date-sensitive computer programs, hardware
or equipment controlled by microprocessor chips may not appropriately deal with
the year "00."
The Bank's objective was to manage the process by determining the scope of
the problem and to focus its efforts and attention on solving it. The Bank's
plan followed the Federal Financial Institution's Examination Council ("FFIEC")
guideline that manages the process in five phases: (i) Awareness, (ii)
Assessment, (iii) Renovation, (iv) Validation and (v) Implementation. To help
manage the process the Bank developed a detailed project plan that identifies
various milestones and deadlines. The Bank also established budgets for manpower
resources and financial expenditures.
The Bank utilizes Fiserv CBS, a third party vendor, to process substantially
all of its data processing functions. Also, a significant portion of the
single-family residential loan portfolio is serviced by other institutions. The
Bank has contacted its critical vendors and has received confirmation that they
will be Year 2000 compliant. The Bank is working with Fiserv CBS and other
critical vendors to ensure that their operational and financial systems will not
be adversely affected by the Y2K problem.
The Bank has analyzed its loan and deposit customers that may present some
exposure to Y2K compliance. Non-compliant commercial loan customers may be at
risk of default and large depositors may cause liquidity problems if the funds
are withdrawn. In an effort to educate borrowers and to gather information for
the risk assessments, questionnaires were sent to the commercial loan customers.
The initial assessment of commercial loan and deposit customers indicates that
there would be minimal impact on the Bank's statement of operations. The Bank
will continue to monitor and evaluate the risks on a quarterly basis.
The Bank is also in the process of reviewing its loan servicers and
investment securities issuers to determine the liquidity and credit risks
associated with their failure to remit payments in a timely manner due to Y2K
problems. The Bank has also implemented a customer awareness program to keep
customers informed of the progress of the Y2K project. The Bank's quarterly
customer newsletter contains Y2K articles and statement stuffers are also
utilized to keep the customers aware of the Bank's efforts. Customers with
questions are encouraged to call the Y2K office.
The Bank has completed the validation or testing phase of the Year 2000
compliance plan. The Bank developed an extensive test plan that contained test
requirements and criteria, manpower assignments and target dates. A dedicated
Y2K test local area network was established to communicate with the Fiserv CBS
test system. Detailed test scripts designed to test date-related functions were
processed on the system for the FFIEC's recommended critical test dates. The
results were reviewed to ensure the system was functioning properly. The Bank
successfully tested dates up through and including December 31, 2001. The Bank
has also successfully completed testing with other critical vendors such as the
Federal Reserve Bank. Various non-critical stand-alone applications were also
successfully tested on the Y2K local area network.
The Bank's costs associated with the Y2K project include: (i) an additional
assessment from Fiserv CBS for the test system, (ii) lease expense for the test
local area network equipment, (iii) various hard costs for the upgrading of the
operating network for the corporate office and retail branch system and (iv)
replacing hardware in branches. Excluding the "soft" costs of Bank management
and personnel time, the Bank estimates that the total Y2K project costs will not
exceed $800,000. Approximately $500,000 of the costs is attributable to a
planned 1999 purchase of new hardware for the branches that will be amortized
over a five-year period. As of June 30, 1999, the Bank estimates that it has
incurred approximately $714,000 in total costs in connection with its Year 2000
project plan.
OC-36
<PAGE>
The Bank has developed a contingency plan to address a course of action in
the unlikely event that the Bank or its vendors and/or business partners are not
ready for Year 2000. If Fiserv CBS experiences some unforeseen Y2K problem after
the turn of the century, the contingency plan will include off-line, manual
postings of transactions to ledger cards or a database. The plan will be
thoroughly tested during the upcoming months to ensure an orderly continuation
of key operations in the event a problem occurs. Even though operating in this
manner would severely tax resources, the Bank will be able to continue business
while Fiserv CBS corrects the problem.
The Bank's Y2K efforts are being watched closely by the OTS, its primary
regulator, which conducts periodic Y2K examinations of the Bank's Y2K project
progress.
The Bank's plans to complete Y2K compliance are based on management's and
the Board of Directors' best estimates. There can be no guarantee that these
estimates will be achieved, and the ending results could be significantly
different due to unforeseen circumstances.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 amends SFAS No. 52
"Foreign Currency Translation" to permit special accounting for a hedge of a
foreign currency forecasted transaction with a derivative. It supersedes SFAS
No. 80, "Accounting for Future Contracts," SFAS No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk", and SFAS No. 119,
"Disclosure about Derivative Financial Instruments." It also amends SFAS No.
107, "Disclosure about Fair Value of Financial Instruments, to include in SFAS
No. 107 disclosure provisions about concentrations of credit risk from SFAS No.
105. SFAS No. 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a foreign-
currency-denominated forecasted transaction. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Management
believes that the adoption of SFAS No. 133 will not have a material impact on
the Bank's financial condition or results of operations or its disclosures.
OC-37
<PAGE>
BUSINESS OF THE BANK
LENDING ACTIVITIES
GENERAL. At June 30, 1999, the Bank's total loans receivable amounted to
$2.3 billion, which represented 66.0% of the Bank's $3.5 billion in total assets
at that date. The Bank has traditionally concentrated its lending activities on
conventional first mortgage loans secured by single-family residential
properties and, to a lesser extent, multi-family residential properties. At June
30, 1999, such loans constituted $1.5 billion or 63.7% and $352.9 million or
14.7%, 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. More recently, the Bank has increased its
emphasis on commercial and consumer lending. At June 30, 1999, commercial real
estate loans amounted to $273.9 million or 11.4% of the total loan portfolio,
while commercial business and consumer loans (including loans secured by
deposits) amounted to $100.7 million and $141.5 million or 4.2% and 5.9% of the
total loan portfolio, respectively. The Bank's total loan portfolio also
included a small amount of land and other miscellaneous loans, which amounted to
$859,000 at June 30, 1999.
The Bank has general authority to originate and purchase loans secured by
real estate located throughout the United States. Notwithstanding this
nationwide lending authority, the Bank's primary market area is Los Angeles
County and, to a lesser extent, Orange and Ventura Counties in Southern
California. The Bank intends from time to time to purchase additional loans to
supplement its loan origination activity, which may include loans secured by
properties outside of the Bank's primary market area in California as well as in
other states.
OC-38
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
JUNE 30, 1999 1998 1997 1996
------------------------ ------------------------ ------------------------ ---------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
--------- ------------- --------- ------------- --------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential........ $1,523,814 64% $1,494,756 68% $ 953,701 62% $ 595,915
Multi-family residential......... 352,927 15 366,625 17 426,254 27 453,064
Commercial real estate........... 273,856 11 206,402 9 135,407 9 110,931
Land and other................... 859 -- 880 -- 5,896 -- 1,639
--------- --- --------- --- --------- --- ---------
Total mortgage loans......... 2,151,456 90 2,068,663 94 1,521,258 98 1,161,549
--------- --- --------- --- --------- --- ---------
Other loans:
Commercial business.............. 100,664 4 62,665 3 22,484 1 3,523
Consumer......................... 139,010 6 53,826 3 8,485 1 988
Secured by deposits.............. 2,485 -- 3,537 -- 2,287 -- 2,132
--------- --- --------- --- --------- --- ---------
Total loans receivable....... 2,393,615 100% 2,188,691 100% 1,554,514 100% 1,168,192
--------- --- --------- --- --------- --- ---------
--------- --- --------- --- --------- --- ---------
Less:
Undistributed loan proceeds...... 41,443 17,152 6,206 473
Unamortized net loan discounts
and deferred origination
fees........................... 5,040 814 (6,859) 2,732
Deferred gain on servicing
sold........................... 2,517 2,971 4,131 --
Allowance for loan losses........ 19,374 18,897 17,824 23,280
--------- --------- --------- ---------
Loans receivable, net............ $2,325,241 $2,148,857 $1,533,212 $1,141,707
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1995 1994
------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL AMOUNT TOTAL AMOUNT TOTAL
------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential........ 51% $ 658,412 52% $ 721,801 54%
Multi-family residential......... 39 479,100 38 480,547 36
Commercial real estate........... 10 120,109 10 129,768 10
Land and other................... -- 3,176 -- 7,546 --
--- --------- --- --------- ---
Total mortgage loans......... 100 1,260,797 100 1,339,662 100
--- --------- --- --------- ---
Other loans:
Commercial business.............. -- -- -- -- --
Consumer......................... -- -- -- -- --
Secured by deposits.............. -- 1,976 -- 908 --
--- --------- --- --------- ---
Total loans receivable....... 100% 1,262,773 100% 1,340,570 100%
--- --------- --- --------- ---
--- --------- --- --------- ---
Less:
Undistributed loan proceeds...... 28 1,376
Unamortized net loan discounts
and deferred origination
fees........................... 3,021 3,336
Deferred gain on servicing
sold........................... -- --
Allowance for loan losses........ 31,572 29,801
--------- ---------
Loans receivable, net............ $1,228,152 $1,306,057
--------- ---------
--------- ---------
</TABLE>
OC-39
<PAGE>
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization of the Bank's total loan portfolio
at June 30, 1999, 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>
TOTAL AT PRINCIPAL REPAYMENTS CONTRACTUALLY DUE OR REPRICING IN YEAR(S) ENDED JUNE 30,
JUNE 30, --------------------------------------------------------------------------------
1999 2000 2001 2002 2003-2004 2005-2010 2011-2016 THEREAFTER
------------ ---------- --------- --------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family
residential............. $ 1,523,814 $ 34,399 $ 32,966 $ 35,913 $ 78,308 $ 281,244 $ 321,177 $ 739,807
Multi-family
residential............. 352,927 9,514 8,239 11,813 20,021 112,078 91,642 99,620
Commercial real estate.... 273,856 13,654 7,030 5,756 51,837 177,262 12,222 6,095
Land...................... 859 145 17 11 686 -- -- --
Other loans:
Commercial business....... 100,664 74,352 6,307 3,676 5,341 6,537 2,165 2,286
Consumer.................. 139,010 26,510 22,276 23,620 54,864 8,503 2,364 873
Secured by deposits....... 2,485 2,485 -- -- -- -- -- --
------------ ---------- --------- --------- ---------- ---------- ---------- ----------
Total (1)............. $ 2,393,615 $ 161,059 $ 76,835 $ 80,789 $ 211,057 $ 585,624 $ 429,570 $ 848,681
------------ ---------- --------- --------- ---------- ---------- ---------- ----------
------------ ---------- --------- --------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Of the $2.2 billion of loan principal repayments contractually due after
June 30, 2000, $1.4 billion have fixed rates of interest and $822 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. Loan applications 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
OC-40
<PAGE>
Bank's Credit Committee, comprised of the Bank's Senior Lending Officer, the
Chief Financial Officer and the Executive Vice President of Retail Banking,
which has approval authority for all loans in excess of $1.0 million and up to
$5.0 million. Any loans exceeding $5.0 million must be approved by the Board of
Directors of the Bank.
The Bank's commercial loan officers have approval authority up to designated
limits. The commercial loan officers do all of the underwriting associated with
an application and prepare the credit authorization for submission to the Senior
Commercial Lending Officer for verification. Loans in excess of $100,000 are
referred directly to the Senior Commercial Lending Officer who has authority to
approve loans up to $500,000. The Bank's Senior Lending Officer can approve
loans up to $1.0 million. Loans in excess of such amounts fall under the
jurisdiction of the Credit Committee or the Board of Directors, based on the
loan amounts set forth above.
Applications for consumer loans, as well as the Bank's smaller "business
express" loans, which range between $5,000 and $50,000, are taken in the Bank's
branches and submitted to the Vice President, Manager of the Bank's Business
Center, who has authority to approve consumer loans up to $300,000. Other
consumer loan officers have approval authority up to lesser designated amounts.
In order to improve the Bank's balance sheet as well as due to asset and
liability management considerations, during the year ended December 31, 1997,
the Bank sold $85.2 million of single-family residential mortgage loans tied to
COFI and reinvested $59.0 million of such proceeds in one-year adjustable-rate
single-family residential mortgage loans. Management used the balance of the
sale proceeds to purchase $4.8 million and $5.0 million of multi-family
residential loans and a land loan, respectively. In addition, during the last
quarter of 1997, management leveraged the capital raised in the Series A
Offering by purchasing in two transactions an aggregate of $408.8 million of
adjustable-rate single-family residential mortgage loans. In 1998, the Bank
leveraged the capital raised from the IPO primarily through purchases of
single-family residential loans totaling $821.7 million. Such loans were
generally underwritten in accordance with the Bank's underwriting guidelines for
direct originations, and consisted of a mix of adjustable and fixed-rate loans.
During the six months ended June 30, 1999, the Bank purchased $191.4 million of
fixed-rate single-family residential loans which become adjustable after 3, 5 or
7 years in order to increase the Bank's interest-earning assets and sold $92.5
million of long-term fixed-rate single-family residential loans in order to
reduce the Bank's interest rate risk. The Bank intends to focus on loan
originations, but may continue to selectively purchase residential mortgage
loans that meet its underwriting criteria from time to time in order to
supplement its loan originations.
A savings institution generally may not make loans to any one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities. At June 30, 1999, the Bank's regulatory limit on
loans-to-one borrower was $35.2 million and its five largest loans or groups of
loans-to-one borrower, including related entities, aggregated $25.0 million,
$21.2 million, $20.0 million, $15.0 million and $10.2 million. All of these five
largest loans or loan concentrations were secured by commercial real estate and
multi-family residential properties, except that the $15.0 million loan is
secured by marketable securities. All of these loans or loan concentrations were
performing in accordance with their terms at June 30, 1999.
OC-41
<PAGE>
The following table shows the activity in the Bank's loans during the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ----------------------------------------
JUNE 30, 1999 1998 1997 1996
----------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross loans held at beginning of period............. $ 2,188,691 $ 1,554,514 $ 1,168,192 $ 1,262,773
Originations of loans:
Mortgage loans:
Single-family residential....................... 137,263 389,475 88,077 37,129
Multi-family residential........................ 11,003 7,847 15,806 7,823
Commercial real estate.......................... 87,945 116,242 24,232 6,945
Land............................................ -- -- -- --
Other loans:
Commercial business............................. 52,980 57,492 20,869 4,303
Consumer........................................ 103,497 32,969 8,050 1,069
Secured by deposits............................. 2,485 3,537 3,664 4,389
----------------- ------------ ------------ ------------
Total originations............................ 395,173 607,562 160,698 61,658
----------------- ------------ ------------ ------------
Purchases of loans:
Single-family residential......................... 191,364 821,716 482,943 --
Multi-family residential.......................... 1,379 13,302 4,834 --
Commercial real estate............................ -- 10,201 12,899
Land.............................................. -- -- 5,000 --
Commercial business............................... 57 9,200 -- --
Consumer.......................................... 44 22,479 5 --
----------------- ------------ ------------ ------------
Total purchases............................... 192,844 876,898 505,681 --
----------------- ------------ ------------ ------------
Total originations and purchases.............. 588,017 1,484,460 666,379 61,658
----------------- ------------ ------------ ------------
Loans sold:
Single-family residential......................... (92,492) (37,051) (85,241) --
Commercial real estate............................ -- (357) -- --
Commercial business............................... -- (5,000) -- --
Consumer.......................................... (7) (13) -- --
----------------- ------------ ------------ ------------
Total sold.................................... (92,499) (42,421) (85,241) --
----------------- ------------ ------------ ------------
Repayments.......................................... (284,870) (797,614) (163,467) (113,721)
Transfers to real estate owned...................... (5,724) (10,248) (31,349) (42,518)
----------------- ------------ ------------ ------------
Net activity in loans............................... 204,924 634,177 386,322 (94,581)
----------------- ------------ ------------ ------------
Gross loans held at end of period................... $ 2,393,615 $ 2,188,691 $ 1,554,514 $ 1,168,192
----------------- ------------ ------------ ------------
----------------- ------------ ------------ ------------
</TABLE>
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. Although the Bank has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on existing single-family residences, more
recently the Bank has placed less emphasis on such lending and has placed
increased emphasis on commercial and consumer lending. At June 30, 1999, $1.5
billion or 63.7% of the Bank's total loan portfolio consisted of single-family
residential loans. The single-family residential loans originated by the Bank
are generally made on terms, conditions and documentation except for
non-conforming loan size which would 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.
OC-42
<PAGE>
Although the Bank has historically originated its single-family residential
loans internally, in an effort to enhance its ability to originate greater
volumes of loans without increasing its staff, during 1997, the Bank entered
into agreements with various mortgage brokers with respect to the origination of
single-family residential loans. Under the terms of such agreements, the
mortgage brokers originate loans on behalf of the Bank using the Bank's loan
documents. Such loans (which generally conform except for the size of the loans
with FHLMC and FNMA resale requirements) are originated and underwritten in
accordance with the Bank's underwriting policies. Currently, the Bank originates
approximately 50% of its single-family residential loans pursuant to such
mortgage broker relationships. The Bank currently utilizes approximately 59
mortgage brokers and management believes that its single-family loan
originations are of high quality based on its scoring results (average FICO
score as of June 30, 1999 of over 719). Substantially all of the single-family
residential loans originated by the Bank (either internally or through mortgage
brokers) are secured by properties located within the Bank's market area.
Although the Bank had not been an active purchaser of single-family
residential loans, during 1997, the Bank established the Company as a REIT and
leveraged the capital generated from two transactions through wholesale
purchases of an aggregate of $408.8 million of adjustable-rate (based upon a
weekly average yield on U.S. Treasury securities adjusted to a constant
comparable maturity of one year) single-family residential loans, which were
funded by short- to intermediate-term FHLB advances. Such purchases
significantly increased the size of the Bank's residential mortgage portfolio.
Similarly, in 1998, the Bank leveraged the proceeds raised from the IPO through
wholesale purchases of $821.7 million of single-family residential loans. During
the six months ended June 30, 1999, the Bank purchased $191.4 million of
fixed-rate single-family residential loans which become adjustable after 3, 5 or
7 years. As the Bank is able to increase its loan originations, management
intends to, over time, replace its wholesale loan purchases with loans which
have been originated internally.
The Bank currently offers fixed-rate single-family residential loans with
terms of 15 or 30 years. Such loans are amortized on a monthly basis with
principal and interest due each month. In addition to these traditional
products, the Bank offers a fixed bi-weekly pay option, which results in 26
payments per year, thereby permitting a customer to pay off the loan faster than
would otherwise be the case. At June 30, 1999, the Bank had $1.3 billion or
83.4% of fixed-rate single-family residential loans in its single-family
residential 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. Approximately 16.6% of the single-family residential loans
in the Bank's single-family residential loan portfolio at June 30, 1999 had
adjustable interest rates.
Under prior management, the Bank's adjustable rate loans were tied to COFI,
which does not adjust as rapidly to changes in interest rates as the U.S.
Treasury constant comparable maturity index now utilized by the Bank. The Bank
has discontinued the use of COFI-based loans. At June 30, 1999, 37.0% 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
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<PAGE>
interest rates increase, the required payments by the borrower increase, thus
increasing the potential for default.
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 generally not lend in excess of 80%.
At June 30, 1999, $19.8 million or 1.3% of the Bank's single-family residential
loans had loan-to-value ratios in excess of 80% and did not have private
mortgage insurance. In addition, as of such date, the Bank's single-family
residential loans had a weighted average loan-to-value ratio of 66%.
In 1997, the Bank sold the servicing rights both with respect to
substantially all of its residential mortgage loans as well as the residential
mortgage loans which the Bank was servicing for others to Temple Inland Mortgage
Corporation ("TIMC"), a wholly owned subsidiary of Guaranty Federal Bank,
F.S.B., which is wholly owned by Temple-Inland Inc., an unrelated third party.
The sale of loan servicing 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. The Bank recognized a gain on sale
of $3.2 million during the year with respect to the Bank's loans serviced for
others and an additional $5.3 million, related to the Bank's mortgage loans,
which was deferred and is being recognized over the estimated life of the
related loans.
In connection with the Bank's sale of servicing, the Bank entered into a
servicing agreement with TIMC, pursuant to which TIMC serviced substantially all
of such residential mortgage loans. The Bank also entered into a forward
production servicing purchase and sale agreement with the TIMC with respect to
new residential loan originations. However, the Bank terminated this agreement
in early 1998, and the Bank began servicing all of the residential mortgage
loans it originated after February 20, 1998.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LOANS. At June 30, 1999, the Bank
had an aggregate of $352.9 million and $273.9 million invested in multi-family
and commercial real estate loans, respectively, or 14.7% and 11.4% of the gross
loan portfolio, respectively. The Bank has generally targeted higher quality,
smaller commercial real estate loans with principal balances of up to $1.0
million. In originating such loans, the Bank relies on relationships it has
developed with brokers, correspondents and mortgage brokers.
The Bank's multi-family loans are secured by multi-family properties of five
units or more, while the Bank's commercial real estate loans are secured by
industrial, warehouse and self-storage properties, office buildings, office and
industrial condominiums, retail space and strip shopping centers, mixed-use
commercial properties, mobile home parks, nursing homes, hotels and motels.
Substantially all of these properties are located in California. The Bank will
presently originate these loans for terms of up to 10 years based upon a 20 to
25 year loan amortization period and up to 15 years for loans amortized over a
period of 15 years or less. The Bank will originate these loans on both a
fixed-rate or adjustable-rate basis, with the latter 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 or more.
It is also the Bank's general policy to
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<PAGE>
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.
Originations of multi-family and commercial real estate loans increased from
an aggregate of $14.8 million during the year ended December 31, 1996 to $40.0
million during the year ended December 31, 1997, to $124.1 million during the
year ended December 31, 1998 and amounted to $98.9 million during the six months
ended June 30, 1999. The Bank began making purchases of multi-family and
commercial real estate loans during the year ended December 31, 1997. Such loan
purchases aggregated $17.7 million in 1997, $23.5 million in 1998 and $1.4
million during the six months ended June 30, 1999.
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, during 1998
the Bank hired over 20 individuals with significant expertise in commercial and
consumer credit administration and lending. Except for loans secured by
deposits, the Bank did not engage in this type of lending activity prior to
1996. During the six months ended June 30, 1999 and the years ended December 31,
1998 and 1997, the Bank originated $159.0 million, $94.0 million and $32.6
million, respectively, of commercial business and consumer loans (including
loans secured by deposits), which amounted to 40.2%, 15.5% and 20.3% of total
originations during such respective periods.
The Bank is originating and intends to continue to originate commercial
business loans including working capital lines of credit, inventory and accounts
receivable loans (including a specialized accounts receivable loan product for
small businesses), equipment and other asset-based 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 seven 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 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 intends to apply for preferred lender status during
1999, which will permit it to underwrite and close such loans much more
promptly. At June 30, 1999, approximately $15.0 million of the Bank's $100.7
million in commercial business loans were comprised of SBA loans.
The Bank is authorized to make loans for a wide variety of personal or
consumer purposes but had 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
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<PAGE>
to provide additional products and services to its customers. The Bank also
offers overdraft protection and unsecured lines of credit. At June 30, 1999,
home equity loans and lines amounted to $6.8 million. On owner-occupied homes,
these loans and lines are originated by the Bank for up to 80% of the first
$350,000 of appraised value plus up to 50% of the remainder, less the amount of
any prior liens on the property. For non-owner occupied properties, the Bank
will lend up to 75% of the first $250,000 of appraised value plus 50% of the
remainder, less the amount of existing liens on the property. Home equity loans
and lines of credit have a maximum term of 25 years and carry variable interest
rates. The Bank will secure each of these types of loans with a mortgage on the
property (generally a second mortgage).
The Bank also originates loans secured by new and used automobiles,
primarily through an indirect lending program with automobile dealers. The
maximum term for the Bank's automobile loans is 84 months for a new luxury car
loan and 72 months with respect to a used luxury car loan. For all other models,
the maximum term is 72 months for new vehicles and 60 months for used vehicles.
The Bank will lend up to 100% of the purchase price on new car loans with a
purchase price of $25,000 or more, and up to 80% for new and used vehicles (up
to five years). On used vehicles, the Bank will finance up to 80% of the lower
of the total purchase price or 100% of the National Automobile Dealers'
Association Wholesale Blue Book Value. The Bank requires all borrowers to
maintain automobile insurance with the Bank named as loss payee. During 1998,
the Bank hired an individual with significant experience to manage the Bank's
indirect automobile lending program. As a result, the Bank has increased its
originations of indirect automobile loans. The Bank currently originates such
loans through approximately 45 dealers, all of which are located in California.
Although management believes that less than 30% of the Bank's indirect
automobile loan portfolio at June 30, 1999 consisted of loans made to "subprime"
borrowers at the time of origination, less than 20% of current originations are
being made to such "subprime" borrowers. The Bank intends to securitize and sell
a portion of its indirect automobile loan portfolio in the future. At June 30,
1999, the Bank had $123.8 million of indirect automobile loans in its portfolio
with a weighted average yield of 10.44%. At June 30, 1999, 1.17% of the indirect
automobile portfolio (net of repossessions) was delinquent 30 days or more.
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
GENERAL. The Bank's loan review function is carried out through an internal
asset review process which is supplemented on a quarterly basis by loan reviews
conducted by an unaffiliated firm. The Bank maintains an Internal Asset Review
Committee and Loan Review and Special Assets Departments and maintains updated
loan underwriting, credit, collection and monitoring procedures. Management
initiated a policy to take title to non-performing assets as promptly as
practicable and improve the properties' physical condition where appropriate so
that marketing efforts may be commenced. In the case of commercial properties,
management takes steps to enhance net operating income with respect to its
properties in order to command a better sales price. The Bank's future results
of operations will be significantly affected by its ability to continue to
maintain its reduced level of non-performing assets without incurring additional
material losses.
OC-46
<PAGE>
LOAN DELINQUENCIES. When a borrower fails to make a required payment on a
loan, the Bank attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made following the grace period after a
payment is due, which is generally ten days on commercial loans and 15 days on
residential loans. At such time, a late payment fee is assessed. In most cases,
deficiencies are cured promptly. If a delinquency extends past the applicable
grace period, the loan file and payment history are reviewed and continued
efforts are made to collect the loan. In the event that no contact with the
borrower is made, or no payment is received by the end of the grace period, a
Notice of Intent to Foreclose ("Notice") is sent. Depending upon the scheduled
payment date, this Notice is sent no later than 30 days after the due date for
residential loans and no later than 15 days after the due date for commercial
loans.
Under the Bank's management team, the accounts are monitored on a weekly
basis by the servicing department. With respect to commercial loans, a trial
balance is updated weekly, and those accounts that are identified as being past
the due date are assigned to staff to begin the collection process. With respect
to commercial loans, delinquent reports and a listing of those accounts for
which a Notice has been issued are sent to senior management and the Special
Assets Department to provide advance information as to potential problems which
may fall under their Department in the coming quarter. Generally when an account
becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.
NON-PERFORMING ASSETS. With respect to residential mortgage loans, as
described under "--Single-Family Residential Real Estate Loans," TIMC services a
substantial amount of the Bank's loan portfolio. The Bank began servicing all of
the residential mortgage loans it originated after February 20, 1998. The
servicing agreement with TIMC requires it to foreclose upon or otherwise
comparably convert the ownership of properties securing such 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. When
residential mortgage loans handled by the TIMC go into non-accrual status, the
Bank may request that they be transferred back to the Bank. All loans serviced
by TIMC which become real estate owned are automatically transferred to the
Bank.
All commercial loans held in the Bank's portfolio are reviewed on a regular
basis to determine any potential problems. Monthly committee meetings are held
to identify problem assets and to set forth a strategy for the mitigation of
loss and the resolution of the problem. Loans are placed on non-accrual status
if management has substantive doubts about payment in full of both principal and
interest, or if principal and interest is contractually in default for a period
of 90 days or more. The Bank provides an allowance for the loss of previously
accrued but uncollected interest on all non-accrual loans. Typically, after a
collection problem has necessitated the issuance of a Notice, the Special Assets
Department will review and recommend the selection and an appointment of a
receiver. The Bank's current policy is to have a receiver appointed at the
expiration of the Notice, which is 10 days after issuance, unless some type of
formal, written agreement with the borrower has been arranged.
The receiver has specific criteria to fulfill with respect to the management
of the property on behalf of the Bank. The first responsibility is to gain
control of the cash generated from the property. The receiver is responsible for
all collection activity. In addition, the receiver is required to prepare
forward forecasting with respect to occupancy and potential rent collections.
Approximately 30 to 60 days after a receiver is appointed, the Bank will order a
third party appraisal report. The information pertaining to the property
operations will be supplied to the appraiser by the receiver. The in-house
appraisal department reviews the third party appraisal report for accuracy and
reasonableness of assumptions.
The receiver and the Bank work together in preparing a budget for potential
repairs and maintenance, as well as capital expenditure items needed at the
property. It is the policy of the Bank to
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<PAGE>
instruct the receiver to utilize all net operating income available to restore
the property or units of current vacancy to "lease ready" condition.
A review of the collateral value is performed to determine if sufficient
equity exists to repay the indebtedness in the event of a foreclosure and
subsequent sale of the property. The valuation is prepared by the account
officer assigned to review the credit facility. The valuation is performed under
two scenarios. First, a review of the current market conditions of similar
properties within the collateral property's market is completed to ascertain
comparable rent and sale data. Second, a discounted cash flow analysis is
prepared, utilizing current investor return requirements and capitalization
rates. Once a value for the property has been estimated based upon its ability
to generate cash flow, expenses associated with the sale of the property, such
as broker commissions and closing costs are deducted from the estimated value. A
comparison of this amount is made to the loan balance to determine whether a
specific allowance or a write-off is appropriate.
During this on-going process, the Bank and the receiver will identify and
catalogue any potential purchasers who call and express an interest in the
property prior to the Bank taking title. Once title is transferred, the Bank
will then begin the process of contacting those entities that previously
expressed an interest to confirm that interest and proceed with the
qualification stage.
REAL ESTATE OWNED. Real estate acquired through foreclosure is carried at
the estimated fair value less estimated selling expenses at the date of
transfer. A loan charge-off is recorded for any writedown in the loan's carrying
value to fair value at the date of transfer. Real estate loss provisions are
recorded if the properties' estimated fair value subsequently declines below the
value determined at the recording date. In determining the fair value at
acquisition, costs relating to development and improvement of property are
considered. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
In preparing a real estate owned property to be marketed for sale, certain
repairs are undertaken and other repair items are left as negotiating points
pertaining to the sale contract. The Bank may offer to adjust the sale price for
such minor repair items, or may offer to deliver the property in a repaired
state. As part of the disposition strategy, the Bank may offer financing at
current market terms to qualified buyers of the real estate owned. Generally,
the Bank requires that the purchaser/borrowing entity provide a minimum of 20%
cash toward the purchase of the property. Terms offered are similar to terms
being offered on other new originations and at comparable rates. The Special
Assets Department makes great efforts to ensure that the underwriting for a loan
to facilitate is comparable to other new loan production, and that the
transactions are done at arms-length and reflect fair market.
TROUBLED DEBT RESTRUCTURINGS. 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 loan, including a reduction of the interest rate,
an extension of the maturity date at a stated interest rate lower than the
current market for new loans with similar risk, a reduction of the face amount
of the loan or a reduction of accrued interest. The Bank provides an allowance
for the loss of previously accrued but uncollected interest on these, as well as
non-accrual loans. Currently, the Bank's TDR's consist of loans collateralized
by single- and multi-family residential properties. The majority of these
restructurings were entered into during the early 1990's when economic
conditions in California were severely depressed or in conjunction with damage
to the collateral properties caused by the Northridge earthquake in 1994.
Management's decision to provide such restructurings was based upon both an
internal assessment of the situation and a consensus of other lenders in
California who believed that this resolution would be the most effective
mitigating measure. Management considers all loans formerly treated as TDRs to
be impaired loans in the year of restructuring. Generally, such loans, as well
as those previously placed on non-accrual status, are
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returned to accrual status when the borrower has had a period of repayment
performance for twelve consecutive months.
The Bank's management 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 Lending
Officer, and the Vice President and Loan Review Officer. The Committee meets at
least monthly and monitors the Bank's assets to ensure proper classification.
All multi-family and commercial assets in excess of $500,000, regardless of
performance, are reviewed at least once each year. Assets that are classified as
special mention are reviewed every six months and those assets classified as
substandard are reviewed every three months and, if collateral dependent, a
market value analysis is performed on the property to determine whether
valuation allowances are required. Loans that are non-performing, subject to
workout or forbearance or classified substandard are monitored and managed
through the Senior Lending Officer. Assets that are foreclosed and become real
estate owned continue to be managed by the Senior Lending Officer through
resolution.
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<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 JUNE 30,
1999 1998 1997 1996 1995 1994
----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans, net:
Mortgage loans:
Single-family residential.......... $ 3,520 $ 3,959 $ 8,435 $ 7,947 $ 10,467 $ 14,780
Multi-family residential........... 1,810 428 405 9,198 16,840(1) --
Commercial real estate............. 918 3,613 1,064 1,093 8,173 8,446
Land............................... -- -- -- -- 112 4,232
----------- --------- --------- --------- --------- ---------
Non-mortgage loans:
Commercial business................ 115 99 -- -- -- --
Consumer........................... -- 408 -- -- -- --
----------- --------- --------- --------- --------- ---------
Total non-performing loans,
net.......................... 6,363 8,507 9,904 18,238 35,592 27,458
----------- --------- --------- --------- --------- ---------
Real estate owned, net:
Single-family residential.......... 1,523 2,723 678 3,268 6,387 5,322
Multi-family residential........... -- -- 6,482 8,310 901 3,999
Commercial real estate............. 2,528 -- 5,921 8,614 3,506 1,095
Land............................... -- -- 202 244 121 69
----------- --------- --------- --------- --------- ---------
Total real estate owned, net......... 4,051 2,723 13,283 20,436 10,915 10,485
----------- --------- --------- --------- --------- ---------
Total non-performing assets.......... $ 10,414 $ 11,230 $ 23,187 $ 38,674 $ 46,507 $ 37,943
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Troubled debt restructurings......... $ 4,945 $ 3,576 $ 9,936 $ 7,544 $ 6,133 $ 40,794(1)
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Total non-performing assets and
troubled debt restructurings....... $ 15,359 $ 14,806 $ 33,123 $ 46,218 $ 52,640 $ 78,737
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Non-performing loans to total loans,
net................................ 0.27% 0.40% 0.65% 1.60% 2.90% 2.10%
Non-performing loans to total
assets............................. 0.18 0.26 0.45 1.04 2.25 1.59
Non-performing assets to total
assets............................. 0.30 0.34 1.05 2.21 2.94 2.21
Total non-performing assets and
troubled debt restructurings to
total assets....................... 0.44 0.44 1.50 2.64 3.33 4.57
</TABLE>
- ------------------------
(1) Reflects to a large extent problems associated with the 1994 Northridge,
California earthquake.
The $1.3 million increase in total real estate owned, net, during the six
month period ended June 30, 1999 is attributable to the migration of a $2.5
million non-performing commercial real estate loan secured by a strip shopping
center, which was foreclosed on during the period.
The interest income that would have been recorded during the six months
ended June 30, 1999 and the years ended December 31, 1998, 1997 and 1996 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 $303,000, $950,000, $644,000
and $1.4 million, respectively.
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
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necessary, and net earnings 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.
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<PAGE>
The following table sets forth the activity in the Bank's allowance for loan
losses during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Allowance at beginning of period............ $ 18,897 $ 17,824 $ 17,824 $ 23,280 $ 31,572 $ 29,801 $ 20,426
--------- --------- --------- --------- --------- --------- ---------
Provision for loan losses................... 2,100 900 2,000 2,046 2,884 8,823 22,330
--------- --------- --------- --------- --------- --------- ---------
Charge-offs:
Mortgage loans:
Single-family residential................. (439) (355) (616) (1,967) (2,213) (3,416) (5,428)
Multi-family residential.................. -- (43) (261) (5,559) (5,039) (1,854) (1,787)
Commercial real estate.................... (39) -- -- (42) (3,371) (860) (5,813)
Land...................................... -- -- -- -- (1,478) (956) --
--------- --------- --------- --------- --------- --------- ---------
Non-mortgage loans:
Commercial business....................... (703) (16) (16) -- -- -- --
Consumer.................................. (562) -- (119) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total charge-offs..................... (1,743) (414) (1,012) (7,608) (12,101) (7,086) (13,028)
--------- --------- --------- --------- --------- --------- ---------
Recoveries:
Mortgage loans:
Single-family residential................. 32 83 85 106 16 34 73
Multi-family residential.................. -- -- -- -- 22 -- --
Commercial real estate.................... -- -- -- -- 2 -- --
Commercial business....................... 9 -- -- -- -- -- --
Consumer.................................. 79 -- -- -- -- -- --
Land...................................... -- -- -- -- 885 -- --
--------- --------- --------- --------- --------- --------- ---------
Total recoveries...................... 120 83 85 106 925 34 73
--------- --------- --------- --------- --------- --------- ---------
Net charge-offs............................. (1,623) (331) (927) (7,502) (11,176) (7,052) (12,955)
--------- --------- --------- --------- --------- --------- ---------
Allowance at end of period.................. $ 19,374 $ 18,393 $ 18,897 $ 17,824 $ 23,280 $ 31,572 $ 29,801
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Allowance for loan losses to total
nonperforming loans at end of period...... 304.48% 175.12% 222.13% 179.97% 127.65% 88.71% 108.53%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Allowance for loan losses to total
nonperforming loans and troubled debt
restructurings at end of period........... 171.33% 93.27% 156.39% 89.84% 90.30% 75.67% 43.66%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Allowance for loan losses to total loans at
end of period............................. 0.81% 0.86% 0.86% 1.15% 1.99% 2.50% 2.18%
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
As shown in the table above, loan charge-offs (net of recoveries) amounted
to $1.6 million, $927,000, $7.5 million and $11.2 million during the six months
ended June 30, 1999 and the years ended December 31, 1998, 1997 and 1996,
respectively. The net charge-off's recognized by the Bank during the six months
ended June 30, 1999 primarily reflected charge-offs relating to commercial
business and consumer loans. The net charge-offs recognized by the Bank during
the years ended December 31, 1998, 1997 and 1996 primarily reflected the
transfer of loans (particularly multi-family residential loans) to real estate
owned, as shown in the preceding non-performing assets table. Such multi-family
loans had specific valuation allowances which had been established through
increased provisions for loans in prior periods. At the time of transfer of the
loans to real estate owned, such specific valuation allowances were charged off.
As a result of the transfer of such loans to real estate owned, the Bank's
non-performing loans have declined since 1995, which has contributed to the
decrease in the Bank's provision for loan losses. Management believes that its
allowance for losses on loans at June 30, 1999 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.
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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>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1999 1998 1997
-------------------------- -------------------------- --------------------------
PERCENT TO PERCENT TO PERCENT TO
TOTAL TOTAL TOTAL
AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN
THOUSANDS)
Residential real estate......................... $ 5,517 28.5% $ 5,637 29.8% $ 5,014 28.1%
Multi-family residential........................ 5,839 30.1 7,239 38.3 8,964 50.3
Commercial real estate.......................... 3,581 18.5 3,887 20.6 3,062 17.2
Land............................................ 45 0.2 44 0.2 305 1.7
Other loans..................................... 4,392 22.7 2,090 11.1 479 2.7
----------- ----- ----------- ----- ----------- -----
Total........................................... $ 19,374 100.0% $ 18,897 100.0% $ 17,824 100.0%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
<CAPTION>
1996 1995 1994
-------------------------- -------------------------- --------------------------
PERCENT TO PERCENT TO PERCENT TO
TOTAL TOTAL TOTAL
AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE
----------- ------------- ----------- ------------- ----------- -------------
<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 67.7 18,509 58.6 11,396 38.2
Commercial real estate.......................... 3,267 14.0 7,850 24.9 6,964 23.4
Land............................................ 94 0.4 104 0.3 3,120 10.5
Other loans..................................... 115 0.5 -- -- 512 1.7
----------- ----- ----------- ----- ----------- -----
Total........................................... $ 23,280 100.0% $ 31,572 100.0% $ 29,801 100.0%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
OC-53
<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 June 30, 1999, the Bank's securities portfolio consisted of $659.5
million of mortgage-backed securities, $654.3 million of which were classified
as available for sale and $5.2 million of which were classified as held to
maturity, $65.2 million of U.S. Government agency obligations, $247.3 million of
investment-grade trust preferred securities and $71.4 million of SBA
certificates. Of the mortgage-backed securities at June 30, 1999, $508.0 million
consisted of fixed-rate securities and $151.5 million consisted of
adjustable-rate securities. Of the Bank's $65.2 million of U.S. Government and
federal agency obligations at June 30, 1999, none were scheduled to mature
within one year thereof, $29.8 million were scheduled to mature within one
through five years thereof, $35.4 million were scheduled to mature after five
through ten years thereof and none were scheduled to mature after ten years. Of
the Bank's $1.0 billion of mortgage-backed and other securities
available-for-sale as well as held-to-maturity at June 30, 1999, none were
scheduled to mature within one year thereof, $110.9 million were scheduled to
mature after one through five years thereof, $230.2 million were scheduled to
mature after five through ten years thereof and $667.7 million were scheduled to
mature after ten years. The Bank's aggregate securities portfolio, net of
repayments and prepayments and sales, increased by $67.6 million or 13.2%
between 1996 and 1997, increased by $430.4 million or 74.1% during 1998 and
increased by $32.1 million or 3.2% during the six months ended June 30, 1999.
The increase in the Bank's securities portfolio during 1998 reflected the
leveraging of the proceeds from the Series A Offering and the IPO. At June 30,
1999, the Bank's securities portfolio amounted to $1.0 billion.
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
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
OC-54
<PAGE>
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
$240,000. To accommodate larger-sized loans, and loans that, for other reasons,
do not conform to the agency programs, a number of private institutions have
established their own home-loan origination and securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgage, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages.
The following table sets forth information regarding the carrying and market
value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
JUNE 30,
1999 1998 1997 1996
-------------------- -------------------- ---------------------- ----------------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
--------- --------- --------- --------- ----------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale (at market):
U.S. Government and federal agency
obligations..................... $ 65,156 $ 65,156 $ 36,977 $ 36,977 $ 139,719 $ 139,719 $ 38,714 $ 38,714
Investment grade trust............ 247,324 247,324 324,965 324,965 -- -- -- --
Mortgage-backed securities........ 654,329 654,329 584,515 584,515 418,450 418,450 463,587 463,587
SBA certificates.................. 71,356 71,356 58,480 58,480 12,991 12,991 -- --
--------- --------- --------- --------- ----------- --------- ----------- ---------
$1,038,165 $1,038,165 $1,004,937 $1,004,937 $ 571,160 $ 571,160 $ 502,301 $ 502,301
--------- --------- --------- --------- ----------- --------- ----------- ---------
--------- --------- --------- --------- ----------- --------- ----------- ---------
Held to maturity:
Mortgage-backed securities........ $ 5,214 $ 5,204 $ 6,282 $ 6,372 $ 9,671 $ 9,743 $ 10,971 $ 10,899
--------- --------- --------- --------- ----------- --------- ----------- ---------
--------- --------- --------- --------- ----------- --------- ----------- ---------
</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,
SIX MONTHS ENDED -------------------------------
JUNE 30, 1999 1998 1997 1996
----------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Securities at beginning of period............................. $ 1,011,219 $ 580,831 $ 513,272 $ 241,645
Purchases..................................................... 262,069 1,130,026 408,729 487,719
Sales......................................................... (119,429) (509,159) (234,339) (158,448)
Repayments and prepayments.................................... (91,552) (178,842) (110,941) (53,207)
Decrease (increase) in unrealized losses on available-for-sale
securities(1)............................................... (18,928) (11,637) 4,110 (4,437)
----------------- --------- --------- ---------
Securities at end of period(2)(3)............................. $ 1,043,379 $1,011,219 $ 580,831 $ 513,272
----------------- --------- --------- ---------
----------------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) At June 30, 1999, the cumulative unrealized losses on securities classified
as available-for-sale amounted to $32.5 million, which reduces stockholder's
equity.
(2) At June 30, 1999, the book value and market value of the Bank's securities
(including held-to-maturity and available for sale securities) amounted to
$1.0 billion and $1.0 billion, respectively.
(3) At June 30, 1999, $409.6 million or 39.3% of the Bank's securities portfolio
consisted of adjustable-rate securities, as compared to $501.1 million or
49.5%, $222.4 million or 43.3% and $115.8 million or 47.9% at December 31,
1998, 1997 and 1996, respectively.
OC-55
<PAGE>
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, consistent with the Bank's
asset and liability management policies. 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 ("Checking") 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 out-of-market, institutional certificates of deposit, the
Bank has allowed such brokered deposits to run off as they mature and is not
accepting any new brokered deposits. The Bank currently operates a total of 42
ATMs.
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>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1999 1998 1997 1996
------------------------ ------------------------ ------------------------ ---------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID BALANCE
--------- ------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Checking accounts............... $ 164,938 1.27% $ 120,664 1.75% $ 83,258 1.96% $ 58,511
Money market accounts........... 133,700 4.07 98,745 4.71 22,010 2.94 29,665
Passbook accounts............... 138,172 3.44 158,396 3.88 235,162 4.34 264,677
--------- --------- --------- ---------
Total transaction
accounts................ 436,810 377,805 340,430 352,853
Term certificates of deposit.... 1,126,361 5.31 1,010,209 5.71 966,863 5.66 1,069,484
--------- --------- --------- ---------
Total deposits............ $1,563,171 4.62% $1,388,014 5.09% $1,307,293 5.14% $1,422,337
--------- --- --------- --- --------- --- ---------
--------- --- --------- --- --------- --- ---------
<CAPTION>
AVERAGE
RATE PAID
-------------
<S> <C>
Checking accounts............... 0.77%
Money market accounts........... 2.52
Passbook accounts............... 4.64
Total transaction
accounts................
Term certificates of deposit.... 5.83
Total deposits............ 5.28%
---
---
</TABLE>
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ----------------------------------------
JUNE 30, 1999 1998 1997 1996
----------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Beginning balance................................... $ 1,543,966 $ 1,266,770 $ 1,371,243 $ 1,473,318
Net increase (decrease) before interest............. 39,384 222,808 (157,446) (160,804)
Interest credited................................... 27,911 54,388 52,973 58,729
----------------- ------------ ------------ ------------
Net increase (decrease) in deposits................. 67,295 277,196 (104,473) (102,075)
----------------- ------------ ------------ ------------
Ending balance...................................... $ 1,611,261 $ 1,543,966 $ 1,266,770 $ 1,371,243
----------------- ------------ ------------ ------------
----------------- ------------ ------------ ------------
</TABLE>
OC-56
<PAGE>
The following table sets forth the amount and remaining maturities of the
Bank's term certificates at June 30, 1999.
<TABLE>
<CAPTION>
OVER SIX MONTHS OVER ONE OVER TWO
SIX MONTHS THROUGH ONE YEAR THROUGH YEARS THROUGH OVER THREE
AND LESS YEAR TWO YEARS THREE YEARS YEARS
----------- ---------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
0.00% to 1.99%............................... $ 1,512 $ -- $ -- $ -- $ --
2.00% to 2.99%............................... 3,067 1,218 332 -- 3
3.00% to 3.99%............................... 6,127 55 -- -- 78
4.00% to 4.99%............................... 126,181 94,581 21,085 564 72
5.00% to 6.99%............................... 288,130 489,521 70,561 10,957 12,130
7.00% to 8.99%............................... 87 828 95 -- --
----------- -------- ------- ------------- -----------
Total.................................. $ 425,104 $ 586,203 $ 92,073 $ 11,521 $ 12,283
----------- -------- ------- ------------- -----------
----------- -------- ------- ------------- -----------
</TABLE>
The following table sets forth by various interest rate categories the term
certificates of deposit with the Bank at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
JUNE 30, --------------------------------------
1999 1998 1997 1996
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
0.00% to 2.99%............................................. $ 6,132 $ 4,536 $ 4,071 $ 4,299
3.00% to 3.99%............................................. 6,260 5,085 2,993 3,833
4.00% to 4.99%............................................. 242,483 107,373 5,700 46,771
5.00% to 6.99%............................................. 871,299 961,204 918,842 909,895
7.00% to 8.99%............................................. 1,010 30,961 1,219 36,244
------------ ------------ ---------- ------------
Total(1)............................................. $ 1,127,184 $ 1,109,159 $ 932,825 $ 1,001,042
------------ ------------ ---------- ------------
------------ ------------ ---------- ------------
</TABLE>
- ------------------------
(1) At June 30, 1999 and December 31, 1998, 1997 and 1996, certificates of
deposit in amounts greater than or equal to $100,000 amounted to $322.6
million, $316.3 million, $138.2 million and $158.7 million, respectively.
As of June 30, 1999, the aggregate amount of outstanding time certificates
of deposit in amounts greater than or equal to $100,000, was approximately
$322.6 million. The following table presents the maturity of these time
certificates of deposit at such dates.
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------
<S> <C>
(IN THOUSANDS)
3 months or less.............................................................. $ 53,566
Over 3 months through 6 months................................................ 74,279
Over 6 months through 12 months............................................... 166,193
Over 12 months................................................................ 28,543
--------------
$ 322,581
--------------
--------------
</TABLE>
OC-57
<PAGE>
BORROWINGS. The following table sets forth certain information regarding
the borrowings of the Bank at or for the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS AT OR FOR THE YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB OF SAN FRANCISCO ADVANCES:
Average balance outstanding................................ $1,211,500 $ 640,167 $ 902,083 $ 148,681 $ 53,666
Maximum amount outstanding at any month-end during the
period................................................... 1,259,000 920,000 1,249,000 472,000 80,000
Balance outstanding at end of period....................... 1,259,000 920,000 1,198,000 472,000 80,000
Weighted average interest rate during the period........... 5.38% 5.63% 5.54% 5.91% 5.49%
Weighted average interest rate at end of period............ 5.36% 5.64% 5.38% 5.87% 5.91%
Weighted average remaining term to maturity at end of
period (in years)........................................ 4.68 2.90 5.01 1.61 0.95
SECURITIES SOLD UNDER AGREEMENTS TO PURCHASE:
Average balance outstanding................................ 381,247 363,428 $ 385,452 $ 357,396 $ 179,002
Maximum amount outstanding at any month-end during the
period................................................... 434,947 658,409 658,409 415,676 219,229
Balance outstanding at end of period....................... 434,947 658,409 364,000 340,788 192,433
Weighted average interest rate during the period........... 5.58% 5.74% 5.66% 5.49% 6.09%
Weighted average interest rate at end of period............ 5.52 5.69% 5.61% 5.76% 5.49%
Weighted average remaining term to maturity at end of
period (in years)........................................ 3.21 3.29 3.73 2.71 0.63
</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 June 30, 1999, the Bank had total FHLB advances of $1.3 billion
at a weighted average interest rate of 5.36%, $75.0 million of which matures in
1999, $185.0 million of which matures in 2000, $25.0 million of which matures in
2001, $139.0 million of which matures in 2002, $525.0 million of which matures
in 2003, and $310.0 million of which matures in 2008.
The Bank increasingly relies on obtaining funds from the sales of securities
to investment dealers under agreements to repurchase ("reverse repurchase
agreements"). At June 30, 1999, reverse repurchase agreements amounted to $434.9
million, as compared to $364.0 million, $340.8 million and $192.4 million at
December 31, 1998, 1987 and 1996, respectively. 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 (which range in maturity from overnight to ten years) at
a price greater than the original sales price. The difference in the sale price
and purchase price is the cost of the use of the proceeds. The mortgage-backed
securities underlying the agreements are delivered to the dealers who arrange
the transactions. For agreements in which the Bank has agreed to repurchase
substantially identical securities, the dealers may sell, loan or otherwise
dispose of the Bank's securities in the normal course of their operations.
However, such dealers or third party custodians safe-keep the securities which
are to be specifically repurchased by the Bank. Reverse repurchase agreements
represent a competitive cost short-term funding source for the Bank.
Nevertheless, the Bank is subject to the risk that the lender may default at
maturity and not return the collateral. The amount at risk is the value of the
collateral which exceeds the balance of the borrowing. In order to minimize this
potential risk, the Bank only deals with large, established investment brokerage
firms when entering into these transactions. Reverse repurchase transactions are
accounted for as financing arrangements rather than sales of securities, and the
obligation to repurchase such securities is reflected as a liability in the
Bank's Consolidated Financial Statements.
OC-58
<PAGE>
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. The
Company is such an operating subsidiary of the Bank. As of June 30, 1999, the
Bank maintained one operating subsidiary, four direct subsidiaries and one
indirect subsidiary consisting of SoCal Mortgage Corporation ("SMC"), Direct
Investment Company of Southern California ("DIC"), SCP Investments, Inc.
("SCP"), Continental Development of California, Inc. ("CDC") and SCS Insurance
Services, Inc. ("SCS"). At June 30, 1999, the Bank's investment in its service
corporation subsidiaries amounted to $39.4 million in the aggregate.
The Company was established as an operating subsidiary of the Bank in 1997
to acquire, hold and manage primarily mortgage assets and to operate in a manner
so as to quality as a REIT for federal income tax purposes under the Code,
commencing with its taxable year ending December 31, 1997.
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. In 1998, SCP sold the Bank's last remaining real estate
development project consisting of 62 acres of vacant land located in Corona,
California.
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 six
months ended June 30, 1999 and the years ended December 31, 1998, 1997 and 1996,
SCS recognized net earnings of $322,000, $434,000, $362,000 and $336,000,
respectively.
LEGAL PROCEEDINGS
Except with respect to the Goodwill Litigation and the Ancillary Litigation,
each of which is defined and discussed below, neither PBOC nor the Bank is
involved in any legal proceedings which are material to either PBOC or the Bank.
The Bank is involved in routine legal proceedings from time to time which arise
in the normal course of its business.
THE GOODWILL LITIGATION
GENERAL. On January 28, 1993, PBOC, the Bank and certain current and former
stockholders of PBOC (collectively, the "Plaintiffs") filed a complaint against
the United States in the United States Court of Federal Claims ("Court of
Claims") seeking damages for breach of contract and for deprivation of property
without just compensation and without due process of law. The allegations in the
complaint arose out of the abrogation of certain contractual promises made to
PBOC, to certain of its current and former common stockholders and to the Bank,
by the Federal Home Loan Bank Board (the predecessor to the OTS) and the FSLIC
(the federal fund which previously insured the deposits of savings institutions)
in exchange for PBOC's agreement to acquire and to operate the Bank which was
then a failed thrift institution. One of the Significant Stockholders (Arbur) is
also a plaintiff in the case, which is entitled SOUTHERN CALIFORNIA FEDERAL
SAVINGS AND LOAN ASSOCIATION, ET AL. V. UNITED STATES, No. 93-52C (the "Goodwill
Litigation"). The Plaintiffs' claims arose from changes, mandated by FIRREA,
with respect to the rules for computing the Bank's regulatory capital. As
discussed below, the
OC-59
<PAGE>
Goodwill Litigation was stayed pending the resolution on appeal of several cases
which present issues similar to those presented by the Goodwill Litigation.
In connection with PBOC's acquisition of the Bank in April 1987, the Bank
was permitted to include in its regulatory capital and recognize as supervisory
goodwill $217.5 million of cash assistance provided to the Bank by the FSLIC
(the "Capital Credit"), as well as $79.7 million of goodwill which was recorded
by the Bank under GAAP. In August 1989, Congress enacted FIRREA which provided,
among other things, that savings institutions such as the Bank were no longer
permitted to include goodwill in their regulatory capital (subject to a gradual
phaseout which expired on December 31, 1994). Consequently, the Bank was
required to write-off its goodwill subject to a regulatory phase-out, which
resulted in the Bank failing to comply with its minimum regulatory capital
requirements during 1990 and 1991. The balance of the Bank's GAAP goodwill was
written off as unrealizable in 1992.
The Plaintiffs allege that the enactment of FIRREA constituted a breach by
the United States of its contractual commitment regarding the treatment of the
Capital Credit and supervisory goodwill and an unlawful taking of the Bank's
property rights in the Capital Credit and supervisory goodwill. The Plaintiffs
seek damages and restitution of all benefits conferred on the United States by
the alleged contract. As discussed below, no conclusive determination has been
made as to the type or amount of damages sought.
RELATED CASES. 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 U.S. 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 have not been finally litigated.
The Court of Claims issued a Case Management Order ("CMO") in all of the
Winstar Cases, including the Goodwill Litigation. 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
Plaintiffs filed a motion for partial summary judgment as to the Government's
liability to the Plaintiffs for breach of contract. The Government's response
thereto appears to concede that there was a contract allowing the Bank to apply
the Capital Credit to regulatory capital and that, by enacting FIRREA, the
Government acted inconsistently with that contract. The Government still
maintains that it does not have liability with respect to the Bank's $79.7
million of GAAP goodwill. Furthermore, the Government contends that only the
Bank and neither PBOC nor the other Plaintiffs have standing to pursue breach of
contract claims. The Court of Claims has not yet ruled on this motion for
partial summary judgment.
In February 1998, the Government sent the Bank a letter inviting the Bank to
commence negotiations to settle the Capital Credit claim portion of the Goodwill
Litigation. In March 1998, the Chief Judge issued an order in all of the Winstar
Cases ordering the Government and the committee representing all of the
plaintiffs, each through a designated representative, to negotiate to develop a
settlement framework or structure to settle these cases. Assuming a settlement
is not reached and based upon the status of the proceedings in the Winstar Cases
and the CMO, the Goodwill Litigation is not expected to be set for trial until
late 2000. The amount of damages the Plaintiffs 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 Goodwill Litigation. To date, there have been no material
substantive settlement discussions to resolve the Goodwill Litigation by and
among PBOC, the Bank and the Government and no trial date has been set.
OC-60
<PAGE>
THIRD PARTY LAWSUIT RELATED TO THE GOODWILL LITIGATION. In August 1997,
Ariadne Financial Services Pty. Ltd. and Memvale Pty Ltd. (collectively,
"Ariadne") filed a request with the Court of Claims in the Goodwill Litigation
for leave to file a motion to intervene as a plaintiff in the Goodwill
Litigation. The motion to intervene is based on Ariadne's claim as a former
stockholder of PBOC that intervention is necessary to protect their interests
and alleged right to participate in any recovery against the Government in the
Goodwill Litigation. The court has not yet ruled on Ariadne's motion. Ariadne
had previously filed its own action in the Court of Claims in April 1996 against
the Government which has been dismissed (and which dismissal has been upheld on
appeal) based on the statute of limitations. In February 1998, Ariadne
petitioned the Circuit Court of Appeals for a rehearing, and in March 1998,
Ariadne's petition was denied.
In May 1997, Ariadne filed a lawsuit against PBOC, the Bank, PBOC's former
stockholders and Arbur seeking damages and a constructive trust based upon
causes of action for breach of contract; anticipatory breach of contract; breach
of fiduciary duty; fraud; negligent misrepresentation, and mistake of fact.
Ariadne was a preferred stockholder in PBOC and the Bank and subordinated its
interest as part of the 1992 recapitalization of PBOC to the new investors, the
Significant Stockholders, and then consented to the redemption of all of its
stock for approximately $50,000 as part of the 1995 recapitalization. Ariadne
alleges that there was an oral and/or implied in fact contract between Ariadne
and the defendants that Ariadne would have a right to a portion of any monetary
damages awarded to PBOC and the other individual defendants (but not the Bank)
in the Goodwill Litigation, notwithstanding that Ariadne was not a named
plaintiff in the action. Ariadne further alleges that when it agreed to have its
stock redeemed, it was misled as to its right relating to participation in any
recovery from the Goodwill Litigation and the value of its stock and investment
in PBOC and the Bank as a result of such Goodwill Litigation. In August 1998,
Ariadne named the Bishop Estate and BIL Securities and certain affiliates of BIL
Securities as defendants in this lawsuit. In June 1999, Ariadne amended its
complaint to include Ariadne's parent company as a plaintiff and to allege
additional causes of action against the defendants. Ariadne's amended complaint
seeks damages in an amount not specified but in excess of $63 million. PBOC and
the Bank intend to defend this action vigorously. For purposes of the
Shareholder Rights Agreement, discussed below, the Ariadne lawsuit against PBOC
and the Bank, among others, is considered to be "Ancillary Litigation."
DAMAGES. Although PBOC and the Bank have conducted preliminary reviews of
the damages allegedly suffered by PBOC and the Bank, no conclusive determination
has been made regarding the amount or type of such damages. Moreover, PBOC and
the Bank believe that there are no finally adjudicated precedents on how to
assess damages in cases such as the Goodwill Litigation. In addition, the
Government may argue that some or all of the damages proffered by the Plaintiffs
are too speculative to permit a recovery. Therefore, even if the Plaintiffs
prevail in establishing the liability of the United States, there can be no
assurances as to the amount, if any, and type of damages that they may recover.
Without limiting the generality of the foregoing, there can be no assurance that
the Plaintiffs will obtain any cash recovery in the Goodwill Litigation.
Furthermore, assuming that there is a cash recovery, it is impossible to predict
the amount of the Litigation Recovery (as defined below) because the fees, costs
and taxes associated with the Litigation Recovery cannot be estimated. To the
extent that the Plaintiffs must engage in protracted litigation, such fees and
costs may increase significantly.
THE SHAREHOLDER RIGHTS AGREEMENT
GENERAL. PBOC, the Bank and each of the Significant Stockholders (i.e., the
Bishop Estate, BIL Securities and Arbur) have entered into an agreement (the
"Shareholder Rights Agreement"), the effective date of which was the
commencement of the IPO, whereby each Material Stockholder received one
Contingent Goodwill Participation Right (each a "Right" and collectively, the
"Rights")
OC-61
<PAGE>
for each share of common stock of PBOC held by the Material Stockholder as of
the date of the Shareholder Rights Agreement.
Each Right entitles the Significant Stockholders to receive 0.0009645% of
the Litigation Recovery, if any (as defined below) and all of the Rights to be
owned by the Significant Stockholders will entitle the Significant Stockholders
to receive in the aggregate 95% of the Litigation Recovery (such portion of the
Litigation Recovery, the "Recovery Payment"). The remaining 5.0% of the
Litigation Recovery will be retained by PBOC and/or the Bank in consideration
for the time and effort incurred previously and hereafter by PBOC, the Bank and
management of PBOC and the Bank with respect to prosecuting the Goodwill
Litigation.
None of the Significant Stockholders have paid any cash or other
consideration to PBOC and/or the Bank in connection with their entering into the
Shareholder Rights Agreement. Any successor to PBOC and/or the Bank is required
to assume the rights and obligations of PBOC and/or the Bank with respect to the
Shareholder Rights Agreement. In addition, to the extent that PBOC enters into a
definitive agreement providing for the acquisition, merger or consolidation of
PBOC or the Bank in which PBOC or the Bank is not the surviving entity, PBOC (or
any successor thereto) is required to create a statutory business trust under
Delaware law (the "Litigation Trust") with five trustees (the "Litigation
Trustees") designated by the Significant Stockholders. The Litigation Trustees
shall have the same authority, identical to and succeeding that of the
Litigation Committee of the Board of Directors, which has the responsibility to
make all decisions on behalf of PBOC and the Bank with respect to the Goodwill
Litigation and any litigation now or hereafter brought seeking in whole or in
part any amounts paid or to be paid as part of the Litigation Recovery or
challenging the claim by a party other than PBOC, the Bank or the Significant
Stockholders challenging the validity or binding effect of the Shareholder
Rights Agreement (the "Ancillary Litigation").
LITIGATION RECOVERY. The Litigation Recovery will equal the cash payment
(or any cash resulting from the liquidation of any non-cash proceeds (the "Cash
Payment"), if any, actually received by PBOC and/or the Bank in the aggregate
pursuant to a final, nonappealable judgment in or final settlement of the
Goodwill Litigation (including any post-judgment interest actually received by
PBOC and/or the Bank with respect to any Cash Payment) after deduction of (i)
(A) the aggregate fees and expenses incurred after the date of the Shareholder
Rights Agreement by PBOC and the Bank in prosecuting the Goodwill Litigation and
obtaining the Cash Payment (including any costs and expenses incurred with
respect to the monetization of any marketable assets received and/or liquidation
of non-cash proceeds), and/or (B) the aggregate liabilities, fees and expenses
incurred after the date of the Shareholder Rights Agreement by PBOC and the Bank
in any Ancillary Litigation, and/or (C) the amount reimbursed to any Litigation
Trustee; (ii) any income tax liability of PBOC and/or the Bank, computed on a
PRO FORMA basis, as a result of PBOC's and/or the Bank's receipt of the Cash
Payment (net of any income tax benefit to PBOC and/or the Bank from making the
Recovery Payment to the Significant Stockholders, and disregarding for purposes
of this clause (ii) the effect of any NOLs or other tax attributes held by PBOC
and the Bank or any of their respective subsidiaries or affiliated entities);
(iii) any portion of the Litigation Recovery (calculated for purposes of this
clause (iii) before the deduction of the amounts calculated pursuant to clauses
(i) and (ii) above and clause (iv) below) which is determined to be owing to one
or more of the Plaintiffs (other than PBOC and the Bank) or to any other third
parties; and (iv) any portion of the Litigation Recovery (calculated for
purposes of this clause (iv) before the deduction of the amounts calculated
pursuant to clauses (i), (ii) and (iii))which Doreen J. Blauschild is entitled
to receive as a result of her employment agreement with the Bank, dated as of
April 11, 1995 (which entitles Ms. Blauschild to 0.25% of the amount by which
any net recovery (i.e., gross amount less attorneys' fees incurred by the Bank)
by and payable to the Bank relating to the Goodwill Litigation, whether by
judgment or settlement, exceeds $150.0 million).
CONVERSION OF RIGHTS TO PREFERRED STOCK. In the event that applicable laws,
rules, regulations, directives or the terms of any judgment or settlement limit
or prevent the Bank from distributing any
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<PAGE>
or all of the Litigation Recovery and/or PBOC from redeeming the Rights and
distributing all or a portion of the Recovery Payment, the Bank shall only
distribute such portion of the Recovery Payment and PBOC shall only redeem those
Rights (on a pro rata basis) and distribute such portion of the Recovery Payment
(on a pro rata basis), to the extent not otherwise restricted. While the Bank
has a continuing obligation to distribute the balance of any Litigation Recovery
which it has been precluded from paying as soon as permissible, and PBOC has a
continuing obligation to redeem the balance of the Rights and distribute the
balance of any Recovery Payment which it has been precluded from paying as soon
as permissible, in no event, however, will PBOC's redemption of the Rights
result in an aggregate distribution of an amount greater than the Recovery
Payment.
To the extent PBOC is prohibited from distributing the Recovery Payment, or
any portion thereof, or cannot do so because the Bank is prohibited from making
the Litigation Recovery distribution to PBOC, PBOC shall, upon the written
request of any Significant Stockholder, issue to such Significant Stockholder
preferred stock of PBOC with an aggregate liquidation preference equal in value
to the Recovery Payment or portion thereof which PBOC shall have been prohibited
from distributing or unable to distribute (the "Recovery Payment Preferred").
The terms of the Recovery Payment Preferred shall be set forth in a Certificate
of Designations and Preferences filed as a supplement to the PBOC's Amended and
Restated Certificate of Incorporation. PBOC shall issue the Recovery Payment
Preferred upon surrender to PBOC of such Significant Stockholder's Rights.
The stated value of each share of Recovery Payment Preferred shall be
$1,000. The holders of the Recovery Payment Preferred shall be entitled to
receive, when, as and if declared by the Board of Directors and out of the
assets of PBOC which are by law available for the payment of dividends,
cumulative preferential cash dividends payable quarterly on the last day of each
calendar quarter commencing with the first full quarter following issuance
thereof at a fixed rate per share of 9 3/4%. Each quarterly dividend shall be
fully cumulative and dividends shall accrue, whether or not earned, declared or
PBOC shall have funds or assets available for the payment of dividends.
REIMBURSEMENT OF FEES AND EXPENSES AND INDEMNIFICATION. Under the terms of
the Shareholder Rights Agreement, the amount of the Recovery Payment which is to
be paid to the Significant Stockholders in connection with a Litigation Recovery
is to be reduced by, among other things, the fees and expenses incurred in
connection with the Goodwill Litigation and any Ancillary Litigation. While such
agreement does not legally require reimbursement of such expenses in the event
there is no Litigation Recovery, the Significant Stockholders have reimbursed
the PBOC and the Bank for expenses to date and have advised the Board of
Directors of their willingness to reimburse PBOC and/or the Bank for such fees
and expenses upon periodic request by PBOC and/or the Bank. No assurance can be
made that the Significant Stockholders will in fact continue to reimburse PBOC
and the Bank for any fees and expenses incurred with respect to the Goodwill
Litigation and any Ancillary Litigation and the Significant Stockholders are not
obligated to do so. The Shareholder Rights Agreement provides that the
Significant Stockholders shall indemnify PBOC and/or the Bank for 95% of the
liability incurred in any claim by a party now pending (such as Ariadne) or
hereafter brought, seeking in whole or in part any amounts paid or to be paid as
part of the Litigation Recovery, and 100% of the liability incurred in any claim
by a party, other than PBOC or the Bank, challenging the validity or binding
effect of the Shareholders Rights Agreement.
TAX CONSEQUENCES. KPMG LLP has issued an opinion to PBOC and the Bank to
the effect that, for federal income tax purposes, the Rights evidenced by the
terms of the Shareholder Rights Agreement should be treated as stock of PBOC for
purposes of Sections 382(e), 311(a) and 305(a) of the Code. Thus, PBOC should
recognize no gain or loss on the distribution of the Rights to the Significant
Stockholders with respect to their ownership of PBOC common stock. In addition,
the Bank should not recognize gain or loss on PBOC's distribution of the Rights
to the Significant Stockholders. Furthermore, the Significant Stockholders
should not be required to include the amount of the Rights in income. Finally,
the amount of value taken into account for purposes of determining the annual
Section 382 limitation in connection with the 1998 Ownership Change should
include the value of the Rights.
OC-63
<PAGE>
OFFICE LOCATIONS
The following table set forth certain information with respect to the Bank's
offices at June 30, 1999.
<TABLE>
<CAPTION>
LEASE NET BOOK VALUE TOTAL DEPOSITS
EXPIRATION OF PROPERTY AT AT
OFFICE LOCATION LEASE/OWNED DATE JUNE 30, 1999 JUNE 30, 1999
- ----------------------------------------------- ------------ ---------------------- --------------- ---------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
EXECUTIVE OFFICE (AND BRANCH):
LOS ANGELES
5900 Wilshire Blvd. Leased 04/2009 $ 1,700 $ 13,241
15(th) and 16(th) Floors Option: 1-5 years
Los Angeles, CA 90036
BRANCH OFFICES:
BEVERLY HILLS
9100 Wilshire Blvd. Leased 03/2000 135 138,137
Beverly Hills, CA 90212 Option: 2-10 years
ORANGE
216 E Chapman Avenue Leased 01/2001 152 124,464
Orange, CA 92866-1506 Option: 2-5 years
PACIFIC PALISADES
15305 Sunset Blvd. Leased 12/2006 208 73,469
Pacific Palisades, CA 90272 Option: 1-10 years
MONTEBELLO
1300 W Beverly Blvd. Leased 08/2003 193 102,960
Montebello, CA 90640 Option: 1-10 years
GARDEN GROVE
12112 Valley View Owned -- 113 82,499
Garden Grove, CA 92845
SIMI VALLEY
1445 Los Angeles Ave. Leased 01/31/2002 159 100,214
Simi Valley, CA 93065 Option: 2-30 months
followed by 3--5 years
SYLMAR
13831 Foothill Blvd. Leased 09/2002 163 52,210
Sylmar, CA 91342 Option: 2-10 years
BUENA PARK
5470 Beach Blvd. Leased 12/2004 129 32,674
Buena Park, CA 90621 Option: 3-5 years
NORTH HOLLYWOOD
12848 Victory Blvd. Leased 05/2000 102 94,505
North Hollywood, CA 91606
BEVERLY/SERRANO
4500 W. Beverly Blvd. Leased 01/2006 174 43,531
Los Angeles, CA 90004 Option: 2-5 years
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
LEASE NET BOOK VALUE TOTAL DEPOSITS
EXPIRATION OF PROPERTY AT AT
OFFICE LOCATION LEASE/OWNED DATE JUNE 30, 1999 JUNE 30, 1999
- ----------------------------------------------- ------------ ---------------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
TARZANA
19500 Ventura Blvd. Leased 10/2002 223 87,853
Tarzana, CA 91356
BURBANK
240 North San Fernando Road Leased 09/2000 392 164,332
Burbank, CA 91502 Option: 2-5 years
NORTH IRVINE Leased 12/2010 25 16,537
4860 Irvine Blvd. Option: 1-20 years
Irvine, CA 92620
SANTA CLARITA
26425 Sierra Highway Owned -- 152 69,341
Santa Clarita, CA 91321
VENTURA
996 South Seaward Ave. Leased 10/2001 116 68,177
Ventura, CA 93001 Option: 1-3 years
CALABASAS
23642 Calabasas Road, Bldg 2 Leased 03/2007 173 76,210
Calabasas, CA 91302
IRVINE
15475 Jeffrey Road Leased 10/2005 238 65,159
Irvine, CA 92620-4102
FAIRFAX
145 South Fairfax Avenue Leased 01/2003 133 90,132
Los Angeles, CA 90036 Option: 1-5 years
WESTMINSTER
15555 Brookhurst Street Leased 09/2000 194 21,012
Westminster, CA 92683 Option: 2-5 years
SAN PEDRO
28110 South Western Avenue Owned -- 353 94,604
San Pedro, CA 90732
Total.................................... $ 5,227 $ 1,611,261
</TABLE>
In addition to the foregoing branch of office locations, the Bank currently
operates 42 ATMs.
The Bank in 1997 also obtained regulatory approval to install remote
automated loan machines, which can take an application for a loan of up to
$10,000, underwrite the loan and extend funds to applicants which have been
approved.
OC-65
<PAGE>
BENEFICIAL OWNERSHIP OF THE BANK
As of June 30, 1999, there were 100,000 shares of Common Stock of the Bank
issued and outstanding, all of which were owned by PBOC. The following table set
forth certain information concerning the ownership of the Bank's outstanding
Common Stock as of that date.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------ --------------------------------- -------------------- -------------------
<S> <C> <C> <C>
Common Stock........................ PBOC Holdings, Inc. 100,000 100%
5900 Wilshire Boulevard
Los Angeles, California 90036
</TABLE>
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITIONS HELD WITH THE BANK SINCE EXPIRES
- -------------------------------------------------- ----------- --------------------------------- ----------- -----------
<S> <C> <C> <C> <C>
John F. Davis..................................... 52 Director 1998 2002
Murray Kalis...................................... 59 Director 1998 2002
Rudolf P. Guenzel................................. 59 President, Chief Executive 1995 2001
Officer and Director
J. Michael Holmes................................. 53 Executive Vice President, Chief 1998 2001
Financial Officer and Director
Randall Chang..................................... 53 Director 1999 2001
Robert W. MacDonald............................... 52 Director 1992 2000
</TABLE>
- ------------------------
(1) As of June 30, 1999.
Set forth below is information with respect to the principal occupations
during at least the last five years for the directors of the Bank.
JOHN F. DAVIS. Mr. Davis has been the Chief Operating Officer of First
Fidelity Bancorp, Irvine, California since October 1998. In addition, Mr. Davis
has served as a legal consultant for two local financial institutions since 1993
and 1995, respectively, during which he was actively involved in troubled real
estate work-outs, foreclosed real estate disposition and related litigation and
with one of such institutions, a reorganization and recapitalization.
MURRAY KALIS. Mr. Kalis is Chairman and Creative Director of Kalis and
Savage Advertising, Los Angeles, California, which he founded in 1995; prior to
1995, Mr. Kalis was President of Coen/Kalis Advertising, Los Angeles,
California.
RUDOLF P. GUENZEL. Mr. Guenzel has served as President of PBOC since March
1995, as its Chief Executive Officer and a Director since 1998 and President,
Chief Executive Officer and Director of the Bank since March 1995, Mr. Guenzel
has over 35 years of banking experience in which he has worked in various
disciplines. Mr. Guenzel began his banking career in 1963 in the management
training program of Chemical Bank, where he worked in various capacities
including Assistant Controller, prior to his departure in 1971. From 1971
through 1989, Mr. Guenzel was employed by European American Bank, starting as
head of the Credit Division and working in problem loan resolutions and
eventually as the head of the Bank's Operations an Systems Division. In 1991,
Mr. Guenzel was hired as President
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<PAGE>
and Chief Executive Officer of BancFlorida and its wholly-owned subsidiary,
BancFlorida, FSB. Mr. Guenzel was hired 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 by increasing the volume of commercial and
consumer loans and the amount of transaction accounts and substantially reducing
operating expenses. Mr. Guenzel served as Chief Executive Officer through
BancFlorida's merger with First Union Corp. Following the BancFlorida
acquisition, Mr. Guenzel worked as a consultant in the area of bank
profitability analysis until being hired by PBOC.
J. MICHAEL HOLMES. Mr. Holmes has served as Executive Vice President and
Chief Financial Officer of the Bank since March 1995 and as a Director of the
Bank since 1998. Mr. Holmes also serves as Executive Vice President, Chief
Financial Officer, Secretary and a Director of PBOC. Mr. Holmes has experience
in various phases of a financial institution's operations, including asset and
liability management, investments, human resources and operations. Mr. Holmes
joined BancFlorida, FSB in 1974 as Controller and served in various capacities,
culminating as Executive Vice President and Chief Financial Officer in 1985, a
position he held through the company's merger with First Union Corp. in August
1994. Mr. Holmes also served as Secretary, Treasurer and Chief Financial Officer
of BancFlorida between 1985 and August 1994.
RANDALL CHANG. Mr. Chang is General Manager of the Asset Management Group
for the Bishop Estate. In this role, he is responsible for numerous real estate
properties and equity investments. Previously, Mr. Chang was involved in
commercial banking for 25 years, with experience in all aspects of bank lending
and operations. Mr. Chang most recently served as President and Chief Operating
Officer of City Bank in Honolulu, Hawaii, for five years. Prior to that, Mr.
Chang served as Senior Vice President of Daiwa Bank in Los Angeles, California.
Mr. Chang also served nine years with Union Bank in Los Angeles, California,
most recently as Senior Vice President.
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 PBOC through Arbur. Mr. MacDonald
was with Salomon Brothers between 1971 and 1979 where he eventually headed the
tax-exempt mortgage-backed financing group. In 1980 he left Salomon Brothers to
start a financial advisory firm and Catalyst Energy Corporation, a leading
developer of independent power facilities. The company went public in 1984 and
was sold to an investor group in 1988. Between 1988 and 1991, Mr. MacDonald
co-founded a merchant banking corporation, East Rock Partners, which invested in
alternative energy projects.
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.
WILLIAM W. FLADER. Mr. Flader has served as Executive Vice President of
Retail Banking for the Bank since March 1995. Before joining the Bank, Mr.
Flader was employed by Banc Florida, FSB from October 1980 to August 1994 in
various capacities. Mr. Flader served as Senior Vice President of Retail Banking
for BancFlorida from December 1989 to August 1994. Mr. Flader has worked in
banking for over 20 years and at BancFlorida managed a 46 branch network. In
addition, Mr. Flader was responsible for the sale of alternative investment
products, marketing and residential lending. Mr. Flader also has experience with
alternative delivery banking services such as ATMs.
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 Bank's Secretary since 1989.
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<PAGE>
WILLIAM G. CARROLL. Mr. Carroll has served as Senior Vice President in
charge of Corporate Financial Services (including branch operations) since
January 1998. He joined the Bank in March 1997 as Vice President with the same
responsibilities. Prior to joining the Bank, Mr. Carroll served as Vice
President of Preferred Bank in Los Angeles, California, from September 1996
through February 1997. From 1991 through 1996, Mr. Carroll served as Regional
Vice President of Metrobank/Comerica and from 1982 through 1991, Mr. Carroll was
employed as Senior Vice President in the commercial banking division at
California Federal Bank.
JAY P. HUNDLEY. Mr. Hundley has served as the Bank's Senior Vice President
and Senior Lending Officer since November 1998. Mr. Hundley's responsibilities
include business development and origination of commercial real estate, SBA,
commercial, indirect automobile loans and accounts receivable financing. From
1994 to November 1998, Mr. Hundley was a financial consultant for a bank in
Beverly Hills, California and for an agency of the U.S. Government. Prior to
that, he served as Senior Vice President at two commercial banks, First Florida
Bank from 1991 to 1993 and Riggs National Bank from 1993 to 1994. Mr. Hundley
has significant experience with respect to loan origination, servicing and
collection as well as problem asset resolution.
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, 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION ALL OTHER
NAME AND PRINCIPLE POSITION SALARY(1) BONUS AWARDS COMPENSATION (2)
- -------------------------------------------------------- ---------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Rudolf P. Guenzel....................................... $ 325,000 $ 243,750(3) N/A $ 3,717,466
President & Chief Executive Officer
J. Michael Holmes....................................... 200,000 150,000(3) N/A 2,957,790
Executive Vice President and Chief Financial Officer
William W. Flader....................................... 170,000 127,500(3) N/A 2,957,790
Executive Vice President
Doreen J. Blauschild.................................... 150,000 15,000 N/A 3,312
Senior Vice President and General Counsel
Richard I. Niedling(4).................................. 115,300 15,000 N/A 3,873
Senior Vice President and Senior Credit Officer
</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, 1998 did not exceed the
lesser of $50,000 or 10% of the total of annual salary and bonus reported.
(2) An aggregate of $3,712,466, $2,952,790 and $2,952,790 of the other
compensation for Messrs. Guenzel, Holmes and Flader, respectively, were
payments made at the time of PBOC's IPO in May 1998, which resulted from the
termination of each of the employment agreements entered into by Messrs.
Guenzel, Holmes and Flader in connection with the Bank's 1995
recapitalization. The remainder represents the employers' contribution on
behalf of the employee to the 401(k) Plan. See "Benefit Plans."
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<PAGE>
(3) Amounts were accrued in 1998 and paid in 1999.
(4) Mr. Niedling resigned from the Bank in June 1999.
OPTION PLAN
In connection with the IPO, the Board of Directors of PBOC adopted the 1999
Stock Option Plan (the "Option Plan"), which was approved by the stockholders of
PBOC at its 1999 Annual Meeting of Stockholders. The following table discloses
the total options granted to the executive officers of PBOC and the Bank on
January 25, 1999.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT
ASSUMED ANNUAL RATES OF
STOCK
PRICE APPRECIATION FOR
NUMBER OF % OF TOTAL OPTION
SECURITIES OPTIONS TERM(3)
UNDERLYING GRANTED TO EXERCISE ---------------------------
NAME OPTIONS EMPLOYEES(1) PRICE(2) EXPIRATION DATE 5 10
- ------------------------ ---------- --------------- ----------- ------------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Rudolf P. Guenzel....... 390,000 38.3% $ 13.75 January 25, 2009 $ 990,600 $ 4,754,100
J. Michael Holmes....... 240,000 23.6 13.75 January 25, 2009 609,600 2,925,600
William W. Flader....... 198,000 19.4 13.75 January 25, 2009 502,920 2,413,620
Doreen J. Blauschild.... 18,500 1.8 13.75 January 25, 2009 46,990 225,515
Richard I.
Niedling(4)........... 25,000 2.5 13.75 January 25, 2009 63,500 304,750
Executive officers as a
group................. 56,500 5.6 13.75 January 25, 2009 143,510 688,735
Non-executive officers
as a group............ 90,000 8.8 13.75 January 25, 2009 228,600 1,097,100
---------- ----- ------------ -------------
All persons............. 1,018,000 100.0% $ 13.75 January 25, 2009 $ 2,585,720 $ 12,409,420
---------- ----- ------------ -------------
</TABLE>
- ------------------------
(1) Percentage of options granted to all employees.
(2) The exercise price was based on the price of PBOC's common stock in the IPO.
(3) Assumes compounded rates of return for the remaining life of the options and
a future stock price of $16.29 and $25.94 at compounded rates of return of
5% and 10%, respectively.
(4) Mr. Niedling resigned from the Bank in June 1999 and all previously awarded
options expired in accordance with their terms.
EMPLOYMENT AGREEMENTS
PBOC and the Bank (the "Employers") entered into new employment agreements
with Messrs. Guenzel, Holmes and Flader (individually, the "Executive" and
collectively, the "Executives") in 1998. The Employers agreed to employ the
executives for a term of three years, in each case in their current respective
positions. The agreements with the Executives was initially at their current
salary levels, which amounted to $325,000, $200,000 and $170,000 for Messrs.
Guenzel, Holmes and Flader, respectively (as of January 1, 1999, the salaries
were increased to $348,000, $219,000 and $180,000 for Messrs. Guenzel, Holmes
and Flader, respectively). The Executives' compensation and expenses are to be
paid by PBOC and the Bank in the same proportion as the time and services
actually expended by the Executives on behalf of each respective Employer. The
employment agreements are to be reviewed annually and, prior to the second
annual anniversary of such agreements and each annual anniversary
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thereafter, the Board of the Directors of the Employers will determine whether
to extend the term of such agreements. Under the agreements, the term of the
Executives' employment agreements may be extended after the second anniversary
of the agreement, for additional one-year periods upon the approval of the
Employers' Boards of Directors, unless either party elects, not less than 30
days prior to the annual anniversary date, not to extend the employment term.
Each of the employment agreements is terminable with or without cause by the
Employers. The Executives have no right to compensation or other benefits
pursuant to the employment agreements for any period after voluntary termination
or termination by the Employers for cause, disability or retirement. The
agreements provide for certain benefits in the event of the Executive's death.
In the event that (i) the Executive terminates his or her employment because of
failure to comply with any material provision of the employment agreement or the
Employers change the executive's title or duties or (ii) the employment
agreement is terminated by the Employers other than for cause, disability,
retirement or death or by the Executive as a result of certain adverse actions
which are taken with respect to the executive's employment following a change in
control of PBOC, as defined, the Executives will be entitled to a cash severance
amount equal to the Executive's base salary in effect prior to the date of
termination multiplied by the number of years or fraction thereof remaining in
the term of the agreement at the date of termination up to a maximum of two
years. In the event that PBOC was required to make cash severance payments to
the Executives because of the occurrence of any of the aforementioned
circumstances, Messrs. Guenzel, Holmes and Flader would be entitled to receive
$696,000, $438,000 and $360,000, respectively.
The employment agreements with the Executives provide that, in the event
that any of the payments to be made thereunder or otherwise upon termination of
employment are deemed to constitute "excess parachute payments" within the
meaning of Section 280G of the Internal Revenue Code, then such payments and
benefits received thereunder shall be reduced by the amount which is the minimum
necessary to result in the payments not exceeding three times the recipient's
average annual compensation from the employer which was includable in the
recipient's gross income during the most recent five taxable years. Recipients
of excess parachute payments are subject to a 20% excise tax on the amount by
which such payments exceed the base amount, in addition to regular income taxes,
and payments in excess of the base amount are not deductible by the employer as
compensation expense for federal income tax purposes.
A change in control is generally defined in the employment agreements to
include any change in control of PBOC required to be reported under the federal
securities laws, as well as (i) the acquisition by any person of 25% or more of
PBOC's outstanding voting securities and (ii) a change in a majority of the
directors of PBOC during any three-year period without the approval of at least
two-thirds of the persons who were directors of PBOC at the beginning of such
period. The employment agreements provide that any additional purchase of Common
Stock by the Bishop Estate or BIL Securities shall not be deemed to constitute a
change of control for purposes of such agreements.
Although the above-described employment agreements could increase the cost
of any acquisition of control of the Bank, management of the Bank does not
believe that the terms thereof would have a significant anti-takeover effect.
PBOC and/or the Bank may determine to enter into similar employment agreements
with other officers in the future.
In April 1995, the Bank entered into an employment agreement with Doreen J.
Blauschild. In the event the Bank terminates Ms. Blauschild's employment 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, (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, and
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(iv) continued benefit of PBOC's indemnification obligations and director and
officer insurance policy. 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 incurred by the Bank) by and payable to the Bank
relating to the Goodwill Litigation, whether by judgment or settlement, exceeds
$150.0 million. 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 Plus 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 Savings Plus Plan are made on a
tax deferred basis, employee participants are able to enjoy significant income
tax savings by participating in the Savings Plus Plan. Employees are also
permitted to direct the investment of their accounts among six separate funds,
including various fixed income and equity investment funds.
An employee of the Bank becomes eligible to participate in the Savings Plus
Plan on the entry date (January 1, April 1, July 1 or October 1) nearest the
date he or she completes a year of service. A year of service is a 12
consecutive month period in which the employee works at least 1,000 hours for
the Bank. Participants may elect to defer amounts up to 15% of their annual
compensation under the Savings 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, 1998, 1997 and 1996, the Bank contributed $76,000, $144,000 and $155,000,
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. The Bank incurred a net periodic
pension (benefit) cost of $(25,000), $(2,000) and $9,000 during the years ended
December 31, 1998, 1997 and 1996, respectively.
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The following table illustrates annual pension benefits for retirement at
age 65 under various levels of compensation and years of service. The figures in
the table assume that the Pension Plan continues in its present form and that
the participant elect a straight life annuity form of benefit.
<TABLE>
<CAPTION>
FIVE YEAR
AVERAGE 5 YEARS OF 10 YEARS OF OVER 10 YEARS OF
COMPENSATION SERVICE SERVICE SERVICE
- --------------- ----------- ----------- ----------------------
<S> <C> <C> <C>
$ 80,000 $ 18,610 $ 37,220 $ 37,220
100,000 23,360 46,720 46,720
120,000 28,110 56,220 56,220
140,000 32,860 65,720 65,720
160,000 37,610 75,220 75,220
180,000 42,360 84,720 84,720
200,000 47,110 94,220 94,220
Over 200,000 47,110 94,220 94,220
</TABLE>
The maximum annual compensation which may be taken into account under the
Code (as adjusted from time to time by the IRS) for calculating contributions
under qualified defined benefit plans currently is $160,000 and the maximum
annual benefit permitted under such plans currently is $130,000.
Ms. Blauschild has three years of credited service and her final
compensation earned under such plan as of December 31, 1990 was $95,000. Messrs.
Guenzel, Holmes, Flader, Hundley, Carroll and Niedling are not participants in
the Pension Plan and have no credited service or plan benefits.
THE STOCKHOLDERS' AGREEMENT
In order to simplify PBOC's equity structure, terminate various agreements
which have governed the relationship among the Significant Stockholders since
the 1995 recapitalization and to effect certain other changes, in May 1998, PBOC
entered into the Stockholders' Agreement with the Significant Stockholders in
connection with PBOC's IPO.
The Stockholders' Agreement provides for continuing Board of Directors
representation by the Significant Stockholders, if requested by such Significant
Stockholders, subject to maintenance by the Significant Stockholders of
specified minimum levels of beneficial ownership of PBOC common stock and lack
of any applicable regulatory prohibition or objection. PBOC has agreed that for
so long as a Significant Stockholder is a "Material Stockholder," as defined
below, it shall (i) exercise all authority under applicable law to cause the
number of nominees permitted to be designated by such Significant Stockholder
and consented to by the Board of Directors of PBOC (such consent not to be
unreasonably withheld) (a "PBOC Designated Director") to be included in the
slate of nominees recommended by the Board of Directors to stockholders for
election as directors at each annual meeting of stockholders of PBOC after the
date of the Stockholders' Agreement at which the term of the PBOC Designated
Director is scheduled to expire (subject to the satisfaction of any applicable
regulatory requirements), and (ii) use all practical efforts to cause the
election of such slate, including such PBOC Designated Director.
Bishop Estate shall be considered a "Material Stockholder" entitled to
nominate: (i) two directors to PBOC's Board of Directors for so long as Bishop
Estate beneficially owns 9.9% or more of PBOC common stock, and (ii) one
director to PBOC's Board of Directors for so long as Bishop Estate beneficially
owns less than 9.9% but more than 4.9% of PBOC's common stock. BIL Securities
and Arbur collectively shall be considered a "Material Stockholder" and entitled
to nominate one director to PBOC's Board of Directors for so long as BIL
Securities and Arbur collectively beneficially own more than 4.9% of PBOC's
common stock. To the extent that either Bishop Estate, or BIL Securities
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and Arbur collectively, beneficially own less than 5.0% of PBOC's common stock,
such party or parties, as the case may be, shall no longer be considered a
"Material Stockholder."
The Stockholders' Agreement also provides that to the extent a PBOC
Designated Director elected to the Board of Directors ceases to serve as a
director for any reason while the Significant Stockholder remains a Material
Stockholder, such vacancy will be promptly filled by the Board of Directors of
PBOC with a substitute PBOC Designated Director designated by such Significant
Stockholder if requested to do so by such Significant Stockholder. The
Stockholders' Agreement provides that subject to any applicable regulatory
prohibitions, the Significant Stockholders shall at all times have and maintain
a right of attendance at Board of Directors meetings, irrespective of their
continued status as Material Stockholders as long as the Goodwill Litigation is
pending. Finally, the Stockholders' Agreement provides that unless otherwise
approved by the requisite vote of stockholders required to amend PBOC's Bylaws,
for so long as a Significant Stockholder is a Material Stockholder, the Bylaws
of PBOC shall provide for and the Board of Directors shall be comprised of,
seven directors. The Bank currently has six directors and one vacancy.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with applicable laws and regulations, the Bank offers mortgage
loans to its directors, officers and employees as well as members of their
immediate families for the financing of their primary residences and certain
other loans. These loans are generally made on substantially the same terms as
those prevailing at the time for comparable transactions with non-affiliated
persons. It is the belief of management that these loans neither involve more
than the normal risk of collectibility nor present other unfavorable features.
All such loans to directors and executive officers were current as of December
31, 1998.
Section 22(h) of the Federal Reserve Act generally provides that any credit
extended by a savings institution, such as the Bank, to its executive officers,
directors and, to the extent otherwise permitted, principal stockholder(s), or
any related interest of the foregoing, must be on substantially the same terms,
including interest rate and collateral, as those prevailing at the time for
comparable transactions by the savings institution with non-affiliated parties,
unless the loans are made pursuant to a benefit or compensation program that (i)
is widely available to employees of the institution and (ii) does not give
preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution, and must not involve more than the normal risk of repayment or
present other unfavorable features.
The Bank utilizes Kalis and Savage Advertising for routine and customary
marketing services of which Murray Kalis, a director of the Company, is Chairman
and Creative Director. A total of $151,000 was paid to that firm by the Bank in
1998.
The Bank has made a $5.0 million term loan at 9.0% and a $3.0 million line
of credit at 7.75% to First Fidelity Bancorp of which Mr. Davis is Chief
Operating Officer. The term loan is due July 31, 2003 and as of December 31,
1998 had an outstanding balance of $4,666,654. The revolving line of credit is
due February 28, 2000 and as of December 31, 1998 had an outstanding balance of
$105,000. The loan and line of credit were made in the ordinary course of
business and were made on substantially the same terms, including interest rate
and collateral, as those prevailing at the time for comparable transactions with
other persons. The loan and line of credit do not involve more than normal risk
of collectibility.
The Bank has also made a $15.0 million loan at an interest rate of 7.75% to
Value Partners, Ltd., which owns 1,449,000 shares or 7.1% of PBOC's common
stock. This loan was originated in November 1998 and is set to mature on March
31, 2000. As of December 31, 1998, the balance of the loan was $15.0 million.
This loan is secured by marketable securities (which do not include shares of
common stock of PBOC).
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REGULATION
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 PBOC or the Bank, is qualified in its
entirety by reference to the particular statutory or regulatory provisions or
proposals.
From time to time, legislation is enacted which increases the cost of doing
business, limits or expands permissible activities, or affects the competitive
balance between banks and other financial services providers. Proposals to
change the laws and regulations governing the operations and taxation of banks,
bank holding companies and other financial institutions are frequently made in
the U.S. Congress, in the state legislatures and before various bank regulatory
agencies. In that regard, the House of Representatives and the Senate recently
passed separate bills which include legislation to revise the Glass-Steagall Act
and to expand permissible activities for banks, principally to facilitate the
convergence of commercial and investment banking and to expand the insurance
activities of banks. The two bills are currently scheduled to be reconciled
within conference committee. It is unclear whether either of these bills or any
form of such bills will become law. Consequently, it is not possible to
determine what effect, if any, they may have on the Bank.
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
PBOC is a registered savings and loan holding company. The Home Owners' Loan
Act, as amended ("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. PBOC 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 PBOC ceases to be a unitary savings and loan
holding company, the activities of PBOC 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
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covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings association and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not make a
loan or extension of credit to an affiliate unless the affiliate is engaged only
in activities permissible for bank holding 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 transactions with affiliates.
REGULATION OF FEDERAL SAVINGS BANKS
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 at least 1% of its aggregate unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each calendar
year or 5% of its advances from the FHLB, whichever is greater.
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 deposit accounts and borrowings payable in one year or less. This
liquidity requirement, which is currently at 4.0%, may be changed from time to
time by the OTS to any amount between 4.0% to 10.0%, depending upon certain
factors. 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
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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.
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.
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries or other persons or savings associations with
which it has significant business relationships. The Bank is not subject to any
such individual minimum regulatory capital requirement.
The Bank's Tier-1 risk-based capital ratio was 11.12%, its leverage capital
ratio was 6.16% and its total risk-based capital ratio was 11.98% at June 30,
1999.
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
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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.
PROMPT CORRECTIVE ACTION. The prompt corrective action regulation of the
OTS, promulgated under the Federal Deposit Insurance Corporation Improvement Act
of 1991, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that falls
within certain undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. At June 30, 1999, the Bank met the capital requirements of a
"well capitalized" institution under applicable OTS regulations.
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
currently are defined to include, in part, dividends and payments for stock
repurchases and cash-out mergers. The current regulation requires savings
associations to file an application or notice with the OTS depending on whether
the association and the proposed dividend fall withing certain criteria such as
the association's capital classification and the amount of the proposed
dividend. Since the Bank is a subsidiary of a savings and loan holding company,
the Bank is presently required to give the OTS at least 30 days notice prior to
any capital distribution. 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.
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. A savings association may qualify
as a qualified thrift lender not only by
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maintaining 65% of portfolio assets in qualified thrift investments (the "QTL
test") but also, in the alternative, by qualifying under the Code as a "domestic
building and loan association." The Bank is a domestic building and loan
association as defined in the Code.
FDIC ASSESSMENTS. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
Under FDIC regulations, institutions are assigned to one of three capital
groups for insurance premium purposes--"well capitalized," "adequately
capitalized" and undercapitalized"--which are defined in the same manner as the
regulations establishing the prompt corrective action system, as discussed
above. These three groups are then divided into subgroups which are based on
supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Effective January 1, 1997,
assessment rates for both SAIF-insured institutions and BIF-insured institutions
ranged from 0% of insured deposits for well-capitalized institutions with minor
supervisory concerns to .27% of insured deposits for undercapitalized
institutions with substantial supervisory concerns. In addition, an additional
assessment of 6.4 basis points and 1.3 basis points is added to the regular
SAIF-assessment and the regular BIF-assessment, respectively, until December 31,
1999 in order to cover Financing Corporation debt service payments.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF satisfied the
required reserve ratio prior to the SAIF, and as a result, the FDIC reduced the
average deposit insurance premium paid by BIF-insured banks to a level
substantially below the average premium previously paid by savings institutions.
Banking legislation was enacted on September 30, 1996 to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions. The
legislation provided that all insured depository institutions with
SAIF-assessable deposits as of March 31, 1995 pay a special one-time assessment
to recapitalize the SAIF. Pursuant to this legislation, the FDIC promulgated a
rule that established the special assessment necessary to recapitalize the SAIF
at 65.7 basis points of SAIF-assessable deposits held by affected institutions
as of March 31, 1995. 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 and
instead, paid subsequent assessments at the assessment rate schedule in effect
as of June 30, 1995. However, upon consummation of the IPO, the Bank used $4.5
million of the proceeds from the IPO to pay the FDIC the special assessment
which the Bank had previously received permission from the OTS to defer. As a
result, the Bank's assessment rate was reduced from 35.28 basis points to 9.1
basis points (which includes in each case the Financing Corporation debt service
payments).
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. There are no pending proceedings to terminate the deposit insurance of
the Bank.
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COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings institutions
have a responsibility under the 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.
SAFETY AND SOUNDNESS GUIDELINES. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
CHANGE OF CONTROL. Subject to certain limited exceptions, no company can
acquire control of a savings association without the prior approval of the OTS,
and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Companies subject to the Bank Holding Company Act of 1956, as amended, 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.
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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 PBOC 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 PBOC whereby the Bank computes and pays taxes based upon the
Bank's tax position assuming that a separate tax return was filed.
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.
As a further result of the 1996 Act, the Bank must use the specific
chargeoff method in computing its bad debt deduction beginning with its 1996
Federal tax return. Under this method, deductions may be claimed only and to the
extent that loans become wholly or partially worthless.
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. NOLses 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 June 30, 1999,
the Bank had an alternative minimum tax credit carryforward of approximately
$1.7 million.
NET OPERATING LOSS CARRYFORWARDS. The Code allows NOLs for tax years
beginning before August 5, 1997 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 fifteen succeeding years taxable years. For taxable
years beginning after August 5, 1997, NOLs can be carried back and deducted from
taxable income for the two preceding taxable years and carried forward and
deducted from taxable income for the twenty succeeding taxable years. The Bank
has federal tax NOLs of approximately $143.9 million at June 30, 1999.
IMPACT OF OWNERSHIP CHANGE ON USE OF NET OPERATING LOSS
CARRYFORWARDS. Section 382 of the Code imposes a limitation on the use of NOLs
if there has been an "ownership change." In general, an ownership change occurs
if immediately after any "owner shift involving a 5% stockholder" 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. A 5% stockholder is any person (or group) 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. As a
general rule, the ownership of owners of less than 5% is aggregated and treated
as the
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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.
Under Section 382 of the Code, if an ownership change of a corporation with
NOLs occurs, the amount of the taxable income for a post-change year that may be
offset by the NOLs arising before the ownership change is limited by an amount
known as the Section 382 limitation. The annual Section 382 limitation for any
post-change year is an amount equal to the value of the corporation multiplied
by the long-term tax-exempt rate that applies with respect to the ownership
change. The annual Section 382 limitation may be increased, however, in a
succeeding year by the amount of the limitation for the previous year that was
not used.
The 1992 recapitalization resulted in the 1992 Ownership Change. The 1992
Ownership Change resulted in an annual Section 382 limitation on the Bank's
ability to utilize its NOLs created prior to the 1992 Ownership Change in any
one year of approximately $7.7 million. At June 30, 1999, the Bank had $29.8
million of NOLs which were created prior to the 1992 Ownership Change.
The IPO resulted in the 1998 Ownership Change. The 1998 Ownership Change
resulted in an annual Section 382 limitation on the Bank's ability to utilize
any NOLs created prior to the 1998 Ownership Change but after the 1992 Ownership
Change in any one year of approximately $21.3 million. At June 30, 1999, the
Bank had $103.3 million of NOLs which were created prior to the 1998 Ownership
Change but after the 1992 Ownership Change.
TREATMENT OF RIGHTS. KPMG LLP has issued an opinion to PBOC and the Bank to
the effect that, for federal income tax purposes, the Rights evidenced by the
terms of the Shareholder Rights Agreement should be treated as stock of PBOC for
purposes of Sections 382(e), 311(a) and 305(a) of the Code. Thus, PBOC should
recognize no gain or loss on the distribution of the Rights to the Significant
Stockholders with respect to their ownership of PBOC Common Stock. In addition,
the Bank should not recognize gain or loss on PBOC's distribution of the Rights
to the Significant Stockholders. Finally, the amount of value taken into account
for purposes of determining the annual Section 382 limitation should include the
value of the Rights. Despite PBOC's receipt of the foregoing opinion from KPMG
LLP, such opinion is not binding on the IRS and no assurance can be made that
the IRS will treat the Shareholder Rights Agreement as stock of PBOC for federal
income tax purposes. If the Shareholder Rights Agreement is treated other than
as stock in PBOC (i.e., debt of PBOC), the value of the Shareholder Rights
Agreement would reduce the value of PBOC's stock, and, correspondingly, the
amount of the Section 382 limitation with respect to the 1998 Ownership Change.
Such a reduction in the amount of the Section 382 limitation would significantly
impair the ability of the Bank to use its NOLs existing at the time of the 1998
Ownership Change. Whether the Shareholder Rights Agreement will be treated as
equity for federal income tax purposes depends on the totality of the facts and
circumstances.
STATE TAXATION. The California franchise tax rate applicable to the Bank
equals the franchise tax rate applicable to corporations generally plus an "in
lieu" rate approximately equal to personal property taxes and business license
taxes paid by such corporation (but generally not paid by banks or financial
corporations such as the Bank); however, the total rate cannot exceed 10.84%.
Under California regulations, bad debt deductions are available in computing
California franchise taxes using a three or six year weighted average loss
experience method. The Bank had no state tax NOLs at June 30, 1999.
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DESCRIPTION OF THE BANK PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Series B 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 Second Supplementary Section to Section 5 of the Charter
setting forth the powers, designations, preferences and rights of the Bank
Preferred Shares. Except with respect to the dividend rate, the Series A Bank
Preferred Shares have terms which are substantially identical to the Series B
Bank Preferred Shares. The terms of the Series A Bank Preferred Shares are set
forth in the Charter of the Bank and the First Supplementary Section to Section
5 of the Charter.
GENERAL
The Series B 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 Series B
Bank Preferred Shares.
When issued, the Series B Bank Preferred Shares will be validly issued,
fully paid and nonassessable. The holders of the Series B 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 Series B Bank Preferred
Shares will not be convertible into shares of Common Stock or any other class or
series of capital stock of the Bank and will not be subject to any sinking fund
or other obligation of the Bank for their repurchase or retirement.
The registrar for the Series B 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 Bank.
RANKING
The Series B 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 equal with or senior to the Series B Bank
Preferred Shares as to dividend rights and rights upon liquidation, winding up
or dissolution. The Series B Bank Preferred Shares rank equal with the Series A
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 equal with the Series A and
Series B Bank Preferred Shares, or that constitute junior stock, without any
approval or consent of the holders of Series A and Series B Bank Preferred
Shares. The rights of holders of the Series A and Series B Bank Preferred Shares
will be subordinate to the rights of the Bank's general creditors, including its
depositors.
DIVIDENDS
Holders of Series B 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 Series B 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
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payment date thereof, as shall be fixed by the Board of Directors of the Bank
provided, however, that if a redemption date for the Series B 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 B Preferred Shares for
Series B Bank Preferred Shares, any accrued and unpaid dividends of the Series B
Preferred Shares at the time of the conversion will be deemed to be accrued and
unpaid dividends on the Series B Bank Preferred Shares.
The right of holders of Series B Bank Preferred Shares to receive dividends
is noncumulative. Because the Series A Bank Preferred Shares are equal stock
with respect to the Series B Bank Preferred Shares, if the Board of Directors
does not declare a dividend payable in respect of any dividend period, holders
of the Series B Bank Preferred Shares will have no right to receive a dividend
in respect of such dividend period, and the Bank will have no obligation to pay
a dividend for such dividend period, whether or not dividends are declared and
paid for any future period.
If any Series A or Series B 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 Series A or
Series B 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 Series A and Series B 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 Series A and Series B Bank Preferred Shares and the
shares of any other series which ranks equally, all dividends declared on the
Series A and Series B Bank Preferred Shares and the shares of any other series
of capital stock ranking equal as to dividends with the Series A and Series B
Bank Preferred Shares shall only be declared PRO RATA based upon the respective
amounts that would have been paid on the Series A and Series B Bank Preferred
Shares and any shares of such other equal series or capital 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 Series A and Series B Bank Preferred Shares for the four (4) most recent
preceding dividend periods (or such lesser number of dividend periods during
which shares of Series A and Series B 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 Series A and Series B 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 Series A and
Series B Bank Preferred Shares for any dividend period unless full dividends
have been paid or set aside for the holders of each class or series of equity
securities, if any, ranking senior to the Series A and Series B Bank Preferred
Shares as to dividends for such dividend period.
REDEMPTION
Except in the case of a Change of Control, the Series B Bank Preferred
Shares will not be redeemable prior to , 2004. On or after such date, the
Series B Bank Preferred Shares will be redeemable in cash by the Bank or its
successor or any acquiring or resulting entity with respect to the Bank
(including by any parent or subsidiary of the Bank, any such successor, or any
such acquiring or resulting entity), as applicable, at its option, in whole or
in part, at any time or from time to time at
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the redemption price of $25.00 per share, plus authorized, declared and unpaid
dividends to the date of redemption without interest. The Series A Bank
Preferred Shares have similar terms except that such shares may not be redeemed
prior to October 15, 2002.
If less than all of the outstanding shares of Series B 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 Series B Bank Preferred
Shares is then listed.
Upon a Change of Control, the Series B Bank Preferred Shares are redeemable
on or prior to , 2004, 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 Series B 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 Series B Bank
Preferred Shares is subject to the prior approval of the OTS.
"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 B Bank Preferred Shares in respect of the period
from the date fixed for redemption through , 2004 (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
PBOC, whether as a result of issuance of securities of the Bank, any merger,
consolidation, liquidation or dissolution of the Bank or PBOC, 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 , 2004; 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
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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
Series B 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 Series A and Series B Bank Preferred
Shares is subject to compliance with applicable regulatory requirements,
including those of the OTS, relating to the redemption of capital instruments.
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Series B Bank Preferred Shares, like the holders of
the Series A Bank Preferred Shares, will not be entitled to vote. In the event
the holders of Series B Bank Preferred Shares are entitled to vote, each share
of Series A and Series B Bank Preferred Shares will be entitled to one vote.
If full dividends on the Series A and Series B 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 Series A and Series B Bank
Preferred Shares, voting together as a class with the holders of any other
series of stock upon which the same voting rights as those of the Series A and
Series B 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 Series A and Series B Bank Preferred
Shares and any other equal series of capital stock 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 Series A and Series B Bank Preferred
Shares and the holders of any other equal series of capital stock 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
Series A and Series B Bank Preferred Shares and any other equal series of
capital 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 Series
A and Series B Bank Preferred Shares and any other parity stock so entitled to
vote thereon, called for that purpose. As long as dividends on the Series A and
Series B Bank Preferred Shares and any other parity stock 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 Series A and Series B
Bank Preferred Shares and any equal series of 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 Series B 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 Series B 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 Series B Bank Preferred
Shares) if such
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amendment, alteration, repeal or change would materially and adversely affect
the rights, preferences, powers or privileges of the Series B 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 Series B Bank Preferred
Shares, either as to dividend rights or rights on liquidation, dissolution or
winding up of the Bank or (c) merge, consolidate, reorganize or effect any other
business combination involving the Bank, unless the resulting corporation will
thereafter have no class or series of equity securities either authorized or
outstanding ranking prior to the Series B 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 Series B 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 Series B 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 Series B 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 Series B 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 Series A and Series B 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 Series A and Series B 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 Series A and Series B 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 Series A and
Series B Bank Preferred Shares and the corresponding amounts payable on all
shares of other classes or series of capital stock of the Bank ranking equal
with the Series A and Series B 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 Series A and Series B 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.
EXCHANGE
The Series B Bank Preferred Shares are to be issued, if ever, in connection
with an exchange of the Series B Preferred Shares issued by the Company. The
Series B Preferred Shares are subject to an
OC-86
<PAGE>
automatic exchange, in whole and not in part, on a share-for-share basis, into
Series B 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 shares of the Series B Bank Preferred Shares to cover the
exchange, if necessary, of the Series B Preferred Shares offered by the
Company and the share over-allotment option granted to the Underwriters of
the Series B Preferred Shares.
LEGAL MATTERS
Certain legal matters with respect to the Series B 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, 1998
and 1997, and for each of the years in the three-year period ended December 31,
1998, have been included herein and in the Offering Circular in reliance upon
the report of KPMG LLP, independent auditors, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
OC-87
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996 AND THE
SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Statements of Financial Condition--December 31, 1998, 1997 and June 30, 1999 (unaudited)...... F-3
Consolidated Statements of Operations--For the Years ended December 31, 1998,1997 and 1996 and for the
six-month period ended June 30, 1999 and 1998 (unaudited)................................................ F-4
Consolidated Statements of Other Comprehensive Earnings (Loss)--For the Years ended December 31, 1998, 1997
and 1996 and the six-month period ended June 30, 1999 and 1998 (unaudited)............................... F-5
Consolidated Statements of Changes in Stockholder's Equity--For the Years ended
December 31, 1998, 1997 and 1996 and the six-month period ended June 30, 1999 (unaudited)................ F-6
Consolidated Statements of Cash Flows--For the Years ended December 31, 1998,1997 and 1996 and the
six-month period ended June 30, 1999 and 1998 (unaudited)................................................ F-7
Notes to Consolidated Financial Statements................................................................. F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
People's Bank of California:
We have audited the accompanying consolidated statements of financial
condition of People's Bank of California (a wholly owned subsidiary of PBOC
Holdings, Inc.) and subsidiaries (the "Bank") as of December 31, 1998 and 1997
and the related consolidated statements of operations, other comprehensive
earnings (loss), changes in stockholder's equity and cash flows for each of the
years in the three-year period ended December 31, 1998. 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, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Los Angeles, California
January 25, 1999
F-2
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998, 1997 AND JUNE 30, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
JUNE 30, 1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash and cash equivalents.............................................. $ 22,660 $ 22,401 $ 14,113
Federal funds sold..................................................... -- 24,000 7,004
Securities available-for-sale, at estimated market values
(notes 3, 12 and 17)................................................. 1,038,165 1,004,937 571,160
Mortgage-backed securities held-to-maturity, market values $5,204,
$6,372 and $9,743 at June 30, 1999 (unaudited) December 31, 1998 and
1997 (notses 5 and 12)............................................... 5,214 6,282 9,671
Loans receivable, net (notes 6, 7 and 12).............................. 2,325,241 2,148,857 1,533,212
Real estate held for investment and sale, net (note 8)................. 4,051 2,723 15,191
Premises and equipment, net (note 9)................................... 6,515 7,212 6,676
Federal Home Loan Bank stock, at cost (note 12)........................ 64,833 63,150 23,634
Accrued interest receivable............................................ 17,760 17,607 13,216
Other assets........................................................... 40,021 37,858 19,177
------------- ------------ ------------
Total assets..................................................... $ 3,524,460 $ 3,335,027 $ 2,213,054
------------- ------------ ------------
------------- ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits (note 10)..................................................... $ 1,611,261 $ 1,543,966 $ 1,266,770
Securities sold under agreements to repurchase (note 11)............... 434,947 364,000 340,788
Advances from Federal Home Loan Bank (note 12)......................... 1,259,000 1,198,000 472,000
Accrued expenses and other liabilities................................. 17,097 16,454 9,675
------------- ------------ ------------
Total liabilities................................................ 3,322,305 3,122,420 2,089,233
------------- ------------ ------------
Commitments and contingencies (notes 6, 9, 16 and 19)
Minority interest (note 1)............................................. 33,250 33,250 33,250
Stockholder's equity (notes 1 and 18):
Preferred stock, $.01 par value. Authorized 1,000,000 shares; none
issued and outstanding at December 31, 1998:
Common stock, par value $.01 per share. Authorized 1,000,000 shares;
issued and outstanding 100,000 shares;............................. 1 1 1
Additional paid-in capital........................................... 231,845 231,845 142,538
Accumulated other comprehensive income............................... (32,953) (14,025) (2,267)
Accumulated deficit.................................................. (29,988) (38,464) (49,701)
------------- ------------ ------------
Total stockholder's equity....................................... 168,905 179,357 90,571
------------- ------------ ------------
Total liabilities and Stockholder's equity....................... $ 3,524,460 $ 3,335,027 $ 2,213,054
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND THE
SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------- -----------------------------------
1999 1998 1998 1997 1996
----------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Interest, fees and dividend income:
Short term investments............................... $ 659 $ 1,076 $ 1,797 $ 1,038 $ 1,195
Securities purchased under agreements to resell...... 396 519 519 2,328 3,257
Investment securities available-for-sale............. 11,830 5,225 17,640 3,980 2,374
Mortgage-backed securities........................... 16,832 14,534 32,439 32,672 26,136
Loans receivable..................................... 78,222 53,915 125,809 89,938 89,020
Federal Home Loan Bank stock......................... 1,637 824 2,521 1,023 914
----------- --------- ------------- --------- ---------
Total interest, fees and dividend income........... 109,576 76,093 180,725 130,979 122,896
----------- --------- ------------- --------- ---------
Interest expense:
Deposits (note 10)................................... 35,689 33,684 70,037 67,247 75,136
Advances from the Federal Home Loan Bank............. 32,437 16,387 47,613 8,785 3,207
Securities sold under agreements to repurchase....... 10,575 8,980 22,159 19,635 10,901
Hedging costs, net (note 14)......................... 81 110 214 267 387
----------- --------- ------------- --------- ---------
Total interest expense............................. 78,782 59,161 140,023 95,934 89,631
----------- --------- ------------- --------- ---------
Net interest income.................................... 30,794 16,932 40,702 35,045 33,265
Provision for loan losses (note 7)..................... 2,100 900 2,000 2,046 2,884
----------- --------- ------------- --------- ---------
Net interest income after provision for loan
losses............................................. 28,694 16,032 38,702 32,999 30,381
----------- --------- ------------- --------- ---------
Other income:
Loan service and loan related fees................... 67 25 111 481 1,378
Gain on sale of mortgage-backed securities, net...... 197 323 1,746 1,275 3,638
Gain (loss) on loan and loan servicing sales, net
(note 4)........................................... 49 -- 613 3,413 (53)
Income (loss) from real estate operations, net
(note 8)........................................... 115 1,785 1,479 (1,805) 1,946
Other income......................................... 1,272 1,136 2,551 1,753 1,215
----------- --------- ------------- --------- ---------
Total other income................................. 1,700 3,269 6,500 5,117 8,124
----------- --------- ------------- --------- ---------
Operating expenses:
Personnel and benefits............................... 7,708 16,901 23,814 11,787 10,763
Occupancy............................................ 4,521 4,026 8,357 7,109 6,389
FDIC insurance....................................... 673 6,715 7,316 4,899 4,415
Professional services................................ 579 460 1,028 517 771
Office related expenses.............................. 2,404 2,038 4,393 3,913 3,992
Other................................................ 1,295 792 1,771 1,288 1,593
----------- --------- ------------- --------- ---------
Total operating expenses........................... 17,180 30,932 46,679 29,513 27,923
----------- --------- ------------- --------- ---------
Earnings (loss) before income tax benefit and minority
interest............................................... 13,214 (11,631) (1,477) 8,603 10,582
Income tax benefit (note 13)........................... (2,000) (9,391) (16,390) (4,500) (3,016)
----------- --------- ------------- --------- ---------
Earnings (loss) before minority interest............... 15,214 (2,240) 14,913 13,103 13,598
Minority interest...................................... 1,738 1,738 3,476 859 --
----------- --------- ------------- --------- ---------
Net earnings (loss)................................ $ 13,476 $ (3,978) $ 11,437 $ 12,244 $ 13,598
----------- --------- ------------- --------- ---------
----------- --------- ------------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE EARNINGS (LOSS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND THE
SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
---------- --------- ---------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net earnings............................................. $ 13,476 $ (3,978) $ 11,437 $ 12,244 $ 13,598
Other comprehensive earnings (loss):
Unrealized (loss) gain on securities available-for-
sale................................................. (19,125) (1,368) (13,383) 2,835 (8,075)
Reclassification of realized gains included in
earnings............................................. 197 323 1,746 1,275 3,638
Minimum pension liability, net of tax.................. -- -- (121) (293) --
---------- --------- ---------- --------- ---------
Other comprehensive earnings (loss).................... (18,928) (1,045) (11,758) 3,817 (4,437)
---------- --------- ---------- --------- ---------
Comprehensive earnings (loss)............................ $ (5,452) $ (5,023) $ (321) $ 16,061 $ 9,161
---------- --------- ---------- --------- ---------
---------- --------- ---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
SIX-MONTH PERIOD ENDED JUNE 30, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL PAID OTHER
IN COMPREHENSIVE ACCUMULATED
COMMON STOCK CAPITAL INCOME DEFICIT TOTAL
--------------- ----------------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.......... $ 1 $ 142,538 $ (1,647) $ (73,443) $ 67,449
Net earnings.................... -- -- -- 13,598 13,598
Change in unrealized losses on
securities.................... -- -- (4,437) -- (4,437)
------ -------- -------------- ------------ ----------
BALANCE, DECEMBER 31, 1996.......... 1 142,538 (6,084) (59,845) 76,610
Net earnings.................... -- -- -- 12,244 12,244
Change in unrealized losses on
securities.................... -- -- 4,110 -- 4,110
Payment of accumulated unpaid
preferred stock dividends..... -- -- -- (2,100) (2,100)
Change in minimum pension
liability..................... -- -- (293) -- (293)
------ -------- -------------- ------------ ----------
BALANCE, DECEMBER 31, 1997.......... 1 142,538 (2,267) (49,701) 90,571
Net earnings.................... -- -- -- 11,437 11,437
Change in unrealized losses on
securities.................... -- -- (11,637) -- (11,637)
Capital contributions, net...... -- 89,307 -- -- 89,307
Preferred dividend paid......... -- -- -- (200) (200)
Change in minimum pension
liability..................... -- -- (121) -- (121)
------ -------- -------------- ------------ ----------
BALANCE, DECEMBER 31, 1998.......... 1 231,845 (14,025) (38,464) 179,357
------ -------- -------------- ------------ ----------
Net earnings.................... -- -- -- 13,476 13,476
Change in unrealized losses on
securities.................... -- -- (18,928) -- (18,928)
Common dividend paid............ -- -- -- (5,000) (5,000)
------ -------- -------------- ------------ ----------
BALANCE, JUNE 30, 1999
(UNAUDITED)......................... $ 1 $ 231,845 $ (32,953) $ (29,988) $ 168,905
------ -------- -------------- ------------ ----------
------ -------- -------------- ------------ ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
--------- --------- ---------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................... $ 13,476 $ (3,978) $ 11,437 $ 12,244 $ 13,598
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 912 455 1,221 1,234 1,837
Provisions for loan and real estate losses........... 2,100 900 2,000 4,800 3,650
Decrease in valuation allowance on net deferred tax
asset.............................................. 7,461 7,006 15,569 8,159 10,807
(Amortization) write-down for discontinued lease
operations......................................... 25 30 55 (265) (150)
Increase (decrease) in net deferred tax asset........ (5,211) 2,506 1,024 (3,434) (7,770)
Amortization and accretion of premiums, discounts and
deferred fees...................................... 6,858 6,244 12,110 2,270 515
Amortization of purchase accounting intangible
assets, premiums and discounts, net................ 92 90 180 (90) (185)
(Gain) on sale of mortgage-backed securities......... (197) (323) (1,746) (1,275) (3,638)
(Gain) loss on sale of loans and loan servicing...... (49) -- (613) (3,413) 53
(Gain) on real estate sales.......................... (142) (2,364) (2,180) (2,214) (2,710)
Federal Home Loan Bank stock dividend................ (1,683) (403) (1,640) (952) (853)
Increase in accrued interest receivable.............. (153) (4,782) (4,391) (1,605) (2,173)
Increase (decrease) in accrued interest payable...... (4) 1,998 5,717 (1,000) 5,543
Decrease in other assets............................. (4,483) (25,410) (35,260) (8,696) (10,317)
Increase (decrease) in accrued expenses.............. 622 1,638 805 (16,938) 14,954
Amortization of Goodwill............................. 70 23 67 -- --
--------- --------- ---------- --------- ---------
Net cash provided by (used in) operating activities.... 19,694 (16,370) 4,355 (11,175) 23,161
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
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........................ 119,626 156,569 510,905 235,611 162,087
Proceeds from sale of loans and servicing rights....... 92,548 357 43,034 93,081 --
Investment and mortgage-backed security principal
repayments and maturities............................ 88,465 84,095 173,830 108,022 52,380
Loan originations, net of repayments................... (86,060) 121,056 207,243 17,607 41,610
Purchases of investments and mortgage-backed securities
available-for-sale................................... (262,069) (630,496) (1,130,026) (408,780) (476,748)
Purchase of mortgage-backed securities
held-to-maturity..................................... -- -- -- -- (10,971)
Purchases of loans..................................... (192,843) (690,798) (878,508) (515,053) --
Costs capitalized on real estate....................... (2) (80) (174) (1,424) (2,228)
Proceeds from sale of real estate...................... 2,965 9,676 18,923 23,458 40,217
Additions to premises and equipment.................... (307) (1,067) (1,937) (1,833) (1,081)
Sales of premises and equipment........................ -- -- -- -- 785
Purchase of FHLB stock................................. -- (21,963) (37,876) (8,475) --
Redemption of FHLB stock............................... -- -- -- 1,173 --
--------- --------- ---------- --------- ---------
Net cash used in investing activities................ (237,677) (972,651) (1,094,586) (456,613) (158,949)
--------- --------- ---------- --------- ---------
</TABLE>
F-7
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- --------------------------------
1999 1998 1998 1997 1996
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from subsidiary preferred stock offering...... $ -- $ -- $ -- $ 33,250 $ --
Proceeds from capital infusion, net.................... -- 89,307 89,307 -- --
Net increase (decrease) in deposits.................... 67,295 131,088 277,196 (104,473) (102,075)
Net increase in securities sold under agreements to
repurchase........................................... 70,947 317,621 23,212 148,355 192,433
Proceeds from FHLB advances............................ 359,750 766,400 4,360,900 1,137,684 113,900
Repayment of FHLB advances............................. (298,750) (318,400) (3,634,900) (745,684) (65,646)
Common dividends paid.................................. (5,000) -- -- -- --
Preferred dividends paid............................... -- (200) (200) (2,100) --
--------- --------- ---------- --------- ---------
Net cash provided by financing activities............ 194,242 985,816 1,115,515 467,032 138,612
--------- --------- ---------- --------- ---------
Net increase (decrease) in cash and cash equivalents..... (23,741) (3,205) 25,284 (756) 2,824
Cash and cash equivalents at beginning of period......... 46,401 21,117 21,117 21,873 19,049
--------- --------- ---------- --------- ---------
Cash and cash equivalents at end of period............... $ 22,660 $ 17,912 $ 46,401 $ 21,117 $ 21,873
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................. $ 78,704 $ 57,282 $ 134,374 $ 96,667 $ 83,691
Income taxes......................................... -- -- -- 200 246
--------- --------- ---------- --------- ---------
Supplemental schedule of non cash investing and financing
activities:
Foreclosed real estate................................. $ 4,149 $ 5,029 $ 10,248 $ 31,349 $ 42,518
Loans originated in connection with sale of foreclosed
real estate.......................................... -- 5,968 6,147 16,145 12,608
Transfer of loans held for investment to loans held for
sale................................................. 92,499 357 42,421 85,241 --
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
PBOC Holdings, Inc. (the "Company") is a Delaware corporation which was
organized in 1987 to acquire the People's Bank of California (the "Bank") from
the Federal Savings and Loan Insurance Corporation ("FSLIC") in connection with
its conversion from mutual to stock form. The Company owns 100% of the Common
Stock of the Bank, which is its primary investment.
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 banking 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, except for PPCCP in which the
Bank owns all of the common stock. All significant intercompany accounts and
transactions have been eliminated in consolidation.
FEES ON LOANS AND MORTGAGE-BACKED AND INVESTMENT SECURITIES
The Bank defers origination and related fees on loans and certain direct
loan origination costs. These deferred fees, net of any deferred costs, are
amortized as an adjustment to the yield on the loans over their lives using the
interest method.
The Bank may purchase whole loans at a premium or discount which is
amortized over the life of the loans as an adjustment to yield using the
interest method. The premium or discount amortization percentage is determined
by adjusting the yield for estimated prepayments when prepayments are probable
and the timing and amount of prepayments can be reasonably estimated based on
market consensus prepayment rates. Calculation of the yield is done on the
aggregate method where there are a large number of similar loans, otherwise, a
loan by loan approach is used. The yield on adjustable rate loans is calculated
based upon the fully adjusted rate in effect when the loan or security is
originated or purchased. 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.
The Bank purchases mortgage-backed and investment securities at a premium or
discount which is amortized over the life of the security as an adjustment to
the yield using the interest method. The premium or discount percentage is
determined by adjusting the securities' yield for estimated
F-9
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
prepayments when prepayments are probable and the timing and amount of
prepayments can be reasonably estimated based on market consensus prepayment
rates.
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 using the
interest method as an adjustment of yield. If the commitment, or a portion
thereof, expires unexercised, deferred commitment fees are recognized in income
upon expiration of the commitment. There were no expired commitment fees
recognized during the six- month periods ended June 30, 1999 and June 30, 1998
(unaudited) and the years ended December 31, 1998, 1997 and 1996. 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 are included in
other comprehensive income in the consolidated statements of financial condition
until these gains or losses are realized. Gains or losses on sales of securities
available-for-sale are 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. Premiums and discounts are accreted or amortized using
the interest method over the estimated life of the securities.
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 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.
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.
F-10
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
ALLOWANCE FOR LOAN 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
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.
REAL ESTATE HELD FOR INVESTMENT AND FOR SALE
Real estate held for investment consists of investments 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 lower of cost or market value, net of anticipated selling costs.
Market 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.
F-11
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Real estate acquired in settlement of loans is recorded at the date of
acquisition at 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
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 allocated
basis of the loans sold. The Bank adopted effective January 1, 1997, Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," (SFAS 125).
In accordance with SFAS 125, the Bank capitalizes mortgage servicing rights
(MSRs) acquired through either the purchase or origination of mortgage loans for
sale or securitization with servicing rights retained. The total costs of the
mortgage loans designated for sale is allocated to the MSRs and the mortgage
loans without the MSRs based on their relative fair values. The MSRs are
included in other assets and as a component of gain on sale of loans. The MSRs
are amortized in proportion to and over the estimated period of net servicing
income. Such amortization is reflected as a component of loan servicing fees.
The MSRs are periodically reviewed for impairment based on their fair value.
The fair value of the MSRs for the purpose of impairment, is measured using a
discounted cash flow analysis based on the Bank's estimated net servicing
income, market prepayments rates and market-adjusted discount rates. Impairment
is measured on a disaggregated basis based on predominant risk characteristics
of the underlying mortgage loans. The risk characteristics used by the Bank for
the purpose of capitalization and impairment evaluation include loan type,
interest rate tranches, loan term and collateral type. Impairment losses are
recognized through a valuation allowance, with any associated provision recorded
as a component of loan servicing fees.
Gains or losses on sales of servicing assets for which the Bank owns the
underlying loans are deferred and amortized over the estimated loan lives using
the interest method.
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 over the lives of the
assets or term of the lease, whichever is shorter. Maintenance and repairs are
expensed as incurred.
F-12
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TAXES ON INCOME
The Bank uses the asset and liability method for measurement and recognition
of income taxes. The statements of financial condition 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 (benefit) is the amount of total
taxes currently payable (receivable).
DERIVATIVE 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
accredited 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 an
original maturity of three months or less to be cash equivalents. This currently
includes cash and amounts due from banks, Federal funds sold, and term
certificates of deposit.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of the Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities as amended by SFAS No. 137." SFAS 133 amends SFAS No. 52 "Foreign
Currency Translation" to permit special accounting for a hedge of a foreign
currency forecasted transaction with a derivative. It supersedes SFAS No. 80,
"Accounting for Future Contracts", SFAS No. 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk", and SFAS No. 119, "Disclosure
about Derivative Financial Instruments". It amends SFAS No.107, "Disclosure
about Fair Value of Financial Instruments, to include in Statement 107
disclosure
F-13
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provisions about concentrations of credit risk from Statement 105. SFAS 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This Statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
Management believes that the adoption of SFAS 133 will not have a material
impact on the Bank's financial condition or results of operations or its
disclosures.
RECLASSIFICATION
Certain amounts in prior periods' 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
set prices, generally collateralized by AA or higher rated mortgage-backed
securities. The average outstanding balance was approximately $16,265,000,
$10,175,000 and $41,225,000 during the six-months ended June 30, 1999
(unaudited) and the years ended December 31, 1998 and 1997, respectively. The
maximum outstanding balance at any month-end was $78,000,000, $90,000,000 and
$25,000,000 during the six-months ended June 30, 1999 (unaudited) and the years
ended 1998 and 1997, respectively. The weighted average interest rate on such
agreements was approximately 4.84%, 5.61%, 5.65% and 5.53% during the six-months
ended June 30, 1999 (unaudited) and years ended December 31, 1998, 1997 and
1996, respectively. The securities pledged are held by a third-party
institution.
F-14
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(3) SECURITIES AVAILABLE-FOR-SALE
The Bank holds certain securities available-for-sale. The amortized cost,
unrealized gains and losses, and estimated fair value of securities
available-for-sale at June 30, 1999 (unaudited) and December 31, 1998 and 1997
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
JUNE 30, 1999 (UNAUDITED):
Debt securities issued by government agencies:
Due after one year through five years...................... $ 30,000 $ -- $ (225) $ 29,775
Due after five years to ten years.......................... 37,000 -- (1,619) 35,381
Corporate trust preferred.................................... 259,300 -- (11,976) 247,324
Mortgage-backed securities................................... 672,720 23 (18,414) 654,329
SBA certificates............................................. 71,684 208 (536) 71,356
------------ --- ----------- ------------
Total securities available-for-sale...................... $ 1,070,704 $ 231 $ (32,770) $ 1,038,165
------------ --- ----------- ------------
------------ --- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Debt securities issued by government agencies:
Due after five years to ten years.......................... $ 37,000 $ -- $ (23) $ 36,977
Corporate trust preferred.................................... 334,814 -- (9,849) 324,965
Mortgage-backed securities................................... 588,081 35 (3,601) 584,515
SBA certificates............................................. 58,653 33 (206) 58,480
------------ --- ----------- ------------
Total securities available-for-sale...................... $ 1,018,548 $ 68 $ (13,679) $ 1,004,937
------------ --- ----------- ------------
------------ --- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
Debt securities issued by government agencies:
Due after one year through five years.......................... $ 55,250 $ 156 $ (73) $ 55,333
Due after five years to ten years.............................. 74,254 244 (205) 74,293
Due after ten years............................................ 10,000 93 -- 10,093
Mortgage-backed securities....................................... 420,621 377 (2,548) 418,450
SBA certificates................................................. 13,009 -- (18) 12,991
---------- ----- ----------- ----------
Total securities available-for-sale.......................... $ 573,134 $ 870 $ (2,844) $ 571,160
---------- ----- ----------- ----------
---------- ----- ----------- ----------
</TABLE>
Proceeds from sales of investments and mortgage-backed securities
available-for-sale were approximately $119,626,000, $,156,569,000, $510,905,000,
$235,612,000 and $162,087,000 in the six-months ended June 30, 1999 and 1998
(unaudited) and in each of the years ended December 31, 1998, 1997 and 1996,
respectively, and resulted in gross realized gains of approximately $200,000,
F-15
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(3) SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
$353,000, $1,847,000, $1,714,000 and $3,860,000, respectively, and gross
realized losses of approximately $3,000, $30,000, $101,000, $439,000 and
$222,000 in the six-months ended June 30, 1999 and 1998 (unaudited) and in each
of the years ended December 31, 1998, 1997 and 1996, respectively.
At June 30, 1999 (unaudited) and December 31, 1998 and 1997, the amortized
cost and estimated fair value of mortgage-backed securities available-for-sale
pledged to secure borrowings and swap agreements are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
JUNE 30, 1999 1998 1997
---------------------- ------------------------ ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
---------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Pledged against:
Securities sold under agreements to
repurchase................................... $ 467,210 $ 453,324 $ 397,488 $ 395,720 $ 366,827 $ 365,822
Advances from Federal Home Loan Bank........... 197,540 193,466 178,797 177,434 47,542 46,779
Swap and corridor agreements................... 70 70 142 139 1,970 1,943
Treasury tax and loan account.................. -- -- 804 820 4,577 4,546
Federal Reserve Discount Window................ 17,530 16,499 -- -- -- --
---------- ---------- ------------ ---------- ---------- ----------
$ 682,350 $ 663,359 $ 577,231 $ 574,113 $ 420,916 $ 419,090
---------- ---------- ------------ ---------- ---------- ----------
---------- ---------- ------------ ---------- ---------- ----------
</TABLE>
(4) LOANS HELD-FOR-SALE
Proceeds from sales of loans held-for-sale were approximately $92,548,000,
$357,000, $43,034,000 and $93,081,000 in the six-months ended June 30, 1999 and
1998 (unaudited) and in each of the years ended December 31, 1998 and 1997,
respectively. The sales resulted in gross realized gains of approximately
$613,000 and $165,000 in each of the years ended December 31, 1998 and 1997 and
gross realized gains of $49,000 and $0 in the six months ended June 30, 1999 and
1998 (unaudited), respectively. Gains from sales of servicing rights, including
flow through and bulk sales of servicing, were $0, $0, $0 and $3,248,000 for the
six-months ended June 30, 1999 and 1998 (unaudited) and in the years ended
December 31, 1998 and 1997, respectively. There were no loan or servicing rights
sales in 1996. In 1997 the Bank deferred gains totaling $5,291,000 on the sales
of servicing rights for loans owned by the Bank. The unamortized balance of the
deferred gain was $2,516,729, $2,970,570 and $4,131,000 at June 30, 1999
(unaudited) and December 31, 1998 and 1997, respectively.
In the six-months ended June 30, 1999 and 1998 (unaudited) and in the years
ended December 31, 1998, 1997 and 1996, write-offs of servicing assets totaled
approximately $0, $0, $0, $0 and $18,000, respectively, and are included in gain
(loss) on loan and loan servicing sales in the accompanying consolidated
statements of operations.
F-16
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(5) MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
The amortized cost, unrealized gains and losses, and estimated fair value of
mortgage-backed securities at June 30, 1999 (unaudited) and December 31, 1998
and 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
June 30, 1999 (Unaudited)..................... $ 5,214 $ 7 $ (17) $ 5,204
----------- --- --- -----------
----------- --- --- -----------
December 31, 1998............................. $ 6,282 $ 90 $ -- $ 6,372
----------- --- --- -----------
----------- --- --- -----------
December 31, 1997............................. $ 9,671 $ 72 $ -- $ 9,743
----------- --- --- -----------
----------- --- --- -----------
</TABLE>
Substantially all mortgage-backed securities are collateralized by
single-family residence secured loans. There were no sales of mortgage-backed
securities held-to-maturity in the six-months ended June 30, 1999 (unaudited) or
in the years ended December 31, 1998 and 1997.
(6) LOANS RECEIVABLE
A summary of loans receivable at June 30, 1999 (unaudited) and December 31,
1998 and 1997 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Real estate loans
Single-family residential:
Fixed rate...................................... $ 1,270,423 $ 1,150,414 $ 212,552
Variable rate................................... 253,391 344,342 741,149
Multifamily, primarily variable rate.............. 352,927 366,625 426,254
Commercial and industrial, primary variable
rate............................................ 273,856 206,402 135,407
Land, primarily fixed rate........................ 859 880 5,896
------------ ------------ ------------
Real estate loans............................. 2,151,456 2,068,663 1,521,258
Commercial loans.................................... 100,664 62,665 22,484
Consumer loans...................................... 139,010 53,826 8,485
Secured by deposits................................. 2,485 3,537 2,287
------------ ------------ ------------
All loans..................................... 2,393,615 2,188,691 1,554,514
Less:
Undistributed loan proceeds....................... 41,443 17,152 6,206
Unamortized net loan (premiums)/discounts and
deferred origination fees....................... 5,040 814 (6,859)
Deferred gain on servicing sold................... 2,517 2,971 4,131
Allowance for loan losses (note 7)................ 19,374 18,897 17,824
------------ ------------ ------------
$ 2,325,241 $ 2,148,857 $ 1,533,212
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-17
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(6) LOANS RECEIVABLE (CONTINUED)
Nonaccrual loans were $6,363,000, $10,503,000, $8,507,000, $9,904,000 and
$18,238,000 at June 30, 1999 and 1998 (unaudited) and December 31, 1998, 1997
and 1996, respectively. If loans which were on nonaccrual at June 30, 1999 and
1998 (unaudited) December 31, 1998, 1997 and 1996 had performed in accordance
with their terms for the year or since origination, if shorter, interest income
from these loans would have been $303,369, $507,691, $950,000, $644,000 and
$1,405,000, respectively. Interest collected on these loans for these periods
was $20,307, $83,526, $364,000, $67,000 and $846,000, respectively.
The Bank's variable rate loans are indexed primarily to the COFI and U.S.
Treasury one-year CMT.
Substantially all real estate collateralized loans are secured by first
trust deeds. The Bank's loan portfolio is concentrated primarily in the state of
California. The commercial real estate secured portfolio is diversified with no
significant industry concentrations of credit risk. Single-family residence,
multifamily, and commercial real estate secured loans are diversified
geographically across the state and by size.
At June 30, 1999 (unaudited) and December 31, 1998, the Bank had loan
applications pending to originate loans of approximately $53,184,000 and
$28,832,000. Other than pending loan applications at year-end, the Bank had no
outstanding commitments to originate or purchase loans.
(7) ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses for the
six-months ended June 30, 1999 (unaudited) and for each of the years ended
December 31, 1998, 1997 and 1996 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------
1999 1998 1997 1996
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
Balance at beginning of year................... $ 18,897 $ 17,824 $ 23,280 $ 31,572
Provision for loan losses...................... 2,100 2,000 2,046 2,884
Recoveries credited to the allowance........... 120 85 106 925
----------- --------- --------- ---------
21,117 19,909 25,432 35,381
Losses charged to the allowance................ (1,743) (1,012) (7,608) (12,101)
----------- --------- --------- ---------
Balance at end of year......................... $ 19,374 $ 18,897 $ 17,824 $ 23,280
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
The Bank's gross impaired loans were $7,280,000, $10,165,000 and $11,361,000
as of June 30, 1999 (unaudited) and December 31, 1998 and 1997, respectively.
The average impaired loans for the periods then ended were $7,253,000,
$9,615,000 and $20,600,000, respectively. Gross impaired loans with a valuation
allowance totaled $4,377,000 and $7,188,000 and gross impaired loans without a
valuation allowance totaled $2,902,000 and $2,978,000 at June 30, 1999
(unaudited) December 31, 1998. Interest income recognized related to these loans
was $552,000 and $67,000 for 1998 and 1997, respectively.
F-18
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(7) ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR LOAN LOSSES (CONTINUED)
The valuation allowance related to impaired loans was $1,455,000, $1,597,000
and $1,772,000 at June 30, 1999 (unaudited) and December 31, 1998 and 1997,
respectively, and is included in the schedule of the allowance for loan losses
described above.
Troubled debt restructurings totaled $4,945,000, $4,515,000 and $11,000,000
as of June 30, 1999 (unaudited) and December 31, 1998 and 1997, respectively.
The Bank has no commitments to lend additional funds to borrowers whose loans
were classified as troubled debt restructurings at June 30, 1999 (unaudited) and
December 31, 1998.
(8) REAL ESTATE HELD FOR INVESTMENT AND FOR SALE
Real estate at June 30, 1999 (unaudited) and December 31, 1998 and 1997,
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Acquired for sale or development............................ $ -- $ -- $ 8,054
Less allowance for losses................................. -- -- (6,146)
----------- --------- ---------
Acquired for sale or development........................ -- -- 1,908
----------- --------- ---------
Acquired in settlement of loans:
Single-family residential................................. 1,523 2,723 750
Multifamily............................................... -- -- 6,481
Commercial and industrial................................. 2,528 -- 7,268
Land...................................................... -- -- 202
----------- --------- ---------
4,051 2,723 14,701
Less allowance for losses................................... -- -- (1,418)
----------- --------- ---------
Acquired in settlement of loans......................... 4,051 2,723 13,283
----------- --------- ---------
Total real estate held for investment and sale.............. $ 4,051 $ 2,723 $ 15,191
----------- --------- ---------
----------- --------- ---------
</TABLE>
F-19
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(8) REAL ESTATE HELD FOR INVESTMENT AND FOR SALE (CONTINUED)
A summary of the components of the income from real estate operations for
the six-months ended June 30, 1999 and 1998 (unaudited) and in each of the years
ended December 31, 1998, 1997 and 1996 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
SIX-MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross income from real estate operations..... $ 194 $ 890 $ 1,147 $ 3,372 $ 4,761
Operating expenses........................... 221 1,468 1,848 4,637 5,395
--------- --------- --------- --------- ---------
Loss from operations....................... (27) (578) (701) (1,265) (634)
Gain on real estate sales.................... 142 2,363 2,180 2,214 3,346
--------- --------- --------- --------- ---------
Gain from real estate operations........... 115 1,785 1,479 949 2,712
Provisions for losses........................ -- -- -- (2,754) (766)
--------- --------- --------- --------- ---------
Total income (loss) from real estate
operations............................... $ 115 $ 1,785 $ 1,479 $ (1,805) $ 1,946
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
An analysis of the activity in the allowance for losses for real estate
acquired and direct real estate investments for the six-months ended June 30,
1999 (unaudited) and for each of the years ended December 31, 1998, 1997 and
1996, respectively, is as follows (dollars in thousands):
<TABLE>
<CAPTION>
DIRECT
REAL ESTATE REAL ESTATE
ACQUIRED INVESTMENTS TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Balance, December 31, 1995................................ $ 1,460 $ 6,526 $ 7,986
Provision for losses...................................... 396 370 766
Charge-offs............................................... (1,784) (380) (2,164)
----------- ----------- ---------
Balance, December 31, 1996................................ 72 6,516 6,588
Provision for losses...................................... 2,754 -- 2,754
Charge-offs............................................... (1,408) (370) (1,778)
----------- ----------- ---------
Balance, December 31, 1997................................ 1,418 6,146 7,564
Charge-offs............................................... (1,418) (6,146) (7,564)
----------- ----------- ---------
Balance, December 31, 1998................................ -- -- --
Charge-offs............................................... -- -- --
----------- ----------- ---------
Balance, June 30, 1999 (Unaudited)........................ $ -- $ -- $ --
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
F-20
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(9) PREMISES AND EQUIPMENT
Premises and equipment at June 30, 1999 (unaudited) and December 31, 1998
and 1997, consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Land..................................................... $ 521 $ 521 $ 521
Buildings................................................ 1,225 967 837
Furniture, fixtures and equipment........................ 14,237 13,969 12,434
Leasehold improvements................................... 7,075 6,308 5,525
----------- ---------- ----------
23,058 21,765 19,317
Less accumulated depreciation and amortization........... (16,543) (14,553) (12,641)
----------- ---------- ----------
$ 6,515 $ 7,212 $ 6,676
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The Bank is committed to operating leases on certain premises. Certain of
these leases require the Bank to pay property taxes and insurance. Some are
subject to annual inflation adjustments, and have renewal options of various
periods at various rates. Lease expense on all property totaled approximately
$1,375,000, $1,271,000, $2,610,000, $2,197,000 and $2,144,000, net of sublease
income of approximately $76,000, $88,000, $166,000, $353,000 and $452,000, in
the six-months ended June 30, 1999 and 1998 (unaudited) and in each of the years
ended December 31, 1998, 1997 and 1996, respectively.
Approximate minimum lease commitments before consideration of the charge for
unused lease property referred to above under noncancelable operating leases at
December 31, 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR GROSS SUBLEASE NET
- --------------------------------------------------------------- --------- ----------- ---------
<S> <C> <C> <C>
1999........................................................... $ 2,594 $ 152 $ 2,442
2000........................................................... 2,293 152 2,141
2001........................................................... 1,453 89 1,364
2002........................................................... 958 -- 958
2003........................................................... 543 -- 543
Thereafter..................................................... 2,433 -- 2,433
--------- ----- ---------
$ 10,274 $ 393 $ 9,881
--------- ----- ---------
--------- ----- ---------
</TABLE>
F-21
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(10) DEPOSITS
Deposits at June 30, 1999 (unaudited) and December 31, 1998 and 1997
consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
JUNE 30, 1999 1998 1997
----------------------------- ----------------------------- ------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
------------ --------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Transaction accounts:
Checking accounts..................... $ 206,339 1.02% $ 166,815 1.26% $ 98,560
Passbook accounts..................... 136,106 3.41 139,800 3.60 182,690
Money market accounts................. 141,632 4.28 128,192 4.20 52,695
------------ ------------ ------------
Transaction accounts................ 484,077 2.64 434,807 2.88 333,945
------------ ------------ ------------
Term certificates:
3-month............................... 7,475 3.91 6,951 3.83 5,135
6-month............................... 63,951 4.49 60,323 4.86 58,055
12-month.............................. 600,684 5.10 594,717 5.46 476,251
18-month.............................. 65,788 5.22 44,502 5.43 146,605
24-month.............................. 36,751 5.37 57,988 6.28 73,226
36-month.............................. 11,780 5.66 11,079 5.71 12,126
48-month.............................. 1,213 5.69 1,176 5.93 1,099
60-month.............................. 16,961 5.88 16,145 5.88 20,149
Public funds.......................... -- -- -- -- 2,006
$100,000 and over..................... 322,581 5.18 316,278 5.54 138,173
------------ ------------ ------------
Term certificates................... 1,127,184 5.12 1,109,159 5.49 932,825
------------ ------------ ------------
$ 1,611,261 4.37% $ 1,543,966 4.76% $ 1,266,770
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
WEIGHTED
AVERAGE RATE
---------------
<S> <C>
Transaction accounts:
Checking accounts..................... 2.38%
Passbook accounts..................... 4.16
Money market accounts................. 5.07
Transaction accounts................ 3.78
Term certificates:
3-month............................... 4.20
6-month............................... 5.18
12-month.............................. 5.73
18-month.............................. 5.75
24-month.............................. 5.71
36-month.............................. 6.04
48-month.............................. 5.95
60-month.............................. 5.77
Public funds.......................... 5.79
$100,000 and over..................... 5.90
Term certificates................... 5.72
5.21%
</TABLE>
Term certificates of deposit outstanding by scheduled maturity date at June
30, 1999 (unaudited) and December 31, 1998 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
----------------------------- -----------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Due within 3 months.................... $ 110,425 5.13% $ 271,083 5.64%
Due within 3 to 6 months............... 314,679 5.05 361,803 5.65
Due within 6 to 9 months............... 297,720 5.11 112,299 5.45
Due within 9 to 12 months.............. 288,483 5.11 201,322 5.13
Due within 12 to 24 months............. 92,073 5.21 137,605 5.30
Due within 24 to 36 months............. 11,521 5.72 10,559 5.70
Due after 36 months.................... 12,283 5.71 14,488 5.87
------------ --- ------------ ---
Total.............................. $ 1,127,184 5.12% $ 1,109,159 5.49%
------------ --- ------------ ---
------------ --- ------------ ---
</TABLE>
F-22
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(10) DEPOSITS (CONTINUED)
The components of deposit interest expense for the six-months ended June 30,
1999 and 1998 (unaudited) in each of the years ended December 31, 1998, 1997 and
1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
SIX-MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Checking accounts.......................................... $ 1,039 $ 1,061 $ 2,107 $ 1,635 $ 449
Passbook and money market accounts......................... 5,060 5,153 10,789 10,841 12,288
Term certificates--under $100,000.......................... 23,256 21,766 45,217 44,852 52,556
Term certificates--$100,000 and over....................... 6,448 5,820 12,132 10,124 10,030
--------- --------- --------- --------- ---------
35,803 33,800 70,245 67,452 75,323
Interest forfeitures on early withdrawals.................. (114) (116) (208) (205) (187)
--------- --------- --------- --------- ---------
$ 35,689 $ 33,684 $ 70,037 $ 67,247 $ 75,136
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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 $434,947,000,
$364,000,000 and $340,788,000 outstanding reverse repurchase agreements at June
30, 1999 (unaudited) and in December 31, 1998 and 1997, respectively.
The maximum repurchase liability balances outstanding at any month-end
during the six months ended June 30, 1999 (unaudited) and years ended December
31, 1998 and 1997 were approximately $434,947,000, $658,409,000 and
$415,676,000, respectively. The average balances outstanding during each of the
six months ended June 30, 1999 (unaudited) and years ended December 31, 1998 and
1997 were approximately $381,247,000, $385,452,000 and $357,396,000,
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.
F-23
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(11) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (CONTINUED)
The scheduled maturities and weighted average interest rates of securities
sold under agreements to repurchase at June 30, 1999 (unaudited) and December
31, 1998 and 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
JUNE 30, 1999 1998 1997
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
---------- --------------- ---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
YEAR OF MATURITY:
1998......................................... $ -- --% $ -- --% $ 76,788 5.79%
1999......................................... 70,947 5.07 -- -- -- --
2000......................................... 129,000 5.71 129,000 5.71 129,000 5.71
2002......................................... 135,000 5.79 135,000 5.79 135,000 5.79
2003......................................... 50,000 5.34 50,000 5.34 -- --
2008......................................... 50,000 5.10 50,000 5.10 -- --
---------- ---------- ----------
$ 434,947 5.52% $ 364,000 5.61% $ 340,788 5.76%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(12) ADVANCES FROM THE FHLB
Advances from the FHLB at June 30, 1999 (unaudited) and December 31, 1998
and 1997 are collateralized by mortgage-backed agency securities and mortgage
loans with a current principal balance of approximately $2.0 billion, $1.9
billion and $913.9 million, respectively, and by the required investment in the
stock of the FHLB with a carrying value at June 30, 1999 (unaudited), and
December 31, 1998 and 1997 of approximately $64,833,000, $63,150,000 and
$23,634,000, respectively.
At June 30, 1999 (unaudited) and December 31, 1998, the Bank had an
available total collateralized line of credit of approximately $1.4 billion and
$1.7 billion with the FHLB. Based on current securities and loans pledged, the
Bank had $8.6 million and $71.7 million of unused line of credit as of June 30,
1999 (unaudited) and December 31, 1998 with the FHLB.
F-24
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(12) ADVANCES FROM THE FHLB (CONTINUED)
The scheduled maturities and weighted average interest rates of advances at
June 30, 1999 (unaudited) and December 31, 1998 and 1997 are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
JUNE 30, 1999 1998 1997
----------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
YEAR OF MATURITY AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
- ----------------------------------------- ------------ --------------- ------------ ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
1998..................................... $ -- --% $ -- --% $ 357,000 5.97%
1999..................................... 75,000 4.89 14,000 4.77 -- --
2000..................................... 185,000 5.69 185,000 5.69 -- --
2001..................................... 25,000 5.68 25,000 5.68 -- --
2002..................................... 139,000 5.44 139,000 5.44 115,000 5.58
2003..................................... 525,000 5.17 525,000 5.17 -- --
2008..................................... 310,000 5.53 310,000 5.53 -- --
------------ ------------ ----------
$ 1,259,000 5.36% $ 1,198,000 5.38% $ 472,000 5.87%
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
(13) INCOME TAXES
The Bank and its subsidiaries (except for People's Preferred Capital
Corporation "PPCC"), file a federal consolidated tax return with PBOC Holdings,
Inc. The Bank entered into a tax sharing agreement with the Company, whereby the
Bank computes and pays taxes based upon Bank's tax position assuming that a
separate tax return was filed. The payment by the Bank is limited to the amount
of the consolidated tax liability.
PPCC has elected to be treated as a Real Estate Investment Trust ("REIT")
for Federal income tax purposes and intends to comply with the provisions of the
Internal Revenue Code of 1986 (the "IRC"), as amended. Accordingly, PPCC will
not be subject to Federal income tax to the extent it distributes its income to
shareholders (other than Bank) and as long as certain asset, income and stock
ownership tests are met in accordance with the IRC. As PPCC expects to qualify
as a REIT for Federal income tax purposes, no provision for income taxes is
included for the earnings of PPCC that will be distributed to outside
shareholders.
F-25
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(13) INCOME TAXES (CONTINUED)
The income tax provision (benefit) for the six months ended June 30, 1999
and 1998 (unaudited), and the years ended December 31, 1998, 1997 and 1996,
respectively, consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
--------- --------- ---------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal................................................ $ 242 $ -- $ -- $ 163 $ 16
State.................................................. 12 8 8 62 5
--------- --------- ---------- --------- ---------
Total current.......................................... 254 8 8 225 21
--------- --------- ---------- --------- ---------
Deferred:
Federal................................................ (2,254) (9,399) (16,398) (4,725) (3,037)
--------- --------- ---------- --------- ---------
Total tax benefit...................................... $ (2,000) $ (9,391) $ (16,390) $ (4,500) $ (3,016)
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
Deferred tax assets are initially recognized for net operating loss and tax
credit carryforwards and differences between the financial statement carrying
amount and the tax bases of assets and liabilities which will result in future
deductible amounts. A valuation allowance is then established to reduce that
deferred tax asset to the level at which "it is more likely than not" that the
tax benefits will be realized. A taxpayer's ability to realize the tax benefits
of deductible temporary differences and operating loss or credit carryforwards
depends on having sufficient taxable income of an appropriate character within
the carryback and carryforward periods. Sources of taxable income that may allow
for the realization of tax benefits include (i) taxable income in the current
year or prior years that is available through carryback, (ii) future taxable
income that will result from the reversal of existing taxable temporary
differences, and (iii) future taxable income generated by future operations.
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 June 30, 1999 (unaudited).
Below is a reconciliation of the expected federal income taxes to the
consolidate effective income taxes for the noted periods:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
--------- --------- ---------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory federal income tax rate.......................... 35% 35% 35% 35% 35%
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Expected federal income taxes (benefit).................... $ 4,625 $ (4,071) $ (517) $ 3,011 $ 3,704
Increases (reductions) in income taxes resulting from:
State franchise tax, net of federal benefit................ 8 5 5 40 3
Adjustments to deferred taxes fully offset by valuation
allowance................................................ 1,294 2,928 -- 566 774
Change in valuation allowance.............................. (7,461) (7,840) (15,556) (7,818) (7,385)
PPCCP nontaxable earnings.................................. (608) (312) (79) (301) --
Other...................................................... 142 (101) (243) 2 (112)
--------- --------- ---------- --------- ---------
$ (2,000) $ (9,391) $ (16,390) $ (4,500) $ (3,016)
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
F-26
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(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 for the noted periods (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Deferred tax assets:
Provision for losses on loans and real estate................................ $ 11,446 $ 12,718 $ 14,875
Tax gains on sales of loans, net of deferred gains........................... 1,993 1,989 2,206
Recognition of interest on nonperforming loans for tax..................... 6,890 6,354 5,747
Accrued interest on deposits recognized for book but deferred for tax........ 1,068 1,188 1,424
REMIC Income................................................................. 6,687 6,576 5,384
Miscellaneous temporary deductible differences............................... 1,346 1,139 969
Available NOL carryforwards.................................................. 50,373 54,955 48,585
AMT tax credit carryforwards................................................. 1,685 1,432 1,432
----------- --------- ---------
Total deferred tax assets.................................................. 81,488 86,351 80,622
Deferred tax liabilities:
Stock dividends from FHLB.................................................... (5,179) (4,429) (3,273)
Real estate partnership tax loss............................................. -- -- (259)
Miscellaneous temporary taxable difference................................... (5,585) (5,584) (1,511)
Federal tax effect of state temporary differences............................ (3,307) (3,714) (3,797)
----------- --------- ---------
Total deferred tax liabilities............................................. (14,071) (13,727) (8,840)
Deferred tax assets, net of deferred tax liabilities........................... 67,417 72,624 71,782
Less deferred tax asset valuation allowances................................... (38,558) (46,019) (61,575)
----------- --------- ---------
Net deferred tax assets.................................................... $ 28,859 $ 26,605 $ 10,207
----------- --------- ---------
----------- --------- ---------
</TABLE>
F-27
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(13) INCOME TAXES (CONTINUED)
The Federal tax net operating loss carryforwards expire as follows (dollars
in thousands):
<TABLE>
<CAPTION>
YEAR TOTAL
- ---------------------------------------------------------------------------------- ----------
<S> <C>
2001.............................................................................. $ 5,326
2002.............................................................................. 2
2003.............................................................................. 24,444
2004.............................................................................. 26
----------
Pre-1992 originated net operating losses.......................................... 29,798
2008.............................................................................. 1,946
2009.............................................................................. 10,650
2010.............................................................................. 80,307
2011.............................................................................. 4,037
2018.............................................................................. 6,358
----------
103,298
Pre-May, 1998 originated net operating losses
2018.............................................................................. 10,825
----------
Post-May, 1998 originated net operating losses.................................... 10,825
----------
Total......................................................................... $ 143,921
----------
----------
</TABLE>
The Bank had Federal and California alternative minimum tax credit
carryforwards of approximately $1,616,000 and $70,000, at June 30, 1999
(unaudited). These carryforwards are available to reduce future regular federal
income taxes and California franchise taxes, if any, over an indefinite period.
In 1992, issuance of preferred stock resulted in a change in control as
defined under Internal Revenue Code Section 382. As a result, any usage of net
operating loss carryforwards created in 1992 and prior years is limited to
approximately $7.7 million per year. The total net operating loss carryforwards
created in 1992 and prior years is approximately $29.8 million. Any unused
limitation is available in subsequent years until expiration. The amount of the
unused limitation carryover available from the 1992 change in control in 1999
and thereafter is approximately $29.8 million.
During May of 1998, the initial public offering resulted in a second change
in control as defined under Internal Revenue Code Section 382. As a result, any
usage of net operating loss carryforwards created prior to May, 1998 (but post
1992) is limited to approximately $21.3 million per year. The total net
operating loss carryforwards created prior to May, 1998 (but post 1992) is
approximately $103.3 million. Any unused limitation is available in subsequent
years until expiration. The amount of the unused limitation carryover available
from the May, 1998 change in control in 1999 is approximately 22.5 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
F-28
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(13) INCOME TAXES (CONTINUED)
require adjustment to the tax assets and liabilities based on the results of
their examinations. Management does not anticipate that the examinations will
result in any material adverse effect on its financial condition or results of
operations.
(14) DERIVATIVES AND HEDGING ACTIVITIES
Hedging costs, net, for the six-months ended June 30, 1999 and 1998
(unaudited) and for each of the years ended December 31, 1998, 1997 and 1996
consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
SIX-MONTHS ENDED
YEAR ENDED DECEMBER 31,
JUNE 30,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest paid on swaps, net of interest received......................... $ -- $ (1) $ -- $ 2 $ 35
Amortization of cost of caps, floors and corridors, net of interest
received............................................................... 81 111 214 265 352
--- --------- --------- --------- ---------
$ 81 $ 110 $ 214 $ 267 $ 387
--- --------- --------- --------- ---------
--- --------- --------- --------- ---------
</TABLE>
At June 30, 1999, 1998 (unaudited) and December 31, 1998, the Bank was not a
party to any interest rate swap agreements. The net expense (income) relating to
the Bank's interest rate swap agreements was $0, $(1,000), $0, $2,000 and
$35,000 during the six-months ended June 30, 1999 and 1998 (unaudited) and the
years ended December 31, 1998, 1997 and 1996, respectively.
At June 30, 1999 (unaudited), the Bank was also a party to five interest
rate corridor agreements, which agreements expire from 2000 through 2001 and
cover an aggregate contract amount of approximately $32.0 million. An interest
rate corridor consists of an agreement whereby the issuer agrees to pay the
purchaser, in exchange for the payment of a premium, the prevailing rate of
interest in the event interest rates rise above a specified rate on a specified
interest rate index and do not exceed a specified upper rate on the same index.
The Bank entered into interest rate corridors as a means to artificially raise
the interest rate cap on certain loans. As of June 30, 1999 (unaudited), the
interest rate corridors have an average strike price of 6.54% and an average
limit rate of 8.20% (the "Bank's interest rate corridors are based on either
three month London Inter-Bank Offered Rate ("LIBOR") or the FHLB of San
Francisco's Cost of Funds Index ("COFI")). The aggregate net expense relating to
the Bank's interest rate corridors and floors was $81,000, $111,000, $214,000,
$265,000 and $352,000 during the six-months ended June 30, 1999, 1998
(unaudited) and the years ended December 31, 1998, 1997, and 1996, respectively.
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
F-29
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(14) DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
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 June 30, 1999 (unaudited)
and December 31, 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999 (UNAUDITED) CONTRACT AVERAGE AVERAGE
YEAR OF MATURITY AMOUNT STRIKE PRICE LIMIT RATE
- ----------------------------------------------------------- --------- ------------- -----------
<S> <C> <C> <C>
2000....................................................... $ 12,000 6.38% 8.13%
2001....................................................... 20,000 6.64 8.24
---------
$ 32,000 6.54% 8.20%
---------
---------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 CONTRACT AVERAGE AVERAGE
YEAR OF MATURITY AMOUNT STRIKE PRICE LIMIT RATE
- ----------------------------------------------------------- --------- ------------- -----------
<S> <C> <C> <C>
1999....................................................... $ 20,000 6.64% 8.24%
2000....................................................... 12,000 6.38 8.13
2001....................................................... 20,000 6.64 8.24
---------
$ 52,000 6.58% 8.21%
---------
---------
</TABLE>
(15) BENEFIT PLANS
The Bank has had a noncontributory defined benefit pension plan covering
substantially all of its employees (the "Plan") hired before 1990. The benefits
are based on years of service and the employee's highest compensation during the
last five consecutive years of employment prior to 1991. The Plan was frozen
effective December 31, 1990, and consequently, employees will no longer earn
additional defined benefits for future services; however, future service may be
counted toward vesting of benefits accumulated based on past service. The Bank's
funding policy has been to contribute annually the minimum amount that can be
deducted for Federal income tax purposes.
F-30
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(15) BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the Plan and amounts
recognized in the Bank's consolidated statements of financial condition at
December 31, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Projected benefit obligation, beginning of year................................................. $ 5,727 $ 5,058
Interest cost............................................................................... 397 372
Benefits paid............................................................................... (106) (97)
Actuarial loss.............................................................................. 230 394
--------- ---------
Projected benefit obligation, end of year................................................... 6,248 5,727
--------- ---------
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year.............................................................. 5,083 4,492
Actual return on plan assets................................................................ 715 663
Employer contribution....................................................................... 25 24
Benefits paid............................................................................... (106) (97)
--------- ---------
Plan assets, end of year.................................................................... 5,717 5,082
--------- ---------
Projected benefit obligation (in excess of) plan assets..................................... (531) (645)
Unrecognized (gain)/loss.................................................................... 1,157 1,221
--------- ---------
Net amount recognized....................................................................... 626 576
--------- ---------
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF:
Accrued benefit liability................................................................... (531) (645)
Accumulated comprehensive income............................................................ 1,157 1,221
--------- ---------
Net amount recognized....................................................................... 626 576
--------- ---------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Interest cost on projected benefit obligation............................................... 396 372
Expected return on Plan assets.............................................................. (456) (404)
Amortization of unrecognized (gain) / loss.................................................. 35 30
--------- ---------
Pension income.............................................................................. $ (25) $ (2)
--------- ---------
--------- ---------
THE ASSUMPTIONS USED IN THE ACCOUNTING WERE:
Discount rate............................................................................... 6.75% 7.00%
Expected long-term rate of return on assets................................................. 9.00% 9.00%
</TABLE>
Pension income was approximately $25,000, $2,000 and $9,000 for the year's
ended December 31, 1998, 1997 and 1996, respectively. The Bank adopted a 401(k)
plan, effective January 1, 1991. The 401(k) plan covers employees with one year
or more of service, and allows participants to contribute a portion of their
covered compensation, which amount is 100% vested at the time of contribution.
The Bank shall contribute an amount equal to 50% of the participant's
contribution up to 6% of the participant's covered compensation, which amount
vests over a period of five years. The Bank may elect to make additional
contributions on a discretionary basis. The contributions as directed by the
participants are invested by the 401(k) plan's trustee in one or more of five
investment alternatives in trust for the benefit of the participants. The Bank
incurred approximately $76,000, $144,000 and $155,000 of expense related to the
401(k) plan, with no discretionary contributions in each of the years ended
December 31, 1998, 1997 and 1996, respectively.
F-31
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(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. See Note 19 for a discussion of litigation
related to the Bank's goodwill litigation.
(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.
The carrying amounts and fair values of the Bank's financial instruments
consisted of the following at December 31, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents.............................. $ 46,401 $ 46,401 $ 21,117 $ 21,117
Securities available-for-sale.......................... 1,004,937 1,004,937 571,160 571,160
Mortgage-backed securities held-to-maturity............ 6,282 6,372 9,671 9,743
Loans receivable....................................... 2,148,857 2,160,238 1,533,212 1,516,827
FHLB stock............................................. 63,150 63,150 23,634 23,634
Financial liabilities:
Deposits............................................... 1,543,966 1,541,449 1,266,770 1,264,298
Securities sold under agreements to repurchase......... 364,000 373,402 340,788 340,788
Advances from the FHLB................................. 1,198,000 1,219,404 472,000 473,523
Financial instruments:
Interest rate swaps.................................... -- -- -- (7)
Interest rate corridors................................ 266 (236) 481 138
</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.
F-32
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(17) FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)
- 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.
- FHLB Stock--The carrying amount of FHLB Stock approximates its fair value.
- Deposit--The fair values of checking 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 fair value is
estimated by discounting projected future cash flows at the current
interest rates available to the Bank for Securities Sold Under Agreements
to Repurchase with similar terms for similar remaining terms to maturity.
- Advances from the FHLB--The fair value is estimated by discounting
projected future cash flows at the current advance interest rates
available to the Bank for FHLB advances with similar terms for similar
remaining terms to maturity.
- Interest Rate Swaps, Caps 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
and corridors are also based upon dealer quotes or estimated using option
pricing models utilizing current market consensus assumptions for interest
rate caps and corridors of similar terms and strike or floor prices for
the same remaining term to maturity.
(18) 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
F-33
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(18) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
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 1 capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier 1 leverage capital (as
defined) to adjusted tangible assets (as defined). Management believes, as of
December 31, 1998, that the Bank met all capital adequacy requirements to which
it is subject.
As of December 31, 1998, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain a minimum total risk-based ratio of 10%, Tier 1 risk-based ratio of 6%
and Tier 1 leverage ratio of 5%. There are no conditions or events since that
notification that management believes have changed the institution's category.
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 FSLIC as part of the Bank's purchase
of the Bank in 1987, and which provides for an additional $121.8 million of
regulatory capital at December 31, 1998. Until the passage of 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, 1998, the Bank met all minimum FIRREA regulatory
capital requirements without inclusion of the additional Assistance Agreement
capital amounts.
To preserve its rights under the Assistance Agreement, in 1993 the Bank and
the Bank commenced a lawsuit against the United States Government for breach of
contract and deprivation of property without just compensation or due process of
law. The lawsuit seeks unspecified monetary compensation for damages sustained
in meeting FIRREA mandated capital requirements and for the fair value of
property taken, but does not seek reinstatement of the Assistance Agreement
capital forbearance. While the outcome of the lawsuit cannot be determined at
this time, it is management's opinion, based on the advice of external legal
counsel, that the Bank's position has substantial legal merit.
F-34
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(18) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The ability of the Bank to pay dividends will depend primarily upon the
receipt of dividends from the Bank. The Bank's ability to pay these dividends is
dependent upon its earnings from operations and the adequacy of its regulatory
capital. As a well capitalized institution, the maximum dividend allowable under
statute is the higher of (i) 100% of the Bank's net income to date during the
calendar year plus the amount that would reduce by one-half its capital surplus
ratio at the beginning of the year or (ii) 75% of the previous four quarters of
net earnings less dividends paid in such quarters. The OTS director must be
notified of the proposed distribution.
At June 30, 1999 (unaudited), December 31, 1998, and 1997, the Bank's
regulatory capital calculations, computed by management both with and without
inclusion of the additional capital provided for in the Bank's Assistance
Agreements were as follows (dollars in thousands):
<TABLE>
<CAPTION>
REGULATORY CAPITAL/STANDARD AS OF JUNE 30, 1999
(UNAUDITED)
-------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL RISK-
TANGIBLE TIER 1 TIER 1 BASED
CAPITAL LEVERAGE RISK- BASED CAPITAL
---------- ---------- ----------- ------------
WITHOUT ADDITIONAL ASSISTANCE AGREEMENT CAPITAL
- --------------------------------------------------------------
Stockholder's equity/GAAP capital............................. $ 168,905 $ 168,905 $ 168,905 $ 168,905
Adjustment for unrealized losses on securities
available-for-sale.......................................... 32,539 32,539 32,539 32,539
Deduction for disallowed deferred tax assets.................. (15,035) (15,035) (15,035) (15,035)
Deduction for intangible assets............................... (1,691) (1,691) (1,691) (1,691)
Minority interest in subsidiary............................... 33,250 33,250 33,250 33,250
---------- ---------- ----------- ------------
Total Tier 1 capital.................................... 217,968 217,968 217,968 217,968
Includable allowance for loan losses.......................... -- -- -- 16,929
---------- ---------- ----------- ------------
Total capital........................................... 217,968 217,968 217,968 234,897
Minimum capital requirement................................... 53,111 141,630 78,398 156,795
---------- ---------- ----------- ------------
Regulatory capital excess............................... $ 164,857 $ 76,338 $ 139,570 $ 78,102
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
Capital ratios:
Regulatory as reported...................................... 6.16% 6.16% 11.12% 11.98%
Minimum capital ratio....................................... 1.50 4.00 4.00 8.00
---------- ---------- ----------- ------------
Regulatory capital excess............................... 4.66% 2.16% 7.12% 3.98%
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
WITH ADDITIONAL ASSISTANCE AGREEMENT CAPITAL
- --------------------------------------------------------------
Regulatory capital as adjusted................................ $ 338,318 $ 338,318 $ 338,318 $ 355,247
Minimum capital requirement (per above)....................... 53,111 141,630 78,398 156,795
---------- ---------- ----------- ------------
Regulatory capital excess..................................... $ 285,207 $ 196,688 $ 259,920 $ 198,452
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
</TABLE>
F-35
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(18) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
REGULATORY CAPITAL/STANDARD AS OF JUNE 30, 1999
(UNAUDITED)
-------------------------------------------------
TOTAL RISK-
TANGIBLE TIER 1 TIER 1 BASED
CAPITAL LEVERAGE RISK- BASED CAPITAL
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
WITHOUT ADDITIONAL ASSISTANCE AGREEMENT CAPITAL
- --------------------------------------------------------------
Stockholder's equity/GAAP capital............................. $ 179,357 $ 179,357 $ 179,357 $ 179,357
Adjustment for unrealized losses on securities available-
for-sale.................................................... 13,609 13,609 13,609 13,609
Deduction for disallowed deferred tax assets.................. (15,024) (15,024) (15,024) (15,024)
Deduction for intangible assets............................... (1,119) (1,119) (1,119) (1,119)
Minority interest in subsidiary............................... 33,250 33,250 33,250 33,250
---------- ---------- ----------- ------------
Total Tier 1 capital.................................... 210,073 210,073 210,073 210,073
Includable allowance for loan losses.......................... -- -- -- 16,143
---------- ---------- ----------- ------------
Total capital........................................... 210,073 210,073 210,073 226,216
Minimum capital requirement................................... 49,983 133,288 73,189 146,378
---------- ---------- ----------- ------------
Regulatory capital excess............................... $ 160,090 $ 76,785 $ 136,884 $ 79,838
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
Capital ratios:
Regulatory as reported...................................... 6.30% 6.30% 11.48% 12.36%
Minimum capital ratio....................................... 1.50 4.00 4.00 8.00
---------- ---------- ----------- ------------
Regulatory capital excess............................... 4.80% 2.30% 7.48% 4.36%
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
WITH ADDITIONAL ASSISTANCE AGREEMENT CAPITAL
- --------------------------------------------------------------
Regulatory capital as adjusted................................ $ 331,873 $ 331,873 $ 331,873 $ 348,017
Minimum capital requirement (per above)....................... 49,983 133,288 73,189 146,378
---------- ---------- ----------- ------------
Regulatory capital excess..................................... $ 281,890 $ 198,585 $ 258,684 $ 201,639
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
</TABLE>
F-36
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(18) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
REGULATORY CAPITAL/STANDARD AS OF JUNE 30, 1999
(UNAUDITED)
-------------------------------------------------
TOTAL RISK-
TANGIBLE TIER 1 TIER 1 BASED
CAPITAL LEVERAGE RISK- BASED CAPITAL
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
WITHOUT ADDITIONAL ASSISTANCE AGREEMENT CAPITAL
- --------------------------------------------------------------
Stockholder's equity/GAAP capital............................. $ 90,571 $ 90,571 $ 90,571 $ 90,571
Adjustment for unrealized losses on securities available-
for-sale.................................................... 1,974 1,974 1,974 1,974
Deduction for direct real estate investments.................. (1,908) (1,908) (1,908) (1,908)
Deduction for intangible assets............................... (529) (529) (529) (529)
Minority interest in subsidiary............................... 30,033 30,033 30,033 30,033
---------- ---------- ----------- ------------
Total Tier 1 capital.................................... 120,141 120,141 120,141 120,141
Includable allowance for loan losses.......................... -- -- -- 13,988
---------- ---------- ----------- ------------
Total capital........................................... 120,141 120,141 120,141 134,129
Minimum capital requirement................................... 33,188 88,501 44,738 89,475
---------- ---------- ----------- ------------
Regulatory capital excess............................... $ 86,953 $ 31,640 $ 75,403 $ 44,654
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
Capital ratios:
Regulatory as reported...................................... 5.43% 5.43% 10.74% 11.99%
Minimum capital ratio....................................... 1.50 4.00 4.00 8.00
---------- ---------- ----------- ------------
Regulatory capital excess............................... 3.93% 1.43% 6.74% 3.99%
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
WITH ADDITIONAL ASSISTANCE AGREEMENT CAPITAL
- --------------------------------------------------------------
Regulatory capital as adjusted................................ $ 244,841 $ 244,841 $ 244,841 $ 258,829
Minimum capital requirement (per above)....................... 33,188 88,501 44,738 89,475
---------- ---------- ----------- ------------
Regulatory capital excess............................... $ 211,653 $ 156,340 $ 200,103 $ 169,354
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
</TABLE>
(19) GOODWILL LITIGATION AND SHAREHOLDER RIGHTS AGREEMENT
As discussed in Note (18) above, the Bank and the Bank have filed a lawsuit
against the United States Government with regard to supervisory and accounting
goodwill which were eliminated by FIRREA. To date, there have been no material
settlement discussions to resolve the litigation and no trial date has been set.
While the outcome of the lawsuit cannot be determined at this time, management
believes that, based on the advice of outside legal counsel, that the Bank's
position has substantial merit.
In May, 1997, a former preferred stockholder of the Bank and the Bank filed
a lawsuit against the Bank, the Bank and certain other parties seeking to
participate in any recovery against the government in the goodwill litigation.
The Bank intends to defend this action vigorously.
F-37
<PAGE>
PEOPLE'S BANK OF CALIFORNIA
A WHOLLY OWNED SUBSIDIARY OF PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(19) GOODWILL LITIGATION AND SHAREHOLDER RIGHTS AGREEMENT (CONTINUED)
The Bank completed an Offering in May, 1998. In connection with this
Offering, the Bank, the Bank and each of the Material Stockholders (i.e., the
Bishop Estate, BIL Securities and Arbur) entered into a Shareholder Rights
Agreement (the "Agreement") which entitles the Material Stockholders to 95% of
any recovery against the government in the goodwill litigation. The remaining 5%
will be retained by the Bank and/or the Bank. As defined in the Agreement, the
litigation recovery to be distributed will equal cash payments received by the
Bank and/or Bank in the litigation, after deduction of legal and other expenses
incurred in the litigation and any income tax liability of the Bank or Bank
incurred as a result of the recovery.
The Agreement provides that the Material Stockholder's claim to 95% of any
litigation recovery by the Bank or Bank is documented in the form of goodwill
participation rights. To the extent the Bank is prohibited from distributing a
recovery payment, or any portion thereof, or cannot do so because the Bank is
prohibited from making a distribution to the Bank, the Bank shall, upon the
written request of any Material Stockholder, issue to such Material Stockholder
preferred stock of the Bank with an aggregate liquidation preference equal in
value to the recovery payment or portion thereof which the Bank shall have been
prohibited from distributing (the "Recovery payment Preferred"). The Bank shall
issue the Recovery Payment Preferred upon surrender to the Bank of such Material
Stockholder's rights. The stated value of each share of Recovery Payment
Preferred shall be $1,000. The holders of the Recovery Payment Preferred shall
be entitled to receive cumulative preferential cash dividends payable quarterly
at a fixed rate per share of 9 3/4% per annum.
As long as any Recovery Payment Preferred remains outstanding, no dividend
shall be declared or paid on the Bank's Common Stock and no shares of Common
Stock shall be redeemed or purchased by the Bank unless all cumulative dividends
on all outstanding shares of Recovery Payment Preferred have been paid. In the
event of any dissolution, liquidation or winding up of the affairs of the Bank,
after payment or provision for payment of the debts and other liabilities of the
Bank, the holders of the Recovery Payment Preferred shall be entitled to
receive, out of the net assets of the Bank available for distribution to its
stockholders and before any distribution shall be made to the holders of Common
Stock, an amount equal to $1,000 per share, plus an amount equal to all
dividends accrued and unpaid on each share of Recovery Payment Preferred.
The Bank shall have the right, at its option, to redeem at any time the
Recovery Payment Preferred Stock, in whole or in part, upon payment in cash with
respect to each share of Recovery Payment Preferred redeemed at $1,000 per
share, plus an amount equal to all dividends accrued and unpaid thereon to the
date fixed for redemption.
The Agreement also established a Litigation Committee of the Bank's Board of
Directors which will oversee the goodwill litigation and related litigation with
the former preferred stockholder and make final decisions relating to any
dismissal, settlement or termination of the litigation. The Agreement further
provides that the Material Stockholders shall indemnify the Bank and/or the Bank
for 95% of the liability incurred by the Bank or Bank in the claim by the former
preferred stockholder or other parties which challenges the validity of the
Agreement.
F-38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 5
The Company.................................... 12
Certain Transactions to Facilitate the
Offering..................................... 12
How We Intend to Use the Proceeds.............. 13
Capitalization................................. 15
Selected Financial Data........................ 16
Management Discussion and Analysis of Financial
Condition and Results of Operations.......... 17
Business and Strategy.......................... 31
Beneficial Ownership of our Common Stock....... 42
Management..................................... 43
Description of Series B Preferred Shares....... 46
Description of Capital Stock................... 54
Federal Income Tax Considerations.............. 59
ERISA Considerations........................... 67
Certain Information Regarding the Bank......... 68
Underwriting................................... 69
Experts........................................ 70
Validity of the Series B Preferred Shares...... 70
Forward Looking Statements..................... 71
Additional Information......................... 71
Glossary....................................... 72
Index to Financial Statements.................. F-1
Annex I--Offering Circular for Series B Bank
Preferred Shares............................. OC-1
</TABLE>
SHARES
PEOPLE'S PREFERRED
CAPITAL CORPORATION
% NONCUMULATIVE
EXCHANGEABLE
PREFERRED STOCK, SERIES B
---------------------
PROSPECTUS
---------------------
, 1999
SANDLER O'NEILL & PARTNERS, L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 12,788
Printing expenses................................................. 100,000*
Legal fees and expenses........................................... 225,000*
Accounting fees and expenses...................................... 175,000*
Investment banking legal fees and expenses........................ 175,000*
Miscellaneous expenses............................................ 37,212*
---------
Total......................................................... $ 725,000
---------
---------
</TABLE>
- ------------------------
* Estimated
ITEM 32. SALES TO SPECIAL PARTIES.
See response to Item 33 below.
ITEM 33. 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") for
an aggregate purchase price equal to $100. These shares of Common Stock were
issued in reliance upon the exemption from registration under Section 4(2) of
the Securities Act of 1933 (the "Securities Act").
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Articles of
Incorporation contain such a provision which eliminates such liability to the
maximum extent permitted by Maryland law.
The Articles of Incorporation authorize the Company, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her status as
a present or former director or officer of the Company. The Bylaws of the
Company obligate it, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of the final
disposition of a proceeding to (a) any present or former director or officer who
is made a party to the proceeding by reason of his service in that capacity or
(b) any individual who, while a director of the Company and at the request of
the Company, serves or has served another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Articles of
Incorporation and Bylaws also permit the Company to indemnify and advance
expenses to
II-1
<PAGE>
any person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Articles of Incorporation do not) to indemnify a director or officer
who has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In addition, the MGCL requires the Company, as a
condition to advancing expenses, to obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the Company as authorized by the Bylaws
and (b) a written statement by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the standard
of conduct was not met.
The Underwriting Agreement to be filed as Exhibit 1 to this Registration
Statement will provide for reciprocal indemnification by the Underwriters of the
Company, the Bank and their respective directors, officers and controlling
persons, and by the Company and the Bank of the Underwriters, and its directors,
officers and controlling persons, against certain liabilities under the
Securities Act.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. 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.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
1*** Form of Underwriting Agreement between the Company, the Bank and the Underwriters
3(a)(i) Amended 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 B Preferred Shares
5 Opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel to the Company, relating to Series B
Preferred Shares ***
8 Opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel to the Company, relating to certain tax
matters ***
10(a) Residential Mortgage Loan Purchase and Warranties Agreement between the Company and the Bank
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
10(a)(i) Amendment to Residential Mortgage Loan Purchase and Warranties Agreement between the Company and the
Bank
10(b) Commercial Mortgage Loan Purchase and Warranties Agreement between the Company and the Bank
10(c) Temple Inland Residential Mortgage Loan Servicing Agreement between the Bank and Temple Inland Mortgage
Corporation **
10(d) Assignment, Assumption and Recognition Agreement between the Company, the Bank and Temple Inland
Mortgage Corporation
10(e) Form of Residential Mortgage Loan Servicing Agreement between the Company and the Bank
10(f) Commercial Mortgage Loan Servicing Agreement between the Company and the Bank
10(g) Advisory Agreement between the Company and the Bank **
12 Statement of Computation of Earnings to Fixed Charges and Preferred Stock Dividends
23(a) Consents of KPMG 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>
- ------------------------
* Incorporated by reference to the Registration Statement on Form S-11 (File
No. 333-31501) of People's Preferred Capital Corporation, as filed with the
Securities and Exchange Commission on July 10, 1997.
** Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-11 (File No. 333-31501) of People's Preferred Capital Corporation,
as filed with the Securities and Exchange Commission on September 8, 1997.
*** To be filed by amendment.
ITEM 37. 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.
II-3
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-11 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in Los
Angeles, California, on the 26th day of July, 1999.
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
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ RUDOLF P. GUENZEL Officer and Director
- ------------------------------ (Principal Executive July 26, 1999
Rudolf P. Guenzel Officer)
Executive Vice President,
/s/ MICHAEL HOLMES Chief Financial Officer
- ------------------------------ and Director (Principal July 26, 1999
Michael Holmes Accounting Officer)
/s/ ROBERT W. MACDONALD Director
- ------------------------------ July 26, 1999
Robert W. Macdonald
/s/ JOHN F. DAVIS Director
- ------------------------------ July 26, 1999
John F. Davis
/s/ DAVID S. HONDA Director
- ------------------------------ July 26, 1999
David S. Honda
/s/ TIMOTHY B. MATZ Director
- ------------------------------ July 26, 1999
Timothy B. Matz
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
1*** Form of Underwriting Agreement between the Company, the Bank and the Underwriters
3(a)(i) Amended 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 B Preferred Shares
5 Opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel to the Company, relating to Series B
Preferred Shares ***
8 Opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel to the Company, relating to certain tax
matters ***
10(a) Residential Mortgage Loan Purchase and Warranties Agreement between the Company and the Bank
10(a)(i) Amendment to Residential Mortgage Loan Purchase and Warranties Agreement between the Company and the
Bank
10(b) Commercial Mortgage Loan Purchase and Warranties Agreement between the Company and the Bank
10(c) Temple Inland Residential Mortgage Loan Servicing Agreement between the Bank and Temple Inland Mortgage
Corporation **
10(d) Assignment, Assumption and Recognition Agreement between the Company, the Bank and Temple Inland
Mortgage Corporation
10(e) Form of Residential Mortgage Loan Servicing Agreement between the Company and the Bank
10(f) Commercial Mortgage Loan Servicing Agreement between the Company and the Bank
10(g) Advisory Agreement between the Company and the Bank **
12 Statement of Computation of Earnings to Fixed Charges and Preferred Stock Dividends
23(a) Consents of KPMG 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>
- ------------------------
* Incorporated by reference to the Registration Statement on Form S-11 (File
No. 333-31501) of People's Preferred Capital Corporation, as filed with the
Securities and Exchange Commission on July 10, 1997.
** Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-11 (File No. 333-31501) of People's Preferred Capital Corporation,
as filed with the Securities and Exchange Commission on September 8, 1997.
*** To be filed by amendment.
<PAGE>
Exhibit 3.(a)(i)
PEOPLE'S PREFERRED CAPITAL CORPORATION
ARTICLES OF AMENDMENT AND RESTATEMENT
FIRST: People's Preferred Capital Corporation, a Maryland corporation (the
"Corporation"), desires to amend and restate its Articles of Incorporation (the
"Articles of Incorporation") as currently in effect and as hereinafter amended.
SECOND: The following provisions are all the provisions of the Articles of
Incorporation currently in effect and as hereinafter amended:
ARTICLE I
INCORPORATOR
The undersigned, Billie Swaboda, whose address is 32 South Street,
Baltimore, Maryland 21202, being at least 18 years of age, does hereby form a
corporation under the general laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation is: People's Preferred Capital Corporation.
ARTICLE III
PURPOSE
The purposes for which the Corporation is formed are to engage in any
lawful act or activity (including, without limitation or obligation, engaging in
business as a real estate investment trust under the Internal Revenue Code of
1986, as amended, or any successor statute (the "Code")) for which corporations
may be organized under the general laws of the State of Maryland as now or
hereafter in force. For purposes of these Articles, "REIT" means a real estate
investment trust under Sections 856 through 860 of the Code.
<PAGE>
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 the Corporation in the State of Maryland is The
Corporation Trust Incorporated, whose post address is 32 South Street,
Baltimore, Maryland 21202. The resident agent is a corporation in the State of
Maryland.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
SECTION 5.1 NUMBER OF DIRECTORS. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. The
number of directors of the Corporation initially shall be seven, which number
may be increased or decreased pursuant to the Bylaws, but shall never be less
than the minimum number required by the Maryland General Corporation Law (the
"MGCL"). At all times that any shares of Series A Preferred Stock (as herein
defined) are outstanding, at least two of the directors shall be Independent
Directors (as defined herein). The names of the directors who shall serve until
the first annual meeting of stockholders and until their successors are duly
elected and qualify are:
Henry Peters
Rudolf P. Guenzel
J. Michael Holmes
Gerald Jervis
Robert W. MacDonald
David Honda
John F. Davis
These directors may increase the number of directors and may fill any
vacancy, whether resulting from an increase in the number of directors or
otherwise, on the Board of Directors occurring before the first annual meeting
of stockholders in the manner provided in the Bylaws.
SECTION 5.2 EXTRAORDINARY ACTIONS. Except as specifically provided in
Section 6.6, notwithstanding any provision of law permitting or requiring any
action to be taken or authorized by the affirmative vote of the holders of a
greater number of votes, any such action shall be effective and valid if taken
or authorized by the affirmative vote of holders of shares entitled to cast a
majority of all the votes entitled to be cast on the matter.
2
<PAGE>
SECTION 5.3 AUTHORIZATION BY BOARD OF STOCK ISSUANCE. The Board of
Directors may authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any class or
series, whether now or hereafter authorized, for such consideration as the Board
of Directors may deem advisable (or without consideration in the case of a stock
split or stock dividend), subject to such restrictions or limitations, if any,
as may be set forth in the Articles of Incorporation or the Bylaws.
SECTION 5.4 PREEMPTIVE RIGHTS. Except as may be provided by the Board of
Directors in setting the terms of classified or reclassified shares of stock
pursuant to Section 6.4, no holder of shares of stock of the Corporation shall,
as such holder, have any preemptive right to purchase or subscribe for any
additional shares of stock of the Corporation, any security convertible into an
additional issue of stock of the Corporation, or any other security of the
Corporation which it may issue or sell.
SECTION 5.5 INDEMNIFICATION.
SECTION 5.5.1 GENERAL. The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, including actions by or in the
right of the Corporation, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation or any predecessor of the
Corporation, or who, while acting as such, is or was serving at the request of
the Corporation or any predecessor of the Corporation as a director, officer,
partner, trustee, employee or agent of another corporation (foreign or
domestic), partnership, joint venture, trust, other enterprise or employee
benefit plan, against expenses (including attorney's fees), judgments, fines,
excise taxes and amounts paid in settlement actually and reasonably incurred by
such person in connection with such action, suit or proceeding to the full
extent authorized by the MGCL in effect from time to time, provided that the
Corporation shall not be liable for any amount which may be due to any person in
connection with a settlement of any action, suit or proceeding effected without
its prior written consent or any action, suit or proceeding initiated by any
person seeking indemnification hereunder (other than to enforce the requirements
of this Section 5.5.1) without its prior written consent.
SECTION 5.5.2 ADVANCEMENT OF EXPENSES. Reasonable expenses incurred
by a director, officer, employee or agent of the Corporation in defending a
civil, administrative, investigative or criminal action, suit or proceeding
described in Section 5.5.1 of this Section 5.5 shall be paid by the Corporation
in advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors only upon receipt by the Corporation of (i)
a written affirmation by the person of such person's good faith belief that the
standard of conduct necessary for indemnification by the Corporation under
Section 5.5.1 of this Section 5.5 has been met and (ii) a written undertaking by
or on behalf of such person to repay such amount if it shall ultimately be
determined that the applicable standard of conduct has not been met or the
person is not otherwise entitled to be indemnified by the Corporation.
3
<PAGE>
SECTION 5.5.3 OTHER RIGHTS AND REMEDIES. The indemnification and
advancement of expenses provided by this Section 5.5 shall not be deemed to
exclude any other rights to which those seeking indemnification or advancement
of expenses may be entitled under the MGCL in effect from time to time, both as
to actions in their official capacity and as to actions in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person, provided that no
indemnification shall be made to or on behalf of an individual if a judgment or
other final adjudication establishes that his acts or omissions relate to
matters for which the liability of directors and officers cannot be restricted
or limited under the MGCL in effect from time to time.
SECTION 5.5.4 INSURANCE. Upon resolution passed by the Board of
Directors, the Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or who, while acting as such, is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation (foreign or domestic), partnership, joint venture, trust,
other enterprise or employee benefit plan, against any liability asserted
against and incurred by him in any such capacity or arising out of his position,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Section 5.5 or the Bylaws of the
Corporation.
SECTION 5.5.5 SECURITY FUND; INDEMNITY AGREEMENTS. By action of the
Board of Directors (notwithstanding their interest in the transaction), the
Corporation may create and fund a trust fund or fund of any nature, and may
enter into agreements with its directors, officers, employees and agents for the
purpose of securing or insuring in any manner its obligation to indemnify or
advance expenses provided for in this Section 5.5.
SECTION 5.5.6 MODIFICATION. The duties of the Corporation to
indemnify and to advance expenses to any persons as provided in this Section 5.5
shall be in the nature of a contract between the Corporation and each such
person, and no amendment or repeal of any provision of this Section 5.5 shall
alter, to the detriment of such person, the right of such person to the advance
of expenses or indemnification related to a claim based on an act or failure to
act which took place prior to such amendment or repeal.
SECTION 5.6 DETERMINATIONS BY BOARD. The determination as to any of the
following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with the Articles of Incorporation and in the
absence of actual receipt of an improper benefit in money, property or services
or active and deliberate dishonesty established by a court, shall be final and
conclusive and shall be binding upon the Corporation and every holder of shares
of its stock: the amount of the net income of the Corporation for any period and
the amount of assets at any time legally available for the payment of dividends,
redemption of its stock or the payment of other distributions on its stock; the
amount of paid-in surplus, net assets, other surplus, annual or other net
profit, net assets in excess of capital, undivided profits or excess of profits
over losses
4
<PAGE>
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 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 9.75% Non-Cumulative
Exchangeable Preferred Stock, Series A, $.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
5
<PAGE>
conditions of redemption as set forth in Section 6.6. The aggregate par value of
all authorized shares of stock having par value is $80,000.
SECTION 6.2 COMMON STOCK. Subject to the provisions of Article VII, each
share of Common Stock shall entitle the holder thereof to one vote. The Board of
Directors may reclassify any unissued shares of Common Stock from time to time
in one or more classes or series of stock.
SECTION 6.3 PREFERRED STOCK. The Board of Directors may classify any
unissued shares of Preferred Stock and reclassify any previously classified but
unissued shares of Preferred Stock of any series from time to time, in one or
more series of stock.
SECTION 6.4 CLASSIFIED OR RECLASSIFIED SHARES. Prior to issuance of
classified or reclassified shares of any class or series, the Board of Directors
by resolution shall: (a) designate that class or series to distinguish it from
all other classes and series of stock of the Corporation; (b) specify the number
of shares to be included in the class or series; (c) set or change, subject to
the provisions of Article VII and subject to the express terms of any class or
series of stock of the Corporation outstanding at the time, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms and conditions of
redemption for each class or series; and (d) cause the Corporation to file
articles supplementary with the State Department of Assessments and Taxation of
Maryland ("SDAT"). Any of the terms of any class or series of stock set or
changed pursuant to clause (c) of this Section 6.4 may be made dependent upon
facts or events ascertainable outside the Articles of Incorporation (including
determinations by the Board of Directors or other facts or events within the
control of the Corporation) and may vary among holders thereof, provided that
the manner in which such facts, events or variations shall operate upon the
terms of such class or series of stock is clearly and expressly set forth in the
articles supplementary filed with the SDAT.
SECTION 6.5 ARTICLES OF INCORPORATION AND BYLAWS. All persons who shall
acquire stock in the Corporation shall acquire the same subject to the
provisions of the Articles of Incorporation and the Bylaws.
SECTION 6.6 SERIES A PREFERRED STOCK.
SECTION 6.6.1 LIQUIDATION VALUE AND RANK. Each Series A Preferred
Share shall have a stated liquidation value of $25.00 per share, plus an amount
per share equal to any dividends authorized and declared but unpaid, without
interest. The Series A Preferred Shares shall rank prior to all classes or
series of Common Stock of the Corporation and to all other classes and series of
equity securities of the Corporation now or hereafter authorized, issued or
outstanding (the Common Stock and such other classes and series of equity
securities of the Corporation are collectively referred to herein as the "Junior
Stock"), other than any class or series of equity securities of the Corporation
expressly designated 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
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Corporation. The Series A Preferred Shares shall be junior to the creditors of
the Corporation. The Series A Preferred Shares shall be subject to the creation
of Senior Stock, Parity Stock and Junior Stock to the extent not expressly
prohibited by the Articles of Incorporation.
SECTION 6.6.2 DIVIDENDS.
(a) PAYMENT OF DIVIDENDS. Holders of Series A Preferred Shares shall
be entitled to receive, if, when and as authorized and declared by the
Board of Directors, out of assets of the Corporation legally available
therefor, noncumulative cash dividends at an annual rate of 9.75% of the
$25.00 stated liquidation value per share ($2.4375 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 December 31,
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 $0.609375. 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 payments on the Series A Preferred Shares authorized
and declared by the Board of Directors which may
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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.
No dividend shall be paid or set aside for holders of Series A
Preferred Shares for any Dividend Period unless full dividends have been
paid or set aside for the holders of Senior Stock as to dividends for such
Dividend Period.
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(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 October 15, 2002. On or after October 15, 2002, subject to
receipt of any required regulatory approvals, the Series A Preferred
Shares may be redeemed in cash by the Corporation or any successor or
acquiring or resulting entity at its option, in whole or in part, at any
time or from time to time, upon notice as provided in subsection (d) of
this Section 6.6.3, at the redemption price of $25.00 per share, plus
authorized, declared and unpaid dividends to the date fixed for
redemption, without interest.
The aggregate redemption price payable to each holder of record of
Series A Preferred Shares to be redeemed shall be rounded to the nearest
cent ($0.01).
If less than all of the outstanding Series A Preferred Shares are to
be redeemed, the Corporation will select those shares to be redeemed PRO
RATA, by lot or by such other methods as the Board of Directors in its
sole discretion determines to be equitable, provided that such method
satisfies any applicable requirements of any securities exchange or
quotation system on which the Series A Preferred Shares are then listed or
quoted. If redemption is being effected by the Corporation, on and after
the date fixed for redemption, dividends shall cease to accrue on the
Series A Preferred Shares called for redemption, and they shall be deemed
to cease to be outstanding, provided that the redemption price (including
any authorized and declared but unpaid dividends to the date fixed for
redemption, without interest) has been duly paid or provided for. If
redemption is being effected by an entity other than the Corporation, on
and as of the date fixed for redemption, such entity shall be deemed to
own the Series A Preferred Shares being redeemed for all purposes of these
Articles of Incorporation, provided that the redemption price (including
the amount of any authorized and declared but unpaid dividends to the date
fixed for redemption, without interest) has been duly paid or provided
for.
(b) TAX EVENT. The Corporation will have the right, at any time upon
the occurrence of a Tax Event, to redeem the Series A Preferred Shares, in
whole, but not in part, upon notice as provided in subsection (d) of this
Section 6.6.3, at a redemption price of $25.00 per share, plus all
authorized, declared and unpaid dividends for the then-current Dividend
Period to the date fixed for redemption, without interest. As used herein,
"Tax Event" means the receipt by the Corporation of an opinion of a law
firm, experienced in such matters to the effect that, as a result of (i)
any amendment to, clarification of, or change (including any announced
prospective change) in, the laws, treatises or any
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regulations thereunder of the United States or any political subdivision
or taxing authority thereof or therein affecting taxation, (ii) any
judicial decision, official administrative pronouncement, published or
private ruling, regulatory procedure, notice or announcement (including
any notice or announcement or intent to adopt such procedures or
regulations) (each, an "Administrative Action") or (iii) any amendment to,
clarification of, or change in the official positions or the
interpretation of any such Administrative Action or any interpretation or
pronouncement that provides for a position with respect to any such
Administrative Action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court, governmental
authority or regulatory body, irrespective of the manner in which such
amendment, clarification or change is made known, which amendment,
clarification or change is effective or such pronouncement of decision is
announced on or after the date of issuance of the Series A Preferred
Shares, there is more than an insubstantial risk that (A) dividends paid
or to be paid by the Corporation with respect to the stock of the
Corporation are not, or will not be, fully deductible by the Corporation
for United States federal income tax purposes or (B) the Corporation is,
or will be, subject to more than a DE MINIMIS amount of other taxes,
duties or other governmental charges as a result of dividends paid or to
be paid by the Corporation.
(c) CHANGE OF CONTROL. In addition to the redemption provisions of
subsections (a) and (b) above and not in lieu of or in substitution
therefor, in the event of a Change of Control, subject to receipt of any
required regulatory approvals, the Series A Preferred Shares shall be
redeemable at the option of the Corporation or its successor or any
acquiring or resulting entity with respect to the Corporation (including
by any parent or subsidiary of the Corporation, any such successor, or any
such acquiring or resulting entity), as applicable, on or prior to October
15, 2002, in whole but not in part. Redemption of the Series A Preferred
Shares pursuant to this subsection (c) shall be effected by notice as
provided in subsection (d) of this Section 6.6.3, given by the Corporation
or its successor or any acquiring or resulting entity with respect to the
Corporation (including by any parent or subsidiary of the Corporation, any
such successor, or any such acquiring or resulting entity), as applicable,
at a redemption price per share equal to (i) $25.00, plus (ii) an amount
equal to any authorized, declared and unpaid dividends to the date fixed
for redemption, without interest, and, without duplication, an additional
amount equal to the amount of dividends that would be payable on the
Series A Preferred Shares in respect of the period from the first day of
the Dividend Period in which the date fixed for redemption occurs to the
date fixed for redemption (assuming all such dividends were to be
authorized and declared), plus (iii) the Applicable Premium, payable in
cash.
The aggregate redemption price payable to each holder of record of
Series A Preferred Shares to be redeemed shall be rounded to the nearest
cent ($0.01).
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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.
"Applicable Premium" means an amount equal to (A) the present value
of (1) the dividends that would be payable on the Series A Preferred
Shares in respect of the period from the date fixed for redemption through
October 15, 2002 (assuming all such dividends were to be authorized and
declared) plus (2) $25.00 (assuming such $25.00 is paid on October 15,
2002), computed using a discount rate equal to the Treasury Rate plus 75
basis points, divided by (B) $25.00.
"Business Day" means any day other than a Saturday, Sunday or a day
on which banking institutions are not required to be open in the State of
California.
"Capital Stock" of any Person means any and all shares, interests
(including partnership interests), rights to purchase, warrants, options,
participations or other equivalents of or interests in (however
designated) equity of such Person, including any Preferred Stock, but
excluding any debt securities convertible into or exchangeable for such
equity.
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"Change of Control" means the occurrence of any of the following
events:
(i) any Person other than a Permitted Holder shall be the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Securities Exchange Act of 1934, as amended), directly or
indirectly, of a majority in the aggregate of the total voting power
of the Voting Stock of People's Bank of California (the "Bank") or
SoCal Holdings, Inc. (the "Holding Company"), whether as a result of
issuance of securities of the Bank or the Holding Company, any
merger, consolidation, liquidation or dissolution of the Bank or the
Holding Company, any direct or indirect transfer of securities by a
Permitted Holder or otherwise; or
(ii) a sale, transfer, conveyance or other disposition, in a
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") or any Person
controlled, directly or indirectly, by the Bishop Estate, BIL
Securities or Arbur.
"Person" shall mean an individual, corporation, partnership,
estate, trust (including a trust qualified under Sections 401(a) or
501(c)(17) of the Code), a portion of a trust permanently set aside
for or to be used exclusively for the purposes described in Section
642(c) of the Code, association, private foundation within the
meaning of Section 509(a) of the Code, joint stock company or other
entity.
"Subsidiary" means any corporation, association, partnership
or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned, directly or indirectly, by
(i) a
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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 October 15, 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' 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
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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) 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.
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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 9.75% 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.
(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),
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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.
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.
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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 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
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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 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).
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6.6.7 INDEPENDENT DIRECTORS.
(a) NUMBER; DEFINITION. As long as any Series A Preferred Shares are
outstanding, at least two directors on the Board of Directors shall be
Independent Directors. As used herein, "Independent Director" means any
director of the Corporation who is either (i) not a current officer or
employee of the Corporation or (ii) not a current director, officer or
employee of the Bank or any affiliate of the Bank.
(b) APPROVAL OF INDEPENDENT DIRECTORS. As long as any Series A
Preferred Shares are outstanding, the Corporation may not take the
following actions without first obtaining the approval of a majority of
the Independent Directors: (i) the issuance of additional Preferred Stock
ranking on a parity with the Series A Preferred Shares, (ii) the
incurrence of debt for borrowed money in excess of 20% of the
Corporation's total stockholders' equity, (iii) the acquisition of assets
other than Mortgage Loans, Mortgage-Backed Securities or Other Authorized
Investments, (iv) the termination or modification of, or the election not
to renew, the Advisory Agreement dated October 3, 1997, by and between the
Corporation and the Bank, the Commercial Mortgage Servicing Agreement
between the Corporation and the Bank, dated October 3, 1997, the
Assignment, Assumption and Recognition Agreement between Temple Inland
Mortgage Corporation, the Bank and the Corporation, dated October 3, 1997
or the subcontracting of any duties under the Advisory Agreement or the
Commercial Mortgage Servicing Agreement to third parties unaffiliated with
the Bank, (v) any material amendment to or modification of either the
Residential Mortgage Purchase and Warranties Agreement or the Commercial
Mortgage Purchase and Warranties Agreement, each dated October 3, 1997
between the Corporation and the Bank, (vi) the determination to revoke the
Corporation's status as a real estate investment trust under Sections 856
through 860 of the Code, and (vii) any dissolution, liquidation or
termination of the Company prior to October 15, 2002. 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.
(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,
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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.
ARTICLE VII
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
SECTION 7.1 DEFINITIONS. For the purpose of this Article VII, the
following terms not otherwise defined in these Articles of Incorporation shall
have the following meanings:
OWNERSHIP LIMIT. The term "Ownership Limit" shall mean no more than 7.5%
of the aggregate initial liquidation preference of the issued and outstanding
shares of Preferred Stock of the Corporation, including the Series A Preferred
Shares. The number and value of the
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outstanding shares of Capital Stock shall be determined by the Board of
Directors of the Corporation in good faith, which determination shall be
conclusive for all purposes hereof. The Board of Directors also may determine
that compliance with any restriction or limitation on stock ownership and
transfers set forth in this Article VII is no longer required for REIT
qualification or that, based upon then current law, such restriction or
limitation may be modified.
CONSTRUCTIVE OWNERSHIP. The term "Constructive Ownership" shall mean
ownership of Capital Stock by a Person, whether the interest in the shares of
Capital Stock is held directly or indirectly (including by a nominee), and shall
include interests that would be treated as owned through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The
terms "Constructive Owner," "Constructively Owns" and "Constructively Owned"
shall have the correlative meanings.
CAPITAL STOCK. The term "Capital Stock" shall mean all classes or series
of stock of the Corporation, including, without limitation, Common Stock and
Preferred Stock.
CHARITABLE BENEFICIARY. The term "Charitable Beneficiary" shall mean one
or more beneficiaries of the Trust as determined pursuant to Section 7.3.6,
provided that each such organization must be described in Section 501(c)(3) of
the Code and contributions to each such organization must be eligible for
deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
EXCEPTED HOLDER. The term "Excepted Holder" shall mean the Bishop Estate,
BIL Securities and Arbur and any entity controlled directly or indirectly by the
Bishop Estate, BIL Securities and Arbur, and their successors, for each of which
no Ownership Limit shall apply, and any stockholder of the Corporation who is
exempted from application of the Ownership Limit or for whom the Ownership Limit
is modified by these Articles of Incorporation or by the Board of Directors
pursuant to Section 7.2.7. Furthermore, any Person which owns or is deemed to
own shares of the Corporation by reason of the attribution of shares of the
Corporation (under certain attribution provisions of the Code) to an Excepted
Shareholder shall be treated as an Excepted Shareholder.
INITIAL DATE. The term "Initial Date" shall mean the date upon which the
Articles of Incorporation containing this Article VII are filed with the SDAT.
MARKET PRICE. The term "Market Price" on any date shall mean, with respect
to any class or series of outstanding shares of Capital Stock, the Closing Price
for such Capital Stock on such date. The "Closing Price" on any date shall mean
the last sale price for such Capital Stock, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, for such Capital Stock, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the principal national securities exchange on which such
Capital Stock is listed or admitted to trading or, if such Capital Stock is not
listed or admitted to trading on any national securities exchange, the last
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quoted price, or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System or, if such system is no
longer in use, the principal other automated quotation system that may then be
in use or, if such Capital Stock is not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in such Capital Stock selected by the Board of
Directors of the Corporation or, in the event that no trading price is available
for such Capital Stock, the fair market value of the Capital Stock, as
determined in good faith by the Board of Directors of the Corporation.
PROHIBITED OWNER. The term "Prohibited Owner" shall mean, with respect to
any purported Transfer, any Person who, but for the provisions of Section 7.2.1,
would own or Constructively Own shares of Preferred Stock in violation of this
Article VII, and if appropriate in the context, shall also mean any Person who
would have been the record owner of the shares that the Prohibited Owner would
have so owned.
RESTRICTION TERMINATION DATE. The term "Restriction Termination Date"
shall mean the first day after the Initial Date on which the Corporation
determines pursuant to Section 5.7 of the Articles of Incorporation that it is
no longer in the best interests of the Corporation to attempt to, or continue
to, qualify as a REIT.
TRANSFER. The term "Transfer" shall mean any issuance, sale, transfer,
gift, assignment, devise or other disposition, as well as any other event that
causes any Person to acquire Constructive Ownership of Preferred Stock or the
right to vote or receive dividends on Preferred Stock, or any agreement to take
any such actions or cause any such events, including (a) the granting or
exercise of any option (or any disposition of any option), (b) any disposition
of any securities or rights convertible into or exchangeable for Preferred Stock
or any interest in Preferred Stock or any exercise of any such conversion or
exchange right, (c) transfers of interests in other entities that result in
changes in Constructive Ownership of Preferred Stock and (d) the transfer of any
shares of Preferred Stock pursuant to a waiver of the Ownership Limit under
Section 7.2.7.; in each case, whether voluntary or 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.
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SECTION 7.2 CAPITAL STOCK.
SECTION 7.2.1 OWNERSHIP LIMITATIONS. During the period commencing on
the Initial Date and prior to the Restriction Termination Date:
(a) BASIC RESTRICTIONS.
(i) No Person, other than an Excepted Holder, shall
Constructively Own shares of Preferred Stock in excess of the
Ownership Limit.
(ii) Notwithstanding any other provisions contained
herein, any Transfer of shares of Preferred Stock that, if
effective, would result in the Preferred Stock being beneficially
owned by less than 100 Persons (determined under the principles of
Section 856(a)(5) of the Code) shall be VOID AB INITIO, and the
intended transferee shall acquire no rights in such shares of
Preferred Stock.
(b) TRANSFER IN TRUST. If any Transfer of shares of Preferred
Stock occurs which, if effective, would result in any Person
Constructively Owning shares of Preferred Stock in violation of Section
7.2.1(a)(i),
(i) then that number of shares of the Preferred Stock
the Constructive Ownership of which otherwise would cause such
Person to violate Section 7.2.1(a)(i) (rounded up to the nearest
whole share) shall be automatically transferred to a Trust for the
benefit of a Charitable Beneficiary, as described in Section 7.3,
effective as of the close of business on the Business Day prior to
the date of such Transfer, and such Person shall acquire no rights
in such shares; or
(ii) if the transfer to the Trust described in clause
(i) of this sentence would not be effective for any reason to
prevent the violation of Section 7.2.1(a)(i), then the Transfer of
that number of shares of Preferred Stock that otherwise would cause
any Person to violate Section 7.2.1(a)(i) 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
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result in the transfer to the Trust described above, and, where applicable, such
Transfer (or other event) shall be VOID AB INITIO as provided above irrespective
of any action (or non-action) by the Board of Directors or a committee thereof.
SECTION 7.2.3 NOTICE OF RESTRICTED TRANSFER. Any Person who acquires
or attempts or intends to acquire Ownership or Constructive Ownership of shares
of Preferred Stock that will or may violate Section 7.2.1(a), or any Person who
would have owned shares of Preferred Stock that resulted in a transfer to the
Trust pursuant to the provisions of Section 7.2.1(b) shall immediately give
written notice to the Corporation of such event, or in the case of such a
proposed or attempted transaction, give at least 15 days prior written notice,
and shall provide to the Corporation such other information as the Corporation
may request in order to determine the effect, if any, of such Transfer on the
Corporation's status as a REIT.
SECTION 7.2.4 OWNERS REQUIRED TO PROVIDE INFORMATION. From the
Initial Date and prior to the Restriction Termination Date:
(a) every owner of more than one percent (or such lower
percentage as required by the Code or the Treasury Regulations promulgated
thereunder) of the outstanding shares of Capital Stock, within 30 days of
June 30 and December 31 of each year, shall give written notice to the
Corporation stating the name and address of such owner, the number of
shares of Capital Stock and other shares of the Capital Stock
Constructively Owned and a description of the manner in which such shares
are held. Each such owner shall provide to the Corporation such additional
information as the Corporation may request in order to determine the
effect, if any, of such Constructive Ownership on the Corporation's status
as a REIT and to ensure compliance with the Ownership Limit.
(b) each Person who is a Constructive Owner of Capital Stock
and each Person (including the stockholder of record) who is holding
Capital Stock for a 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
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to it. In the event Section 7.2 or 7.3 requires an action by the Board of
Directors and the Articles of Incorporation fails to provide specific guidance
with respect to such action, the Board of Directors shall have the power to
determine the action to be taken so long as such action is not contrary to the
provisions of Sections 7.1, 7.2 or 7.3.
SECTION 7.2.7 EXCEPTIONS.
(a) Subject to Section 7.2.7(b), the Board of Directors of the
Corporation, in its sole discretion, may exempt a Person from the
Ownership Limit and may establish or increase an Ownership Limit for such
Person if it receives a ruling from the Internal Revenue Service, or an
opinion of counsel, in either case in form and substance satisfactory to
the Board of Directors in its sole discretion, as it may deem necessary or
advisable in order to determine or ensure the Corporation's status as a
REIT. Notwithstanding the receipt of any ruling or opinion, the Board of
Directors may impose such conditions or restrictions as it deems
appropriate in connection with granting such exception.
(b) An underwriter which participates in a public offering or
a private placement of Preferred Stock (or securities convertible into or
exchangeable for Capital Stock) may own or Constructively Own shares of
Capital Stock (or securities convertible into or exchangeable for Capital
Stock) in excess of the Ownership Limit, but only to the extent necessary
to facilitate such public offering or private placement.
SECTION 7.2.8 LEGEND. Each certificate for shares of Preferred Stock
shall bear substantially the following legend:
The shares represented by this certificate are subject to
restrictions on Constructive Ownership and Transfer for the purpose
of the Corporation's maintenance of its status as a Real Estate
Investment Trust under the Internal Revenue Code of 1986, as amended
(the "Code"). Subject to certain further restrictions and except as
expressly provided in the Corporation's Articles of Incorporation,
(i) no Person may Constructively Own in excess of 7.5% of the
aggregate initial liquidation preference of the issued and
outstanding shares of Preferred Stock of the Corporation, including
the Series A Preferred Shares; and (ii) no Person may Transfer
shares of Capital Stock if such Transfer would result in the Capital
Stock of the Corporation being owned (directly or beneficially) by
fewer than 100 Persons. Any Person who attempts to Constructively
Own shares of Capital Stock which causes or will cause a Person to
Constructively Own shares of Capital Stock in excess or in violation
of the above limitations must immediately notify the Corporation. If
any of the restrictions on transfer or ownership are violated, the
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shares of Capital Stock represented hereby will be automatically
transferred to a Trustee of a Trust for the benefit of one or more
Charitable Beneficiaries. In addition, upon the occurrence of
certain events, attempted Transfers in violation of the restrictions
described above may be VOID AB INITIO. All capitalized terms in this
legend have the meanings defined in the Articles of Incorporation of
the Corporation, as the same may be amended from time to time, a
copy of which, including the restrictions on transfer and ownership,
will be furnished to each holder of Capital Stock of the Corporation
on request and without charge.
Instead of the foregoing legend, the certificate may state that the
Corporation will furnish a full statement about certain restrictions on
transferability to a stockholder on request and without charge.
SECTION 7.3 TRANSFER OF PREFERRED STOCK IN TRUST.
SECTION 7.3.1 OWNERSHIP IN TRUST. Upon any purported Transfer or
other event that would result in a transfer of shares of Preferred Stock to a
Trust, such shares of Preferred Stock shall be deemed to have been transferred
to the Trustee as trustee of a Trust for the exclusive benefit of one or more
Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be
effective as of the close of business on the Business Day prior to the purported
Transfer or other event that results in the transfer to the Trust. The Trustee
shall be appointed by the Corporation and shall be a Person unaffiliated with
the Corporation and any Prohibited Owner. Each Charitable Beneficiary shall be
designated by the Corporation as provided in Section 7.3.6.
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
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Trustee shall have the authority (at the Trustee's sole discretion) (i) to
rescind as void any vote cast by a Prohibited Owner prior to the discovery by
the Corporation that the shares of Preferred Stock have been transferred to the
Trustee and (ii) to recast such vote in accordance with the desires of the
Trustee acting for the benefit of the Charitable Beneficiary; provided, however,
that if the Corporation has already taken irreversible corporate action, then
the Trustee shall not have the authority to rescind and recast such vote.
Notwithstanding the provisions of this Article VII, until the Corporation has
received notification that shares of Preferred Stock have been transferred into
a Trust, the Corporation shall be entitled to rely on its share transfer and
other stockholder records for purposes of preparing lists of stockholders
entitled to vote at meetings, determining the validity and authority of proxies
and otherwise conducting votes of stockholders.
SECTION 7.3.4 SALE OF SHARES BY TRUSTEE. Within 20 days of receiving
notice from the Corporation that shares of Preferred Stock have been transferred
to the Trust, the Trustee of the Trust shall sell the shares held in the Trust
to a person, designated by the Trustee, whose ownership of the shares will not
violate the ownership limitations set forth in this Article VII. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold shall terminate
and the Trustee shall distribute the net proceeds of the sale to the Prohibited
Owner and to the Charitable Beneficiary as provided in this Section 7.3.4. The
Prohibited Owner shall receive the lesser of (1) the price paid by the
Prohibited Owner for the shares or, if the Prohibited Owner did not give value
for the shares in connection with the event causing the shares to be held in the
Trust (e.g., in the case of a gift, devise or other such transaction), the
Market Price of the shares on the day of the event causing the shares to be held
in the Trust and (2) the price per share received by the Trustee from the sale
or other disposition of the shares held in the Trust. Any net sales proceeds in
excess of the amount payable to the Prohibited Owner shall be immediately paid
to the Charitable 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
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Beneficiary of the interest in the Trust such that (i) the shares of Capital
Stock held in the Trust would not violate the restrictions set forth in this
Article VII in the hands of such Charitable Beneficiary and (ii) each such
organization must be described in Section 501(c)(3) of the Code and
contributions to each such organization must be eligible for deduction under
each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
SECTION 7.4 SETTLEMENT OF TRANSACTIONS. Nothing in this Article VII shall
preclude the settlement of any transaction entered into through the facilities
of any national securities exchange or automated inter-dealer quotation system.
The fact that the settlement of any transaction is so permitted shall not negate
the effect of any other provision of this Article VII and any transferee in such
a transaction shall be subject to all of the provisions and limitations set
forth in this Article VII.
SECTION 7.5 ENFORCEMENT. The Corporation is authorized specifically to
seek equitable relief, including injunctive relief, to enforce the provisions of
this Article VII.
SECTION 7.6 NON-WAIVER. No delay or failure on the part of the Corporation
or the Board of Directors in exercising any right hereunder shall operate as a
waiver of any right of the Corporation or the Board of Directors, as the case
may be, except to the extent specifically waived in writing.
ARTICLE VIII
AMENDMENTS
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
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of Incorporation or Bylaws inconsistent with this Article IX, shall apply to or
affect in any respect the applicability of the preceding sentence with respect
to any act or failure to act which occurred prior to such amendment, repeal or
adoption.
ARTICLE X
NON-APPLICABILITY OF MARYLAND GENERAL CORPORATION LAW TO
CERTAIN BUSINESS COMBINATIONS AND CONTROL
SHARE ACQUISITIONS
The provisions of Title 3, Subtitle 6 of the Corporations and Associations
Article of the Annotated Code of Maryland (or any successor statute) shall not
apply to any business combination by the Bank and any present or future
affiliates thereof. This Article X may be altered, repealed, in whole or in
part, at any time, provided that such repeal shall not affect any business
combinations that have been consummated or are subject to an existing agreement
entered into prior to such alteration or repeal.
The provisions of Title 3, Subtitle 7 of the Corporations and Associations
Article of the Annotated Code of Maryland (or any successor statute) shall not
apply to any acquisition by the Bank and any present or future affiliates
thereof of shares of stock of the Corporation. This Article X may be repealed,
in whole or in part, at any time, whether before or after an acquisition of
control shares and, upon such repeal, may, to the extent provided by any
successor article or bylaw, apply to any prior or subsequent control share
acquisition.
THIRD: The amendment to and restatement of the Articles of Incorporation
as hereinabove set forth has been duly advised by the Board of Directors and
approved by the stockholders of the Corporation as required by law.
FOURTH: The current address of the principal office of the Corporation in
the State of Maryland is as set forth in Article IV of the foregoing amendment
and restatement of the Articles of Incorporation.
FIFTH: The name and address of the Corporation's current resident agent is
as set forth in Article IV of the foregoing amendment and restatement of the
Articles of Incorporation.
SIXTH: The number of directors of the Corporation and the names of those
currently in office are as set forth in Article V of the foregoing amendment and
restatement of the Articles of Incorporation.
SEVENTH: The total number of shares of stock which the Corporation had
authority to issue immediately prior to this amendment and restatement was
10,000 shares, $.01 par value per share, all of one class. The aggregate par
value of all shares of stock having par value was $100.
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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 1st day of October, 1997.
ATTEST: PEOPLE'S PREFERRED CAPITAL
CORPORATION
/s/ J. Michael Holmes
- ------------------------- By: /s/ Rudolf P. Guenzel
Secretary --------------------------
President
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Exhibit 3.(a)(ii)
PEOPLE'S PREFERRED CAPITAL CORPORATION
ARTICLES OF AMENDMENT AND RESTATEMENT
FIRST: People's Preferred Capital Corporation, a Maryland corporation (the
"Corporation"), desires to amend and restate its Articles of Incorporation (the
"Articles of Incorporation") as currently in effect and as hereinafter amended.
SECOND: The following provisions are all the provisions of the Articles of
Incorporation currently in effect and as hereinafter amended:
ARTICLE I
INCORPORATOR
The undersigned, Billie Swaboda, whose address is 32 South Street,
Baltimore, Maryland 21202, being at least 18 years of age, does hereby form a
corporation under the general laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation is: People's Preferred Capital Corporation.
ARTICLE III
PURPOSE
The purposes for which the Corporation is formed are to engage in any
lawful act or activity (including, without limitation or obligation, engaging in
business as a real estate investment trust under the Internal Revenue Code of
1986, as amended, or any successor statute (the "Code")) for which corporations
may be organized under the general laws of the State of Maryland as now or
hereafter in force. For purposes of these Articles, "REIT" means a real estate
investment trust under Sections 856 through 860 of the Code.
<PAGE>
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 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 shall be six, which number may be
increased or decreased pursuant to the Bylaws, but shall never be less than the
minimum number required by the Maryland General Corporation Law (the "MGCL"). At
all times that any shares of Series A Preferred Stock (as herein defined) are
outstanding, at least two of the directors shall be Independent Directors (as
defined herein). The names of the directors who shall serve until the next
annual meeting of stockholders and until their successors are duly elected and
qualify are:
Rudolf P. Guenzel
J. Michael Holmes
Robert W. McDonald
John F. Davis
David S. Honda
Timothy B. Matz
---------------------
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 next annual meeting of
stockholders in the manner provided in the Bylaws.
SECTION 5.2 EXTRAORDINARY ACTIONS. Except as specifically provided in
Sections 6.6 or 6.7, 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,
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whether now or hereafter authorized, or securities or rights convertible into
shares of its stock of any class or series, whether now or hereafter authorized,
for such consideration as the Board of Directors may deem advisable (or without
consideration in the case of a stock split or stock dividend), subject to such
restrictions or limitations, if any, as may be set forth in the Articles of
Incorporation or the Bylaws.
SECTION 5.4 PREEMPTIVE RIGHTS. Except as may be provided by the Board of
Directors in setting the terms of classified or reclassified shares of stock
pursuant to Section 6.4, no holder of shares of stock of the Corporation shall,
as such holder, have any preemptive right to purchase or subscribe for any
additional shares of stock of the Corporation, any security convertible into an
additional issue of stock of the Corporation, or any other security of the
Corporation which it may issue or sell.
SECTION 5.5 INDEMNIFICATION.
SECTION 5.5.1 GENERAL. The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, including actions by or in the
right of the Corporation, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the Corporation or any predecessor of the
Corporation, or who, while acting as such, is or was serving at the request of
the Corporation or any predecessor of the Corporation as a director, officer,
partner, trustee, employee or agent of another corporation (foreign or
domestic), partnership, joint venture, trust, other enterprise or employee
benefit plan, against expenses (including attorney's fees), judgments, fines,
excise taxes and amounts paid in settlement actually and reasonably incurred by
such person in connection with such action, suit or proceeding to the full
extent authorized by the MGCL in effect from time to time, provided that the
Corporation shall not be liable for any amount which may be due to any person in
connection with a settlement of any action, suit or proceeding effected without
its prior written consent or any action, suit or proceeding initiated by any
person seeking indemnification hereunder (other than to enforce the requirements
of this Section 5.5.1) without its prior written consent.
SECTION 5.5.2 ADVANCEMENT OF EXPENSES. Reasonable expenses incurred
by a director, officer, employee or agent of the Corporation in defending a
civil, administrative, investigative or criminal action, suit or proceeding
described in Section 5.5.1 of this Section 5.5 shall be paid by the Corporation
in advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors only upon receipt by the Corporation of (i)
a written affirmation by the person of such person's good faith belief that the
standard of conduct necessary for indemnification by the Corporation under
Section 5.5.1 of this Section 5.5 has been met and (ii) a written undertaking by
or on behalf of such person to repay such amount if it shall ultimately be
determined that the applicable standard of conduct has not been met or the
person is not otherwise entitled to be indemnified by the Corporation.
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SECTION 5.5.3 OTHER RIGHTS AND REMEDIES. The indemnification and
advancement of expenses provided by this Section 5.5 shall not be deemed to
exclude any other rights to which those seeking indemnification or advancement
of expenses may be entitled under the MGCL in effect from time to time, both as
to actions in their official capacity and as to actions in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person, provided that no
indemnification shall be made to or on behalf of an individual if a judgment or
other final adjudication establishes that his acts or omissions relate to
matters for which the liability of directors and officers cannot be restricted
or limited under the MGCL in effect from time to time.
SECTION 5.5.4 INSURANCE. Upon resolution passed by the Board of
Directors, the Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or who, while acting as such, is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation (foreign or domestic), partnership, joint venture, trust,
other enterprise or employee benefit plan, against any liability asserted
against and incurred by him in any such capacity or arising out of his position,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Section 5.5 or the Bylaws of the
Corporation.
SECTION 5.5.5 SECURITY FUND; INDEMNITY AGREEMENTS. By action of the
Board of Directors (notwithstanding their interest in the transaction), the
Corporation may create and fund a trust fund or fund of any nature, and may
enter into agreements with its directors, officers, employees and agents for the
purpose of securing or insuring in any manner its obligation to indemnify or
advance expenses provided for in this Section 5.5.
SECTION 5.5.6 MODIFICATION. The duties of the Corporation to
indemnify and to advance expenses to any persons as provided in this Section 5.5
shall be in the nature of a contract between the Corporation and each such
person, and no amendment or repeal of any provision of this Section 5.5 shall
alter, to the detriment of such person, the right of such person to the advance
of expenses or indemnification related to a claim based on an act or failure to
act which took place prior to such amendment or repeal.
SECTION 5.6 DETERMINATIONS BY BOARD. The determination as to any of the
following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with the Articles of Incorporation and in the
absence of actual receipt of an improper benefit in money, property or services
or active and deliberate dishonesty established by a court, shall be final and
conclusive and shall be binding upon the Corporation and every holder of shares
of its stock: the amount of the net income of the Corporation for any period and
the amount of assets at any time legally available for the payment of dividends,
redemption of its stock or the payment of other distributions on its stock; the
amount of paid-in surplus, net assets, other surplus, annual or other net
profit, net assets in excess of capital, undivided profits or excess of profits
over losses on sales of assets; the amount, purpose, time of creation, increase
or decrease, alteration or cancellation of any
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reserves or charges and the propriety thereof (whether or not any obligation or
liability for which such reserves or charges shall have been created, shall have
been paid or discharged); the fair value, or any sale, bid or asked price to be
applied in determining the fair value, of any asset owned or held by the
Corporation; and any matters relating to the acquisition, holding and
disposition of any assets by the Corporation.
SECTION 5.7 REIT QUALIFICATION. The Board of Directors shall use its
reasonable best efforts to take such actions as are necessary or appropriate to
qualify and preserve the status of the Corporation as a REIT. If the Board of
Directors determines that it is no longer in the best interests of the
Corporation to continue to be qualified as a REIT, the Board of Directors may
revoke or otherwise terminate the Corporation's REIT election pursuant to
Section 856(g) of the Code; provided, however, that as long as any shares of
Series A or Series B Preferred Stock (both 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 1,650,000 shares are classified as 9.75% Non-Cumulative
Exchangeable Preferred Stock, Series A, $.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 and of which ____ shares are classified as ____% Non-
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Cumulative Exchangeable Preferred Stock, Series B, $.01 par value per share
("Series B 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 7.6. The aggregate par value of all authorized shares of stock
having par value is $80,000.
SECTION 6.2 COMMON STOCK. Subject to the provisions of Article VII, each
share of Common Stock shall entitle the holder thereof to one vote. The Board of
Directors may reclassify any unissued shares of Common Stock from time to time
in one or more classes or series of stock.
SECTION 6.3 PREFERRED STOCK. The Board of Directors may classify any
unissued shares of Preferred Stock and reclassify any previously classified but
unissued shares of Preferred Stock of any series from time to time, in one or
more series of stock.
SECTION 6.4 CLASSIFIED OR RECLASSIFIED SHARES. Prior to issuance of
classified or reclassified shares of any class or series, the Board of Directors
by resolution shall: (a) designate that class or series to distinguish it from
all other classes and series of stock of the Corporation; (b) specify the number
of shares to be included in the class or series; (c) set or change, subject to
the provisions of Article VII and subject to the express terms of any class or
series of stock of the Corporation outstanding at the time, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms and conditions of
redemption for each class or series; and (d) cause the Corporation to file
articles supplementary with the State Department of Assessments and Taxation of
Maryland ("SDAT"). Any of the terms of any class or series of stock set or
changed pursuant to clause (c) of this Section 6.4 may be made dependent upon
facts or events ascertainable outside the Articles of Incorporation (including
determinations by the Board of Directors or other facts or events within the
control of the Corporation) and may vary among holders thereof, provided that
the manner in which such facts, events or variations shall operate upon the
terms of such class or series of stock is clearly and expressly set forth in the
articles supplementary filed with the SDAT.
SECTION 6.5 ARTICLES OF INCORPORATION AND BYLAWS. All persons who shall
acquire stock in the Corporation shall acquire the same subject to the
provisions of the Articles of Incorporation and the Bylaws.
SECTION 6.6 SERIES A PREFERRED STOCK.
SECTION 6.6.1 LIQUIDATION VALUE AND RANK. Each Series A Preferred
Share shall have a stated liquidation value of $25.00 per share, plus an amount
per share equal to any dividends authorized and declared but unpaid, without
interest. The Series A Preferred Shares shall rank prior to all classes or
series of Common Stock of the Corporation and to all other classes and series of
equity securities of the Corporation now or hereafter authorized, issued or
outstanding (the Common Stock and such other classes and series of equity
securities of the Corporation are collectively referred to herein as the "Junior
Stock"), other than any class or series of equity securities of the
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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 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 9.75% of the
$25.00 stated liquidation value per share ($2.4375 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 December 31,
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 $0.609375. 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).
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Holders of the Series A Preferred Shares shall not be entitled to
any interest, or any sum of money in lieu of interest, in respect of any
dividend payment or payments on the Series A Preferred Shares authorized
and declared by the Board of Directors which may be unpaid. Any dividend
payment made on the Series A Preferred Shares shall first be credited
against the earliest authorized and declared but unpaid cash dividend with
respect to the Series A Preferred Shares.
(b) DIVIDENDS NONCUMULATIVE. The right of holders of Series A
Preferred Shares to receive dividends is noncumulative. Accordingly, if
the Board of Directors does not authorize or declare a dividend payable in
respect of any Dividend Period, holders of Series A Preferred Shares shall
have no right to receive a dividend in respect of such Dividend Period,
and the Corporation shall have no obligation to pay a dividend in respect
of such Dividend Period, whether or not dividends are authorized and
declared and payable in respect of any future Dividend Period.
(c) PRIORITY AS TO DIVIDENDS. No full dividends or other
distributions shall be authorized, declared or paid or set apart for
payment on any Parity Stock or Junior Stock for any Dividend Period unless
full dividends have been or contemporaneously are authorized, declared and
paid or authorized and declared and a sum sufficient for the payment
thereof set apart for such payment on the Series A Preferred Shares for
(i) the immediately preceding Dividend Period, in the case of Parity
Stock, and (ii) such then-current Dividend Period, in the case of Junior
Stock. When dividends are not paid in full (or a sum sufficient for such
full payment is not so set apart) for any Dividend Period on the Series A
Preferred Shares and any Parity Stock, dividends authorized and declared
on the Series A Preferred Shares and Parity Stock shall only be authorized
and declared PRO RATA based upon the respective amounts that would have
been paid on the Series A Preferred Shares and such Parity Stock had
dividends been authorized and declared in full.
In addition to the foregoing restriction, the Corporation shall not
authorize, declare, pay or set apart funds for any dividends or other
distributions (other than in Common Stock or other Junior Stock) with
respect to any Common Stock or other Junior Stock of the Corporation or
repurchase, redeem or otherwise acquire, or set apart funds for
repurchase, redemption or other acquisition of, any Common Stock or other
Junior Stock through a sinking fund or otherwise, unless and until (i) the
Corporation shall have authorized, declared and paid full dividends on the
Series A Preferred Shares for the four (4) most recent preceding Dividend
Periods (or such lesser number of Dividend Periods during which Series A
Preferred Shares have been outstanding) or sufficient funds have been paid
over to the dividend disbursing agent of the Corporation for payment of
such dividends and (ii) the Corporation has authorized and declared a cash
dividend on the Series A Preferred Shares at the 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 Senior Stock as to dividends for such
Dividend Period.
(d) Any reference to "dividends" or "distributions" in this Section
6.6.2 shall not be deemed to include any distribution made in connection
with any voluntary or involuntary dissolution, liquidation or winding up
of the Corporation.
SECTION 6.6.3 OPTIONAL REDEMPTION.
(a) GENERAL. The Series A Preferred Shares are not subject to
mandatory redemption, and, except as hereinafter provided in Section
6.6.3(b) below, are not subject to optional redemption by the Corporation
prior to October 15, 2002. On or after October 15, 2002, subject to
receipt of any required regulatory approvals, the Series A Preferred
Shares may be redeemed in cash by the Corporation or any successor or
acquiring or resulting entity at its option, in whole or in part, at any
time or from time to time, upon notice as provided in subsection (d) of
this Section 6.6.3, at the redemption price of $25.00 per share, plus
authorized, declared and unpaid dividends to the date fixed for
redemption, without interest.
The aggregate redemption price payable to each holder of record of
Series A Preferred Shares to be redeemed shall be rounded to the nearest
cent ($0.01).
If less than all of the outstanding Series A Preferred Shares are to
be redeemed, the Corporation will select those shares to be redeemed PRO
RATA, by lot or by such other methods as the Board of Directors in its
sole discretion determines to be equitable, provided that such method
satisfies any applicable requirements of any securities exchange or
quotation system on which the Series A Preferred Shares are then listed or
quoted. If redemption is being effected by the Corporation, on and after
the date fixed for redemption, dividends shall cease to accrue on the
Series A Preferred Shares called for redemption, and they shall be deemed
to cease to be outstanding, provided that the redemption price (including
any authorized and declared but unpaid dividends to the date fixed for
redemption, without interest) has been duly paid or provided for. If
redemption is being effected by an entity other than the Corporation, on
and as of the date fixed for redemption, such entity shall be deemed to
own the Series A Preferred Shares being redeemed for all purposes of these
Articles of Incorporation, provided that the redemption price (including
the amount of any authorized and declared but unpaid dividends to the date
fixed for redemption, without interest) has been duly paid or provided
for.
(b) TAX EVENT. The Corporation will have the right, at any time upon
the occurrence of a Tax Event, to redeem the Series A Preferred Shares, in
whole, but not in part, upon notice as provided in subsection (d) of this
Section 6.6.3, at a redemption price of $25.00 per share, plus all
authorized, declared and unpaid dividends for the then-current Dividend
Period to the date fixed for redemption, without interest. As used in this
Section 6.6, "Tax
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Event" means the receipt by the Corporation of an opinion of a law firm,
experienced in such matters to the effect that, as a result of (i) any
amendment to, clarification of, or change (including any announced
prospective change) in, the laws, treatises or any regulations thereunder
of the United States or any political subdivision or taxing authority
thereof or therein affecting taxation, (ii) any judicial decision,
official administrative pronouncement, published or private ruling,
regulatory procedure, notice or announcement (including any notice or
announcement or intent to adopt such procedures or regulations) (each, an
"Administrative Action") or (iii) any amendment to, clarification of, or
change in the official positions or the interpretation of any such
Administrative Action or any interpretation or pronouncement that provides
for a position with respect to any such Administrative Action that differs
from the theretofore generally accepted position, in each case, by any
legislative body, court, governmental authority or regulatory body,
irrespective of the manner in which such amendment, clarification or
change is made known, which amendment, clarification or change is
effective or such pronouncement of decision is announced on or after the
date of issuance of the Series A Preferred Shares, there is more than an
insubstantial risk that (A) dividends paid or to be paid by the
Corporation with respect to the stock of the Corporation are not, or will
not be, fully deductible by the Corporation for United States federal
income tax purposes or (B) the Corporation is, or will be, subject to more
than a DE MINIMIS amount of other taxes, duties or other governmental
charges as a result of dividends paid or to be paid by the Corporation.
(c) CHANGE OF CONTROL. In addition to the redemption provisions of
subsections (a) and (b) above and not in lieu of or in substitution
therefor, in the event of a Change of Control, subject to receipt of any
required regulatory approvals, the Series A Preferred Shares shall be
redeemable at the option of the Corporation or its successor or any
acquiring or resulting entity with respect to the Corporation (including
by any parent or subsidiary of the Corporation, any such successor, or any
such acquiring or resulting entity), as applicable, on or prior to October
15, 2002, in whole but not in part. Redemption of the Series A Preferred
Shares pursuant to this subsection (c) shall be effected by notice as
provided in subsection (d) of this Section 6.6.3, given by the Corporation
or its successor or any acquiring or resulting entity with respect to the
Corporation (including by any parent or subsidiary of the Corporation, any
such successor, or any such acquiring or resulting entity), as applicable,
at a redemption price per share equal to (i) $25.00, plus (ii) an amount
equal to any authorized, declared and unpaid dividends to the date fixed
for redemption, without interest, and, without duplication, an additional
amount equal to the amount of dividends that would be payable on the
Series A Preferred Shares in respect of the period from the first day of
the Dividend Period in which the date fixed for redemption occurs to the
date fixed for redemption (assuming all such dividends were to be
authorized and declared), plus (iii) the Applicable Premium, payable in
cash.
The aggregate redemption price payable to each holder of record of
Series A Preferred Shares to be redeemed shall be rounded to the nearest
cent ($0.01).
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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.
"Applicable Premium" for purposes of this Section 6.6 means an
amount equal to (A) the present value of (1) the dividends that would be
payable on the Series A Preferred Shares in respect of the period from the
date fixed for redemption through October 15, 2002 (assuming all such
dividends were to be authorized and declared) plus (2) $25.00 (assuming
such $25.00 is paid on October 15, 2002), computed using a discount rate
equal to the Treasury Rate plus 75 basis points, divided by (B) $25.00.
"Business Day" means any day other than a Saturday, Sunday or a day
on which banking institutions are not required to be open in the State of
California.
"Capital Stock" of any Person means any and all shares, interests
(including partnership interests), rights to purchase, warrants, options,
participations or other equivalents of or interests in (however
designated) equity of such Person, including any Preferred Stock, but
excluding any debt securities convertible into or exchangeable for such
equity.
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"Change of Control" means the occurrence of any of the following
events:
(i) any Person other than a Permitted Holder shall be the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Securities Exchange Act of 1934, as amended), directly or
indirectly, of a majority in the aggregate of the total voting power
of the Voting Stock of People's Bank of California (the "Bank") or
SoCal Holdings, Inc. (the "Holding Company"), whether as a result of
issuance of securities of the Bank or the Holding Company, any
merger, consolidation, liquidation or dissolution of the Bank or the
Holding Company, any direct or indirect transfer of securities by a
Permitted Holder or otherwise; or
(ii) a sale, transfer, conveyance or other disposition, in a
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") or any Person
controlled, directly or indirectly, by the Bishop Estate, BIL
Securities or Arbur.
"Person" shall mean an individual, corporation, partnership,
estate, trust (including a trust qualified under Sections 401(a) or
501(c)(17) of the Code), a portion of a trust permanently set aside
for or to be used exclusively for the purposes described in Section
642(c) of the Code, association, private foundation within the
meaning of Section 509(a) of the Code, joint stock company or other
entity.
"Subsidiary" means any corporation, association, partnership
or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned, directly or indirectly, by
(i) a Person, (ii) such Person and one or more Subsidiaries of such
Person or (iii) one or more Subsidiaries of such Person.
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"Treasury Rate" for purposes of this Section 6.6 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 October 15, 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' 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.
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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) 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 9.75% 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
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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.
(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
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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.
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
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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 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
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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 authorized shares of preferred stock of the
Series A Preferred Shares or any Junior Stock or Parity Stock, shall not
be deemed to be a material and adverse change requiring a vote of the
holders of Series A Preferred Shares pursuant to this Section 6.6.6(c).
6.6.7 INDEPENDENT DIRECTORS.
(a) NUMBER; DEFINITION. As long as any Series A Preferred Shares are
outstanding, at least two directors on the Board of Directors shall be
Independent Directors. As used herein, "Independent Director" means any
director of the Corporation who is either (i) not a current officer or
employee of the Corporation or (ii) not a current director, officer or
employee of the Bank or any affiliate of the Bank.
(b) APPROVAL OF INDEPENDENT DIRECTORS. As long as any Series A
Preferred Shares are outstanding, the Corporation may not take the
following actions without first obtaining the approval of a majority of
the Independent Directors: (i) the issuance of additional Preferred Stock
ranking on a parity with the Series A Preferred Shares, (ii) the
incurrence of debt for borrowed money in excess of 20% of the
Corporation's total stockholders' equity, (iii) the acquisition of assets
other than Mortgage Loans, Mortgage-Backed Securities or Other Authorized
Investments, (iv) the termination or modification of, or the election not
to renew, the Advisory Agreement dated October 3, 1997, by and between the
Corporation and the Bank, the Commercial Mortgage Servicing Agreement
between the Corporation and the Bank, dated October 3, 1997, the
Assignment, Assumption and Recognition Agreement between Temple Inland
Mortgage Corporation, the Bank and the Corporation, dated October 3, 1997
or the subcontracting of any duties under the Advisory Agreement or the
Commercial Mortgage Servicing Agreement to third parties unaffiliated with
the Bank, (v) any material amendment to or modification of either the
Residential Mortgage Purchase and Warranties Agreement or the Commercial
Mortgage Purchase and Warranties Agreement, each dated October 3, 1997
between the Corporation and the Bank, (vi) the determination to revoke the
Corporation's status as a real estate investment trust under Sections 856
through 860 of the Code, and (vii) any dissolution, liquidation or
termination of the Company prior to October 15, 2002. So long as the
number of Independent Directors is two, the foregoing actions must be
approved by both of the Independent Directors. For purposes herein (i)
"Mortgage Loans" means whole loans secured by single-family (one- to
four-unit)
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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.
(c) DETERMINATION BY INDEPENDENT DIRECTORS. In determining whether
any proposed action requiring their consent is in the best interests of
the Corporation, the Independent Directors shall consider the interests of
holders of both the Common Stock and the Preferred Stock, including,
without limitation, the holders of the Series A Preferred Shares. In
considering the interests of the holders of the Preferred Stock,
including, without limitation, holders of the Series A Preferred Shares,
the Independent Directors shall owe the same duties that the Independent
Directors owe with respect to holders of shares of Common Stock.
SECTION 6.6.8 NO CONVERSION RIGHTS. The holders of Series A
Preferred Shares shall not have any rights to convert such shares into shares of
any other class or series of stock or into any other securities of, or any
interest in, the Corporation.
SECTION 6.6.9 NO SINKING FUND. No sinking fund shall be established
for the retirement or redemption of Series A Preferred Shares.
SECTION 6.6.10 PREEMPTIVE OR SUBSCRIPTION RIGHTS. No holder of
Series A Preferred Shares shall have any preemptive or subscription rights in
respect of any shares of the Corporation that may be issued.
SECTION 6.6.11 NO OTHER RIGHTS. The Series A Preferred Shares shall
not have any designations, preferences or relative, participating, optional or
other special rights except as set forth in the Articles of Incorporation or as
otherwise required by law.
SECTION 6.6.12 COMPLIANCE WITH APPLICABLE LAW. Declaration by the
Board of Directors and payment by the Corporation of dividends to holders of the
Series A Preferred Shares and repurchase, redemption or other acquisition by the
Corporation (or another entity as provided in subsection (a) of Section 6.6.3
hereof) of Series A Preferred Shares shall be subject in all respects to any and
all restrictions and limitations placed on dividends, redemptions or other
distributions by the Corporation (or any such other entity) under (i) laws,
regulations and regulatory conditions or limitations applicable to or regarding
the Corporation (or any such other entity) from time to time and (ii) agreements
with federal banking authorities with respect to the Corporation (or any such
other entity) from time to time in effect.
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SECTION 6.6.13 MAINTENANCE OF STATUS AS REPORTING COMPANY. As long
as any Series A Preferred Shares are outstanding, the Corporation shall maintain
its status das a reporting company under the Securities Exchange Act of 1934, as
amended ("Exchange Act").
SECTION 6.7 SERIES B PREFERRED STOCK.
SECTION 6.7.1 LIQUIDATION VALUE AND RANK. Each Series B 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 B Preferred Shares shall rank prior to all classes or
series of Common Stock of the Corporation and to all other classes and series of
equity securities of the Corporation now or hereafter authorized, issued or
outstanding, other than Parity Stock or Senior Stock, as to dividend rights and
rights upon voluntary or involuntary liquidation, winding up or dissolution of
the Corporation. The Series B Preferred Shares shall be junior to the creditors
of the Corporation. The Series B 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. The Series B Preferred
Shares shall be constituted as Parity Stock.
SECTION 6.7.2 DIVIDENDS.
(a) PAYMENT OF DIVIDENDS. Holders of Series B 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, on the next Business Day. Each authorized and declared
dividend shall be payable to holders of record of the Series B 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; provided, however,
that if a redemption date for the Series B 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 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 Series B
Dividend Period") shall commence on and include the first day upon which a
share of Series B Preferred Shares shall be issued and shall end on and
include ___________, 1999.
The amount of dividends payable on each share outstanding on a
Record Date of the Series B Preferred Shares for each full Dividend Period
shall be $________. The amount of dividends payable for the Initial Series
B Dividend Period and for any other Dividend Period which, as to a share
of Series B Preferred Shares (determined by reference to the issuance
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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, any accrued and unpaid dividends on the Series B
Preferred Shares as of the Time of Exchange shall be deemed to be accrued
and unpaid dividends on the Bank Preferred Shares.
Holders of the Series B Preferred Shares shall not be entitled to
any interest, or any sum of money in lieu of interest, in respect of any
dividend payment or payments on the Series B Preferred Shares authorized
and declared by the Board of Directors which may be unpaid. Any dividend
payment made on the Series B Preferred Shares shall first be credited
against the earliest authorized and declared but unpaid cash dividend with
respect to the Series B Preferred Shares.
(b) DIVIDENDS NONCUMULATIVE. The right of holders of Series B
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 B 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 B 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 B
Preferred Shares and any Parity Stock, dividends authorized and declared
on the Series B 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 B 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 B Preferred Shares for the four (4) most recent preceding Dividend
Periods (or such lesser number of Dividend Periods during which Series
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B 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 B 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.
No dividend shall be paid or set aside for holders of Series B
Preferred Shares for any Dividend Period unless full dividends have been
paid or set aside for the holders of Senior Stock as to dividends for such
Dividend Period.
(d) Any reference to "dividends" or "distributions" in this Section
6.7.2 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 6.7.3 OPTIONAL REDEMPTION.
(a) GENERAL. The Series B Preferred Shares are not subject to
mandatory redemption, and, except as hereinafter provided in Section
6.7.3(b) below, are not subject to optional redemption by the Corporation
prior to __________, 2004. On or after __________, 2004, subject to
receipt of any required regulatory approvals, the Series B Preferred
Shares may be redeemed in cash by the Corporation or any successor or
acquiring or resulting entity at its option, in whole or in part, at any
time or from time to time, upon notice as provided in subsection (d) of
this Section 6.7.3, at the redemption price of $25.00 per share, plus
authorized, declared and unpaid dividends to the date fixed for
redemption, without interest.
The aggregate redemption price payable to each holder of record of
Series B Preferred Shares to be redeemed shall be rounded to the nearest
cent ($0.01).
If less than all of the outstanding Series B 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 B 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 B Preferred Shares called for redemption, and they shall be deemed
to cease to be outstanding, provided that the redemption price (including
any authorized and declared but unpaid dividends to the date fixed for
redemption, without interest) has been duly paid or provided for. If
redemption is being effected by an entity other than the Corporation, on
and as of the date fixed for redemption, such entity shall be deemed to
own the Series B Preferred Shares being redeemed for all purposes of these
Articles of Incorporation, provided that the redemption price (including
the amount of any authorized
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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 B Preferred Shares, in
whole, but not in part, upon notice as provided in subsection (d) of this
Section 6.7.3, 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 in this
Section 6.7, "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 B Preferred
Shares, there is more than an insubstantial risk that (A) dividends paid
or to be paid by the Corporation with respect to the stock of the
Corporation are not, or will not be, fully deductible by the Corporation
for United States federal income tax purposes or (B) the Corporation is,
or will be, subject to more than a DE MINIMIS amount of other taxes,
duties or other governmental charges as a result of dividends paid or to
be paid by the Corporation.
(c) CHANGE OF CONTROL. In addition to the redemption provisions of
subsections (a) and (b) above and not in lieu of or in substitution
therefor, in the event of a Change of Control, subject to receipt of any
required regulatory approvals, the Series B 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
__________, 2004, in whole but not in part. Redemption of the Series B
Preferred Shares pursuant to this subsection (c) shall be effected by
notice as provided in subsection (d) of this Section 6.7.3, given by the
Corporation or its successor or any acquiring or resulting entity with
respect to the Corporation (including by any parent or subsidiary of the
Corporation, any such successor, or any such acquiring or resulting
entity), as applicable, at a redemption price per share equal to (i)
$25.00, plus (ii) an amount equal to any authorized, declared and unpaid
dividends to the date fixed for redemption, without interest, and, without
duplication, an additional amount equal to the amount of dividends that
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would be payable on the Series B 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 B Preferred Shares to be redeemed shall be rounded to the nearest
cent ($0.01).
Subject to subsection (d) of this Section 6.7.3, 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 B
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 B 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.
"Applicable Premium" for purposes of this Section 6.7 means an
amount equal to (A) the present value of (1) the dividends that would be
payable on the Series B Preferred Shares in respect of the period from the
date fixed for redemption through __________, 2004 (assuming all such
dividends were to be authorized and declared) plus (2) $25.00 (assuming
such $25.00 is paid on __________, 2004), computed using a discount rate
equal to the Treasury Rate plus 75 basis points, divided by (B) $25.00.
"Treasury Rate" for purposes of this Section 6.7 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 _______, 2004; 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)
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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.
(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 B 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 B 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 B 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 6.7.3) separate and apart from its other funds in trust for the
account of the holders of Series B 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 B
Preferred Shares so called for redemption shall not have been surrendered
for cancellation or transfer, the Series B 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 B 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 B Preferred Shares that shall
have been redeemed shall not within two (2) years (or any longer period if
required by law) after the redemption date claim any amount deposited in
trust with a bank or trust company for the redemption
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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 B Preferred Shares redeemed
pursuant to this Section 6.7.3, 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 B Preferred Shares.
SECTION 6.7.4 AUTOMATIC EXCHANGE.
(a) GENERAL. Subject to the terms and conditions of this Section
6.7.4, each Series B Preferred Share will be exchanged automatically (the
"Automatic Series B Exchange") for one newly issued share of ____%
Noncumulative Preferred Stock, Series B, par value $.01 per share (a
"Series B Bank Preferred Share"), of the Bank. The issuance of the Series
B 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 Series B Bank Preferred Shares shall be as set forth in
the Second Supplementary Section to Section 5 of the Bank's Charter which
has been filed with the OTS. All corporate action necessary for the Bank
to issue the Series B Bank Preferred Shares as of the Time of Exchange was
completed prior to or concurrently with completion of the offering of the
Series B Preferred Shares.
(b) CONDITIONS OF EXCHANGE. The Automatic Series B Exchange will
occur only if the appropriate federal regulatory agency issues a Directive
requiring an exchange of the Series B Preferred Shares for Series B Bank
Preferred Shares because of the Exchange Event.
(c) SURRENDER OF CERTIFICATES. Upon the Exchange Event, each holder
of Series B Preferred Shares shall be unconditionally obligated to
surrender to the Bank the certificates representing each Series B
Preferred Share held by such holder, and the Bank shall be unconditionally
obligated to issue to such holder in exchange for each such Series B
Preferred Share a certificate representing one Series B Bank Preferred
Share.
(d) EFFECTIVENESS OF AND PROCEDURE FOR EXCHANGE. The Automatic
Series B Exchange shall occur as of the Time of Exchange. As of the Time
of Exchange, all of the Series B 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 B Preferred Shares
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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 Series B 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 B
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 B Preferred Shares are
to be surrendered by the holders thereof, and the Bank shall deliver to
each such holder certificates for Series B Bank Preferred Shares upon
surrender of certificates for the Series B Preferred Shares. Until such
replacement share certificates are delivered (or in the event such
replacement certificates are not delivered), certificates previously
representing the Series B Preferred Shares shall be deemed for all
purposes to represent Series B Bank Preferred Shares.
(e) STATUS OF SHARES REDEEMED; TREATMENT OF DIVIDENDS. Any Series B
Preferred Shares purchased or redeemed by the Corporation in accordance
with Section 6.7.3 hereof prior to the Time of Exchange shall not be
deemed outstanding and shall not be subject to the Automatic Series B
Exchange. In the event of the Automatic Series B Exchange, any accrued and
unpaid dividends on the Series B Preferred Shares as of the Time of
Exchange shall be deemed to be accrued and unpaid dividends on the Series
B Bank Preferred Shares.
SECTION 6.7.5 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 B 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.
If the amounts available for distribution in respect of Series B
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 B
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 B 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 B Preferred
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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
6.7.5.
SECTION 6.7.6 VOTING RIGHTS.
(a) GENERAL. Except as expressly provided in this Section 6.7.6,
holders of Series B Preferred Shares shall have no voting rights. When the
holders of Series B Preferred Shares are entitled to vote, each Series B
Preferred Share will be entitled to one vote.
(b) RIGHT TO ELECT DIRECTORS. If full dividends on the Series B
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 B 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 B 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
B Preferred Shares for four (4) consecutive Dividend Periods. Any
Preferred Director may be removed by, and shall not be removed except by,
the vote of the holders of record of the outstanding Series B 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 B 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 B 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.
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(c) CERTAIN VOTING RIGHTS. So long as any Series B 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 B 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 B
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 B 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 B 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 B 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 B Preferred Shares held by such holder
immediately prior thereto.
The creation or issuance of Parity Stock or Junior Stock in respect
of the payment of dividends, or the distribution of assets upon
liquidation, dissolution or winding up of the Corporation, or an amendment
that increases the number of authorized shares of preferred stock of the
Series B 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 B Preferred Shares pursuant to this Section 6.7.6(c).
6.7.7 INDEPENDENT DIRECTORS.
(a) NUMBER; DEFINITION. As long as any Series B Preferred Shares are
outstanding, at least two directors on the Board of Directors shall be
Independent Directors.
(b) APPROVAL OF INDEPENDENT DIRECTORS. As long as any Series B
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 B Preferred Shares, (ii) the
incurrence of debt for borrowed money in excess of 20% of the
Corporation's total stockholders' equity,
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(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 October 3, 1997, by and between the Corporation and the Bank, the
Commercial Mortgage Servicing Agreement between the Corporation and the
Bank, dated October 3, 1997, the Residential Mortgage Servicing Agreement
between the Corporation and the Bank, dated _________, 1999 or the
subcontracting of any duties under the Advisory Agreement, the Commercial
Mortgage Servicing Agreement or the Residential Mortgage Servicing
Agreement to third parties unaffiliated with the Bank, (v) any material
amendment to or modification of either the Residential Mortgage Purchase
and Warranties Agreement or the Commercial Mortgage Purchase and
Warranties Agreement, each dated October 3, 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 __________, 2004. So long as the number of Independent Directors
is two, the foregoing actions must be approved by both of the Independent
Directors.
(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 and Series B Preferred
Shares. In considering the interests of the holders of the Preferred
Stock, including, without limitation, holders of the Series A and Series B
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 6.7.8 NO CONVERSION RIGHTS. The holders of Series B
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 6.7.9 NO SINKING FUND. No sinking fund shall be established
for the retirement or redemption of Series B Preferred Shares.
SECTION 6.7.10 PREEMPTIVE OR SUBSCRIPTION RIGHTS. No holder of
Series B Preferred Shares shall have any preemptive or subscription rights in
respect of any shares of the Corporation that may be issued.
SECTION 6.7.11 NO OTHER RIGHTS. The Series B 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 6.7.12 COMPLIANCE WITH APPLICABLE LAW. Declaration by the
Board of Directors and payment by the Corporation of dividends to holders of the
Series B Preferred Shares and repurchase, redemption or other acquisition by the
Corporation (or another entity as provided
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in subsection (a) of Section 6.7.3 hereof) of Series B 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 6.7.13 MAINTENANCE OF STATUS AS REPORTING COMPANY. As long
as any Series B Preferred Shares are outstanding, the Corporation shall maintain
its status as a reporting company under the Exchange Act.
ARTICLE VII
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
SECTION 7.1 DEFINITIONS. For the purpose of this Article VII, the
following terms not otherwise defined in these Articles of Incorporation shall
have the following meanings:
OWNERSHIP LIMIT. The term "Ownership Limit" shall mean no more than 8.25%
of the aggregate initial liquidation preference of the issued and outstanding
shares of Preferred Stock of the Corporation, including the Series A and Series
B Preferred Shares. The number and value of the outstanding shares of Capital
Stock shall be determined by the Board of Directors of the Corporation in good
faith, which determination shall be conclusive for all purposes hereof. The
Board of Directors also may determine that compliance with any restriction or
limitation on stock ownership and transfers set forth in this Article VII is no
longer required for REIT qualification or that, based upon then current law,
such restriction or limitation may be modified.
CONSTRUCTIVE OWNERSHIP. The term "Constructive Ownership" shall mean
ownership of Capital Stock by a Person, whether the interest in the shares of
Capital Stock is held directly or indirectly (including by a nominee), and shall
include interests that would be treated as owned through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The
terms "Constructive Owner," "Constructively Owns" and "Constructively Owned"
shall have the correlative meanings.
CAPITAL STOCK. The term "Capital Stock" shall mean all classes or series
of stock of the Corporation, including, without limitation, Common Stock and
Preferred Stock.
CHARITABLE BENEFICIARY. The term "Charitable Beneficiary" shall mean one
or more beneficiaries of the Trust as determined pursuant to Section 7.3.6,
provided that each such organization must be described in Section 501(c)(3) of
the Code and contributions to each such organization must be eligible for
deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
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EXCEPTED HOLDER. The term "Excepted Holder" shall mean the Bishop Estate,
BIL Securities and Arbur and any entity controlled directly or indirectly by the
Bishop Estate, BIL Securities and Arbur, and their successors, for each of which
no Ownership Limit shall apply, and any stockholder of the Corporation who is
exempted from application of the Ownership Limit or for whom the Ownership Limit
is modified by these Articles of Incorporation or by the Board of Directors
pursuant to Section 7.2.7. Furthermore, any Person which owns or is deemed to
own shares of the Corporation by reason of the attribution of shares of the
Corporation (under certain attribution provisions of the Code) to an Excepted
Shareholder shall be treated as an Excepted Shareholder.
INITIAL DATE. The term "Initial Date" shall mean the date upon which the
Articles of Incorporation containing this Article VII are filed with the SDAT.
MARKET PRICE. The term "Market Price" on any date shall mean, with respect
to any class or series of outstanding shares of Capital Stock, the Closing Price
for such Capital Stock on such date. The "Closing Price" on any date shall mean
the last sale price for such Capital Stock, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, for such Capital Stock, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the principal national securities exchange on which such
Capital Stock is listed or admitted to trading or, if such Capital Stock is not
listed or admitted to trading on any national securities exchange, the last
quoted price, or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System or, if such system is no
longer in use, the principal other automated quotation system that may then be
in use or, if such Capital Stock is not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in such Capital Stock selected by the Board of
Directors of the Corporation or, in the event that no trading price is available
for such Capital Stock, the fair market value of the Capital Stock, as
determined in good faith by the Board of Directors of the Corporation.
PROHIBITED OWNER. The term "Prohibited Owner" shall mean, with respect to
any purported Transfer, any Person who, but for the provisions of Section 7.2.1,
would own or Constructively Own shares of Preferred Stock in violation of this
Article VII, and if appropriate in the context, shall also mean any Person who
would have been the record owner of the shares that the Prohibited Owner would
have so owned.
RESTRICTION TERMINATION DATE. The term "Restriction Termination Date"
shall mean the first day after the Initial Date on which the Corporation
determines pursuant to Section 5.7 that it is no longer in the best interests of
the Corporation to attempt to, or continue to, qualify as a REIT.
TRANSFER. The term "Transfer" shall mean any issuance, sale, transfer,
gift, assignment, devise or other disposition, as well as any other event that
causes any Person to acquire Constructive Ownership of Preferred Stock or the
right to vote or receive dividends on Preferred Stock, or any agreement to take
any such actions or cause any such events, including (a) the granting or
exercise
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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 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
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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 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
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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, 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 fail to provide specific guidance
with respect to such action, the Board of Directors shall have the power to
determine the action to be taken so long as such action is not contrary to the
provisions of Sections 7.1, 7.2 or 7.3.
SECTION 7.2.7 EXCEPTIONS.
(a) Subject to Section 7.2.7(b), the Board of Directors of the
Corporation, in its sole discretion, may exempt a Person from the
Ownership Limit and may establish or increase an Ownership Limit for such
Person if it receives a ruling from the Internal Revenue Service, or an
opinion of counsel, in either case in form and substance satisfactory to
the Board of Directors in its sole discretion, as it may deem necessary or
advisable in order to determine or ensure the Corporation's status as a
REIT. Notwithstanding the receipt of any ruling or opinion, the Board of
Directors may impose such conditions or restrictions as it deems
appropriate in connection with granting such exception.
(b) An underwriter which participates in a public offering or
a private placement of Preferred Stock (or securities convertible into or
exchangeable for Capital Stock) may own or Constructively Own shares of
Capital Stock (or securities convertible into or exchangeable for Capital
Stock) in excess of the Ownership Limit, but only to the extent necessary
to facilitate such public offering or private placement.
SECTION 7.2.8 LEGEND. Each certificate for shares of Preferred Stock
shall bear substantially the following legend:
The shares represented by this certificate are subject to
restrictions on Constructive Ownership and Transfer for the 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
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may Constructively Own in excess of 8.25% of the aggregate initial
liquidation preference of the issued and outstanding shares of
Preferred Stock of the Corporation, including the Series A and
Series B Preferred Shares; and (ii) no Person may Transfer shares of
Capital Stock if such Transfer would result in the Capital Stock of
the Corporation being owned (directly or beneficially) by fewer than
100 Persons. Any Person who attempts to Constructively Own shares of
Capital Stock which causes or will cause a Person to Constructively
Own shares of Capital Stock in excess or in violation of the above
limitations must immediately notify the Corporation. If any of the
restrictions on transfer or ownership are violated, the shares of
Capital Stock represented hereby will be automatically transferred
to a Trustee of a Trust for the benefit of one or more Charitable
Beneficiaries. In addition, upon the occurrence of certain events,
attempted Transfers in violation of the restrictions described above
may be VOID AB INITIO. All capitalized terms in this legend have the
meanings defined in the Articles of Incorporation of the
Corporation, as the same may be amended from time to time, a copy of
which, including the restrictions on transfer and ownership, will be
furnished to each holder of Capital Stock of the Corporation on
request and without charge.
Instead of the foregoing legend, the certificate may state that the
Corporation will furnish a full statement about certain restrictions on
transferability to a stockholder on request and without charge.
SECTION 7.3 TRANSFER OF PREFERRED STOCK IN TRUST.
SECTION 7.3.1 OWNERSHIP IN TRUST. Upon any purported Transfer or
other event that would result in a transfer of shares of Preferred Stock to a
Trust, such shares of Preferred Stock shall be deemed to have been transferred
to the Trustee as trustee of a Trust for the exclusive benefit of one or more
Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be
effective as of the close of business on the Business Day prior to the purported
Transfer or other event that results in the transfer to the Trust. The Trustee
shall be appointed by the Corporation and shall be a Person unaffiliated with
the Corporation and any Prohibited Owner. Each Charitable Beneficiary shall be
designated by the Corporation as provided in Section 7.3.6.
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.
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SECTION 7.3.3 DIVIDEND AND VOTING RIGHTS. The Trustee shall have all
voting rights and rights to dividends or other distributions with respect to
shares of Preferred Stock held in the Trust, which rights shall be exercised for
the exclusive benefit of the Charitable Beneficiary. Any dividend or other
distribution paid prior to the discovery by the Corporation that the shares of
Preferred Stock have been transferred to the Trustee shall be paid by the
recipient of such dividend or distribution to the Trustee upon demand and any
dividend or other distribution authorized but unpaid shall be paid when due to
the Trustee. Any dividend or distribution so paid to the Trustee shall be held
in trust for the Charitable Beneficiary. The Prohibited Owner shall have no
voting rights with respect to shares held in the Trust and, subject to Maryland
law, effective as of the date that the shares of Preferred Stock have been
transferred to the Trustee, the Trustee shall have the authority (at the
Trustee's sole discretion) (i) to rescind as void any vote cast by a Prohibited
Owner prior to the discovery by the Corporation that the shares of Preferred
Stock have been transferred to the Trustee and (ii) to recast such vote in
accordance with the desires of the Trustee acting for the benefit of the
Charitable Beneficiary; provided, however, that if the Corporation has already
taken irreversible corporate action, then the Trustee shall not have the
authority to rescind and recast such vote. Notwithstanding the provisions of
this Article VII, until the Corporation has received notification that shares of
Preferred Stock have been transferred into a Trust, the Corporation shall be
entitled to rely on its share transfer and other stockholder records for
purposes of preparing lists of stockholders entitled to vote at meetings,
determining the validity and authority of proxies and otherwise conducting votes
of stockholders.
SECTION 7.3.4 SALE OF SHARES BY TRUSTEE. Within 20 days of receiving
notice from the Corporation that shares of Preferred Stock have been transferred
to the Trust, the Trustee of the Trust shall sell the shares held in the Trust
to a person, designated by the Trustee, whose ownership of the shares will not
violate the ownership limitations set forth in this Article VII. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold shall terminate
and the Trustee shall distribute the net proceeds of the sale to the Prohibited
Owner and to the Charitable Beneficiary as provided in this Section 7.3.4. The
Prohibited Owner shall receive the lesser of (1) the price paid by the
Prohibited Owner for the shares or, if the Prohibited Owner did not give value
for the shares in connection with the event causing the shares to be held in the
Trust (e.g., in the case of a gift, devise or other such transaction), the
Market Price of the shares on the day of the event causing the shares to be held
in the Trust and (2) the price per share received by the Trustee from the sale
or other disposition of the shares held in the Trust. Any net sales proceeds in
excess of the amount payable to the Prohibited Owner shall be immediately paid
to the Charitable 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
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transaction that resulted in such transfer to the Trust (or, in the case of a
devise or gift, the Market Price at the time of such devise or gift) and (ii)
the Market Price on the date the Corporation, or its designee, accepts such
offer. The Corporation shall have the right to accept such offer until the
Trustee has sold the shares held in the Trust pursuant to Section 7.3.4. Upon
such a sale to the Corporation, the interest of the Charitable Beneficiary in
the shares sold shall terminate and the Trustee shall distribute the net
proceeds of the sale to the Prohibited Owner.
SECTION 7.3.6 DESIGNATION OF CHARITABLE BENEFICIARIES. By written
notice to the Trustee, the Corporation shall designate one or more nonprofit
organizations to be the Charitable Beneficiary of the interest in the Trust such
that (i) the shares of Capital Stock held in the Trust would not violate the
restrictions set forth in this Article VII in the hands of such Charitable
Beneficiary and (ii) each such organization must be described in Section
501(c)(3) of the Code and contributions to each such organization must be
eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the
Code.
SECTION 7.4 SETTLEMENT OF TRANSACTIONS. Nothing in this Article VII shall
preclude the settlement of any transaction entered into through the facilities
of any national securities exchange or automated inter-dealer quotation system.
The fact that the settlement of any transaction is so permitted shall not negate
the effect of any other provision of this Article VII and any transferee in such
a transaction shall be subject to all of the provisions and limitations set
forth in this Article VII.
SECTION 7.5 ENFORCEMENT. The Corporation is authorized specifically to
seek equitable relief, including injunctive relief, to enforce the provisions of
this Article VII.
SECTION 7.6 NON-WAIVER. No delay or failure on the part of the Corporation
or the Board of Directors in exercising any right hereunder shall operate as a
waiver of any right of the Corporation or the Board of Directors, as the case
may be, except to the extent specifically waived in writing.
ARTICLE VIII
AMENDMENTS
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 and
the rights of the holders of shares of Series B Preferred Stock set forth in
Section 6.7, 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
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approved as provided therein. Any amendment to Section 6.7 of the Articles of
Incorporation shall be valid only if approved as provided therein.
ARTICLE IX
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time
permits limitation of the liability of directors and officers of a corporation,
no director or officer of the Corporation shall be liable to the Corporation or
its stockholders for money damages. Neither the amendment nor repeal of this
Article IX, nor the adoption or amendment of any other provision of the Articles
of Incorporation or Bylaws inconsistent with this Article IX, shall apply to or
affect in any respect the applicability of the preceding sentence with respect
to any act or failure to act which occurred prior to such amendment, repeal or
adoption.
ARTICLE X
NON-APPLICABILITY OF MARYLAND GENERAL CORPORATION LAW TO
CERTAIN BUSINESS COMBINATIONS AND CONTROL
SHARE ACQUISITIONS
The provisions of Title 3, Subtitle 6 of the Corporations and Associations
Article of the Annotated Code of Maryland (or any successor statute) shall not
apply to any business combination by the Bank and any present or future
affiliates thereof. This Article X may be altered, repealed, in whole or in
part, at any time, provided that such repeal shall not affect any business
combinations that have been consummated or are subject to an existing agreement
entered into prior to such alteration or repeal.
The provisions of Title 3, Subtitle 7 of the Corporations and Associations
Article of the Annotated Code of Maryland (or any successor statute) shall not
apply to any acquisition by the Bank and any present or future affiliates
thereof of shares of stock of the Corporation. This Article X may be repealed,
in whole or in part, at any time, whether before or after an acquisition of
control shares and, upon such repeal, may, to the extent provided by any
successor article or bylaw, apply to any prior or subsequent control share
acquisition.
THIRD: The amendment to and restatement of the Articles of Incorporation
as hereinabove set forth has been duly advised by the Board of Directors and
approved by the stockholders of the Corporation as required by law.
FOURTH: The current address of the principal office of the Corporation in
the State of Maryland is as set forth in Article IV of the foregoing amendment
and restatement of the Articles of Incorporation.
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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 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 _______, 1999.
ATTEST: PEOPLE'S PREFERRED CAPITAL
CORPORATION
__________________________ By: _______________________________
J. Michael Holmes Rudolf P. Guenzel
Secretary President
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Exhibit 4
Number Shares
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
fully paid and nonassessable shares of __% Noncumulative Preferred Stock, Series
B, $.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
Amended and Restated 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 Amended and Restated 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 8.25% of
the aggregate initial liquidation preference of the value of the issued and
outstanding shares of Preferred Stock of the Corporation, 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.
---------------------
<PAGE>
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>
Exhibit 10.(a)
- --------------------------------------------------------------------------------
RESIDENTIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
PEOPLE'S PREFERRED CAPITAL CORPORATION
PURCHASER
PEOPLE'S BANK OF CALIFORNIA
SELLER
DATED AS OF OCTOBER 3, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. Definitions................................................ 1
SECTION 2. Agreement to Purchase Initial Portfolio.................... 11
SECTION 3. Subsequent Purchases....................................... 11
SECTION 4. Payment of Purchase Price.................................. 12
SECTION 5. Examination of Mortgage Files.............................. 12
SECTION 6. Conveyance from Seller to Purchaser........................ 12
SUBSECTION 6.1 Possession of Servicing Files........................ 12
SUBSECTION 6.2 Books and Records.................................... 13
SUBSECTION 6.3 Delivery of Custodian's File......................... 13
SECTION 7. Servicing of the Mortgage Loans............................ 14
SECTION 8. Representations, Warranties and Covenants of the
Seller; Remedies for Breach.............................. 15
SUBSECTION 8.1 Representations and Warranties Regarding the Seller.. 15
SUBSECTION 8.2 Representations and Warranties Regarding
Individual Mortgage Loans.......................... 17
SUBSECTION 8.3Remedies for Breach of Representations and Warranties.. 26
SECTION 9. Closing.................................................... 29
SECTION 10. Closing Documents.......................................... 29
SECTION 11. Costs...................................................... 30
SECTION 12. Merger or Consolidation of the Seller...................... 30
SECTION 13. Mandatory Delivery; Grant of Security Interest............. 31
SECTION 14. Notices.................................................... 31
SECTION 15. Severability Clause........................................ 32
SECTION 16. Counterparts............................................... 32
SECTION 17. Governing Law.............................................. 32
SECTION 18. Intention of the Parties................................... 33
SECTION 19. Successors and Assigns; Assignment of Purchase Agreement... 33
SECTION 20. Waivers.................................................... 33
SECTION 21. Entire Agreement, Amendment................................ 33
SECTION 22. General Interpretive Principles............................ 34
SECTION 23. Reproduction of Documents.................................. 34
SECTION 24. Further Agreements......................................... 34
SECTION 25. Recordation of Assignments of Mortgage..................... 35
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EXHIBITS
EXHIBIT A Contents of Each Mortgage File
EXHIBIT B Residential Mortgage Servicing Agreement
EXHIBIT C Form of Seller's Officer's Certificate
EXHIBIT D Form of Opinion of Counsel to the Seller
EXHIBIT E Notice of Sale and Release of Collateral
EXHIBIT F Form of Security Release Certification
EXHIBIT G Form of Assignment and Assumption Agreement
EXHIBIT H Initial Portfolio Mortgage Loan Schedule
EXHIBIT I Form of Commitment Letter
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<PAGE>
RESIDENTIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
This RESIDENTIAL MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT (the
"Agreement"), dated as of October 3, 1997, by and between People's Preferred
Capital Corporation, a Maryland corporation, having an office at 5900 Wilshire
Boulevard, Los Angeles, California 90036 (the "Purchaser"), and People's Bank of
California, a stock savings bank organized under the laws of the United States
of America, having an office at 5900 Wilshire Boulevard, Los Angeles, California
90036 (the "Seller").
W I T N E S S E T H:
WHEREAS, the Seller desires to sell to the Purchaser, and the Purchaser
desires to purchase from the Seller, from time to time, certain Mortgage Loans
(as defined herein) on a servicing retained basis as described herein, and which
shall be delivered as whole loans; and
WHEREAS, each Mortgage Loan, at the time it is sold by Seller to Purchaser
pursuant to this Agreement, will be secured by a mortgage, deed of trust or
other security instrument creating a first lien on a residential dwelling
located in the jurisdiction indicated on the related Mortgage Loan Schedule; and
WHEREAS, the Purchaser and the Seller wish to prescribe the manner of the
conveyance, servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the premises and mutual agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Purchaser and the Seller agree
as follows:
SECTION 1. DEFINITIONS.
For purposes of this Agreement and any Commitment Letter (as defined
herein), the following capitalized terms shall have the respective meanings set
forth below. Other capitalized terms used in this Agreement and not defined
herein shall have the respective meanings set forth in the Residential Servicing
Agreement attached as Exhibit B hereto.
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Act" means The National Housing Act, as amended from time to time.
<PAGE>
"Adjustable Rate Mortgage Loan" means any individual Mortgage Loan
purchased pursuant to this Agreement the interest rate of which adjusts
periodically based on the index identified in the Mortgage Note.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agreement" means this Residential Mortgage Loan Purchase and Warranties
Agreement, all amendments hereof and supplements hereto and each Commitment
Letter hereunder.
"ALTA" means The American Land Title Association or any successor thereto.
"Ancillary Income" means all late charges, assumption fees, escrow account
benefits, reinstatement fees, conversion fees, optional insurance commissions
and similar types of fees arising from or in connection with any Mortgage and
collected from the related Mortgagor, to the extent not otherwise payable to the
Mortgagor under applicable law or pursuant to the terms of the related Mortgage
Note.
"Appraised Value" means the value of the Mortgaged Property set forth in
an appraisal made in connection with the origination of the related Mortgage
Loan as the value of the Mortgaged Property.
"Assignment and Assumption Agreement" has the meaning set forth in Section
19.
"Assignment of Mortgage" means an assignment of the Mortgage delivered in
blank, notice of transfer or equivalent instrument in recordable form,
sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the sale of the Mortgage Loan to the Purchaser.
"Business Day" means any day other than (i) a Saturday or Sunday, or (ii)
a day on which banking and savings and loan institutions in the State of
California or the State in which the servicing operations of the Seller's
Servicer are located, are authorized or obligated by law or executive order to
be closed.
"Classified" is used herein generally to describe a Mortgage Loan which is
deemed substandard, doubtful or loss with respect to collectibility.
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<PAGE>
"Closing Date" means the Initial Closing Date and any other date on which
the parties hereto shall agree to close a sale of Mortgage Loans hereunder as
set forth in a duly executed Commitment Letter.
"Code" means Internal Revenue Code of 1986, as amended.
"Commitment Letter" means a letter agreement executed by the Purchaser and
the Seller providing for the purchase and sale of Mortgage Loans and
substantially in the form of Exhibit I hereto.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Conventional Loan" means a conventional residential first lien mortgage
loan which is a Mortgage Loan.
"Convertible Mortgage Loan" means any individual Mortgage Loan purchased
pursuant to this Agreement which contains a provision whereby the Mortgagor is
permitted to convert the Mortgage Loan to a fixed rate Mortgage Loan in
accordance with the terms of the related Mortgage Note.
"Custodial Account" means the separate trust account created and
maintained pursuant to the Residential Servicing Agreement.
"Cut-off Date" means the Initial Cut-off Date and any other date as of
which the principal balance of Mortgage Loans will be determined for purposes of
calculating the Purchase Price for the purchase and sale of Mortgage Loans,
which date shall be set forth in the related Commitment Letter.
"Deleted Mortgage Loan" means a Mortgage Loan that is repurchased or
replaced with a Qualified Substitute Mortgage Loan by the Seller in accordance
with the terms of this Agreement.
"Due Date" means the day of the month on which the Monthly Payment is due
on a Mortgage Loan, exclusive of any days of grace.
"Escrow Account" means the separate account created and maintained
pursuant to the Residential Servicing Agreement with respect to each Mortgage
Loan, as specified in the Residential Servicing Agreement.
"Escrow Payments" means, with respect to any Mortgage Loan, the amounts
(whether referred to as escrow, impound or otherwise) constituting ground rents,
taxes, assessments, water
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<PAGE>
rates, sewer rents, municipal charges, mortgage insurance premiums, fire and
hazard insurance premiums, flood insurance premiums, earthquake insurance
premiums, condominium charges, and, to the extent that such items can become a
lien on the Mortgaged Property superior to the Mortgage, if unpaid, and are
reportable by the Servicer's tax lien reporting service, any other payments
required to be escrowed by the Mortgagor with the mortgagee pursuant to the
Mortgage or any other document.
"FHA" means the Federal Housing Administration, an agency within the
United States Department of Housing and Urban Development, or any successor
thereto and including the Federal Housing Commissioner and the Secretary of
Housing and Urban Development where appropriate under the FHA Regulations.
"FHLMC" means the Federal Home Loan Mortgage Corporation, or any successor
thereto.
"FNMA" means the Federal National Mortgage Association, or any successor
thereto.
"Gross Margin" means, with respect to each Adjustable Rate Mortgage Loan,
the applicable fixed percentage which, when added to the applicable Index (and
rounded as set forth in the applicable Mortgage Note), calculates to the current
Mortgage Interest Rate paid by the related Mortgagor (without taking into
account any Lifetime Rate Caps, Periodic Rate Caps or minimum interest rates).
"HUD" means the Department of Housing and Urban Development, or any
federal agency or official thereof which may from time to time succeed to the
functions thereof with regard to FHA mortgage insurance. The term "HUD," for
purposes of this Agreement, is also deemed to include subdivisions thereof such
as the FHA and Government National Mortgage Association.
"Independent Directors" means the members of the Board of Directors of the
Purchaser who are not current employees or officers of the Purchaser or current
employees, officers or directors of the Seller or any affiliate of the Seller.
In addition, any members of the Board of Directors of the Purchaser elected by
holders of the preferred stock of the Purchaser, including the Series A
Preferred Shares, will be deemed to be "Independent Directors" for purposes of
approving actions requiring the approval of a majority of the Independent
Directors.
"Index" means, with respect to each Interest Rate Adjustment Date of a
Six-Month Treasury Rate Adjustable Rate Mortgage Loan, the weekly average
investment yield of auction rates on six-month Treasury securities as made
available by the Federal Reserve Board; with respect to each Interest Rate
Adjustment Date of a One-Year Treasury Rate Adjustable Rate Mortgage Loan, the
weekly average yield on United States Treasury securities adjusted to a constant
maturity of one year, as made available by the Federal Reserve Board; and, with
respect to each Interest Rate Adjustment Date of an Eleventh District Cost of
Funds Adjustable Rate Mortgage Loan, the then-current monthly weighted average
cost of funds for savings institutions in Arizona, California and Nevada that
are members of the Eleventh Federal Home Loan Bank District.
4
<PAGE>
"Initial Closing Date" means October 3, 1997, or such other date as the
parties hereto may mutually agree.
"Initial Cut-off Date" means September 22, 1997.
"Initial Portfolio Mortgage Loan Schedule" means the schedule of Mortgage
Loans to be purchased by the Purchaser on the Initial Closing Date, attached
hereto as Exhibit H.
"Initial Portfolio Purchase Price" means the amount set forth in Section 2
of this Agreement.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds
of insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Interest Rate Adjustment Date" means, with respect to each Adjustable
Rate Mortgage Loan, the date, specified in the related Mortgage Note, on which
the Mortgage Interest Rate is adjusted.
"Lifetime Rate Cap" means the provision of each Mortgage Note related to
an Adjustable Rate Mortgage Loan which provides for an absolute maximum Mortgage
Interest Rate thereunder as set forth in the related Mortgage Note.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of such Mortgage Loan.
"Loan-to-Value Ratio" or "LTV" means, with respect to any Mortgage Loan,
the ratio (expressed as a percentage) of the original principal amount of the
Mortgage Loan to the lesser of (a) the Appraised Value of the related Mortgaged
Property at origination and (b) if the Mortgage Loan was made to finance the
acquisition of the related Mortgaged Property, the purchase price of the
Mortgaged Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other instrument securing
a Mortgage Note, including any riders, addendums, assumptions, modifications or
extensions thereto, which creates a first lien on an unsubordinated estate in
fee simple in real property securing the Mortgage Note; except that with respect
to real property located in jurisdictions in which the use of leasehold estates
for residential properties is a widely accepted practice, the mortgage, deed of
trust or other instrument securing the Mortgage Note may secure and create a
first lien upon a leasehold estate of the Mortgagor.
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<PAGE>
"Mortgage File" means the items pertaining to a particular Mortgage Loan
referred to in Exhibit A, and any additional documents required to be added to
the Mortgage File pursuant to this Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which, in the case of an Adjustable Rate Mortgage Loan, shall be
adjusted from time to time, with respect to each Mortgage Loan.
"Mortgage Loan" means an individual residential first mortgage loan which
is the subject of this Agreement, each Mortgage Loan originally sold pursuant to
this Agreement being identified on Exhibit H attached hereto, and each Mortgage
Loan sold pursuant to a Commitment Letter being identified on the applicable
Mortgage Loan Schedule, and each of which Mortgage Loans includes or shall
include, without limitation, the Mortgage File, the Monthly Payments, Principal
Prepayments, Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds,
and all other rights, benefits, proceeds and obligations arising from or in
connection with such Mortgage Loan, excluding replaced or repurchased mortgage
loans.
"Mortgage Loan Documents" means, with respect to each Mortgage Loan, the
following documents pertaining to such Mortgage Loan:
(a) The original Mortgage Note (or, with respect to the Mortgage Loan
listed on Schedule I to Exhibit A hereto, a lost note affidavit,
executed by an officer of the Seller, with a copy of the original
note attached thereto) bearing all intervening endorsements,
endorsed "Pay to the order of (IN BLANK) without recourse" and
signed in the name of the Seller by an authorized officer. To the
extent that there is no room on the face of the Mortgage Notes for
endorsements, the endorsement may be contained on an allonge, if
state law so allows. If the Mortgage Loan was acquired by the Seller
in a merger, the endorsement must be by "[Seller], successor by
merger to [name of predecessor]." If the Mortgage Loan was acquired
or originated by the Seller while doing business under another name,
the endorsement must be by "[Seller], formerly known as [previous
name]"; and
(b) The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all of the Mortgage Loans in form and
substance acceptable for recording and signed in the name of the
Seller. If the Mortgage Loan was acquired by the Seller in a merger,
the Assignment of Mortgage must be made by "[Seller], successor by
merger to [name of predecessor]". If the Mortgage Loan was acquired
or originated by the Seller while doing business under another name,
the Assignment of Mortgage must be by "[Seller], formerly known as
[previous name]."
(c) The original of any guarantee executed in connection with the
Mortgage Note.
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<PAGE>
(d) The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or
cause to be delivered the original Mortgage with evidence of
recording thereon on or prior to the Closing Date because of a delay
caused by the public recording office where such Mortgage has been
delivered for recordation, a photocopy of such Mortgage certified by
the Seller to be true and correct will be delivered; if such
Mortgage has been lost or if such public recording office retains
the original recorded Mortgage, the Seller shall deliver or cause to
be delivered to the Purchaser, a photocopy of such Mortgage,
certified by such public recording office to be a true and complete
copy of the original recorded Mortgage.
(e) The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon if
such agreements have been recorded, or certified copies of such
documents if the originals thereof are unavailable.
(f) Originals of all intervening assignments of the Mortgage with
evidence of recording thereon, if such intervening assignment has
been recorded.
(g) The original mortgagee policy of title insurance or, in the event
such original title policy is unavailable, a certified true copy of
the related policy binder or commitment for title certified to be
true and complete by the title insurance company.
(h) Any other security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
(i) For Mortgage Loans with original LTV's greater than 80%, evidence of
a Primary Insurance Policy.
"Mortgage Loan Schedule" means (a) the Initial Portfolio Mortgage Loan
Schedule attached hereto as Exhibit H and (b) any schedule of Mortgage Loans in
similar form attached to and constituting part of a duly executed Commitment
Letter, in each case setting forth at least the following information with
respect to each Mortgage Loan set forth thereon: (1) the Seller's Mortgage Loan
identifying number; (2) the Mortgagor's name; (3) the street address of the
Mortgaged Property including the city, state and zip code; (4) a code indicating
whether the Mortgaged Property at origination was owner-occupied, second home or
investor owned; (5) the property type, i.e., the type of residential units
constituting the Mortgaged Property; (6) the original months to maturity; (7)
the remaining months to maturity from the applicable Cut-off Date, based on the
original amortization schedule, and, if different, the maturity expressed in the
same manner but based on the actual amortization schedule; (8) the Loan-to-Value
Ratio at origination; (9) the Mortgage Interest Rate as of the applicable
Cut-off Date; (10) the stated maturity date; (11) the amount of the Monthly
Payment as of the applicable Cut-off Date; (12) the original principal amount
7
<PAGE>
of the Mortgage Loan; (13) the principal balance of the Mortgage Loan as of the
close of business on the applicable Cut-off Date; (14) a code indicating the
purpose of the loan (i.e., purchase and refinance); (15) a code indicating the
documentation style (i.e. full, alternative or reduced); (16) the type of
Mortgage Loan product, if any; (17) the first payment Due Date; (18) the initial
Mortgage Interest Rate; (19) the amount of the first Monthly Payment; (20) the
name of any Qualified Insurer with respect to a PMI Policy; and (21) the
Servicing Fee Rate. With respect to any Adjustable Rate Mortgage Loan, such
schedule shall also set forth (1) the Interest Rate Adjustment Dates; (2) the
Gross Margin; (3) the Lifetime Rate Cap; (4) any Periodic Rate Caps; (5) any
minimum interest rate, if other than the Gross Margin; (6) the first Interest
Rate Adjustment Date after the applicable Cutoff Date; (7) any Payment
Adjustment Cap; (8) the first Payment Adjustment Date after the related Cut-off
Date; (9) whether such Mortgage Loan has the potential to negatively amortize;
and (10) the name of the applicable Index, in each case, under the terms of the
Mortgage Note. With respect to the Mortgage Loans in the aggregate set forth
thereon, each Mortgage Loan Schedule shall set forth the following information,
as of the applicable Cut-off Date: (1) the number of Mortgage Loans; (2) the
current aggregate outstanding principal balance of the Mortgage Loans; (3) the
weighted average Mortgage Interest Rate of the Mortgage Loans; and (4) the
weighted average remaining maturity of the Mortgage Loans and (5) the weighted
average servicing fee.
"Mortgage Note" means the note or other evidence of the indebtedness of a
Mortgagor secured by a Mortgage, including any amendment, modification or
addendum thereto.
"Mortgaged Property" means the real property (or leasehold estate, if
applicable) securing repayment of the debt evidenced by a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
"Non-accrual Status" refers to Mortgage Loans that are 90 days or more
past due in the payment of principal or interest.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President and
by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller or the Servicer, as the case may be, and
delivered to the Purchaser as required by this Agreement.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Seller, reasonably acceptable to the Purchaser.
"Payment Adjustment Cap" means, with respect to an Adjustable Rate
Mortgage Loan, the maximum amount of the related Monthly Payment as adjusted on
a given Payment Adjustment Date in accordance with the terms of the related
Mortgage Note.
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<PAGE>
"Payment Adjustment Date" means, with respect to each Adjustable Rate
Mortgage Loan, the date set forth in the related Mortgage Note on which the
Monthly Payment is adjusted in accordance with the terms of the Mortgage Note.
"Periodic Rate Cap" means the provision of each Mortgage Note related to
each Adjustable Rate Mortgage Loan which provides for an absolute maximum amount
by which the Mortgage Interest Rate therein may increase or decrease on an
Interest Rate Adjustment Date above or below the Mortgage Interest Rate
previously in effect as set forth in the applicable Mortgage Note.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"PMI Policy" or "Primary Mortgage Insurance Policy" means a policy of
primary mortgage guaranty insurance issued by a Qualified Insurer.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Western
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Price" means the price to be paid on the applicable Closing Date
by the Purchaser to the Seller in consideration for the Mortgage Loans to be
purchased by the Purchaser on such Closing Date (including, without limitation,
the Initial Portfolio Purchase Price to be paid by Purchaser at the Initial
Closing) as set forth in this Agreement or a duly executed Commitment Letter, as
the case may be.
"Purchaser" means People's Preferred Capital Corporation or its successor
in interest or assigns or any successor to the Purchaser under this Agreement as
herein provided.
"Qualified Appraiser" means, with respect to a Mortgaged Property, an
appraiser who had no interest, direct or indirect in such Mortgaged Property or
in any loan made on the security thereof, and whose compensation is not affected
by the approval or disapproval of the Mortgage Loan, and such appraiser and the
appraisal made by such appraiser both satisfy the requirements of Title XI of
the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 and the
regulations promulgated thereunder, all as in effect on the date the Mortgage
Property was appraised.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided and approved as an
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<PAGE>
insurer by FNMA with respect to primary mortgage insurance and, in addition, in
the two highest rating categories by Best's with respect to hazard and flood
insurance.
"Qualified Substitute Mortgage Loan" means a mortgage loan eligible to be
substituted by the Seller for a Deleted Mortgage Loan which must, on the date of
such substitution, (i) have an outstanding principal balance, after deduction of
all payments collected as of the date of substitution (or in the case of a
substitution of more than one mortgage loan for a Deleted Mortgage Loan, an
aggregate principal balance), not in excess of the outstanding principal balance
of the Deleted Mortgage Loan (the amount of any shortfall will be provided by
the Seller to the Servicer for deposit in the Custodial Account by the Seller in
the month of substitution); (ii) have a Mortgage Interest Rate and a remaining
term to maturity, each of which is as reasonably comparable as possible to the
Mortgage Interest Rate and remaining term to maturity of the Deleted Mortgage
Loan; (iii) be of the same type as the Deleted Mortgage Loan (i.e., Mortgage
Loan with the same Periodic Rate Caps or fixed rate); and (iv) comply with each
representation and warranty (respecting individual Mortgage Loans) set forth in
Section 8.2 hereof.
"Remittance Date" means the date specified in the Residential Servicing
Agreement.
"Repurchase Price" means, with respect to any Mortgage Loan, a price equal
to (i) the unpaid principal balance of such Mortgage Loan plus (ii) interest,
net of Servicing Fees, on such unpaid principal balance of such Mortgage Loan at
the Mortgage Interest Rate from the last date through which interest has been
paid or advanced to the Purchaser to the date of repurchase, less any
unreimbursed advances made by the Servicer, if any, in respect of such
repurchased Mortgage Loan.
"Residential Servicing Agreement" means the Assignment, Assumption and
Recognition Agreement, attached as Exhibit B hereto, to be entered into by the
Seller, the Purchaser and Temple-Inland Mortgage Corporation, as servicer,
providing for Temple-Inland Mortgage Corporation to service the Mortgage Loans
for the Purchaser as specified by the Residential Servicing Agreement.
"RESPA" means Real Estate Settlement Procedures Act, as amended from time
to time.
"Seller" means People's Bank of California, and its successors in interest
and assigns.
"Series A Preferred Shares" means the __% Noncumulative Exchangeable
Preferred Stock, Series A, par value $.01 per share, of the Purchaser.
"Servicer" means Temple-Inland Mortgage Corporation.
"Servicing Fee" means, with respect to each Mortgage Loan, subject to the
Residential Servicing Agreement, the amount of the annual fee the Purchaser
shall pay to the Servicer, which shall for a period of one full month be equal
to one-twelfth of the product of (a) the Servicing Fee Rate and (b) the Stated
Principal Balance of such Mortgage Loan. Such fee shall be payable monthly,
computed on the basis of the same principal amount and period in respect of
which any
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<PAGE>
related interest payment on a Mortgage Loan is computed, and shall be pro rated
for any portion of a month during which the Mortgage Loan is serviced by the
Servicer under the Residential Servicing Agreement. The obligation of the
Purchaser to pay the Servicing Fee with respect to any Mortgage Loan is limited
to, and the Servicing Fee is payable solely from, the interest portion
(including recoveries with respect to interest from Liquidation Proceeds, to the
extent permitted by the Residential Servicing Agreement) of the related Monthly
Payment collected by the Servicer, or as otherwise provided under the
Residential Servicing Agreement. In addition to the Servicing Fee, the Servicer
shall be entitled to retain all Ancillary Income.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the rate
specified in the applicable Mortgage Loan Schedule with respect to such Mortgage
Loan.
"Servicing File" means, with respect to each Mortgage Loan, the files
retained by the Servicer during the period in which the Servicer is acting as
Servicer pursuant to the Residential Servicing Agreement, consisting of
originals of all documents in the Mortgage File which are not delivered to the
Purchaser or its designee and copies of the other Mortgage Loan Documents.
"Stated Principal Balance" means as to each Mortgage Loan, the unpaid
principal balance as of the date of determination of such balance.
SECTION 2. AGREEMENT TO PURCHASE INITIAL PORTFOLIO.
The Seller hereby agrees to sell, transfer, assign, set over and convey to
the Purchaser on the Initial Closing Date, without recourse, but subject to the
terms of this Agreement, all right, title and interest of the Seller in and to
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
the related Mortgage Files and all rights and obligations arising under the
documents contained therein. Mortgage Loans on the Initial Portfolio Mortgage
Loan Schedule shall have an aggregate principal balance on the Initial Cut-off
Date in an amount no less than $__________.
The Initial Portfolio Purchase Price payable by the Purchaser in
consideration for the Mortgage Loans listed on the Initial Portfolio Mortgage
Loan Schedule shall be equal to the actual aggregate unpaid principal balance of
the Mortgage Loans as of the Initial Cut-off Date as accepted by the Purchaser
on the Initial Closing Date plus interest accrued on such Mortgage Loans at the
weighted average Mortgage Interest Rate from the last interest paid to date for
each such Mortgage Loan to and including the day prior to the Initial Closing
Date.
SECTION 3. SUBSEQUENT PURCHASES.
From time to time, by executing a Commitment Letter substantially in the
form of Exhibit I hereto, the Seller shall sell, transfer, assign, set over and
convey to the Purchaser, without recourse, but subject to the terms of this
Agreement, and the Purchaser will purchase, all the right, title and interest of
the Seller, as of the applicable Closing Date, in and to the Mortgage Loans set
forth in the
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Mortgage Loan Schedule attached to such Commitment Letter, and the Purchaser
shall pay to Seller the Purchase Price set forth in such Commitment Letter on
such Closing Date.
SECTION 4. PAYMENT OF PURCHASE PRICE.
The estimated Purchase Price computed as of the Initial Cut-off Date and
other Cut-off Dates, as applicable, shall be paid by Purchaser on the applicable
Closing Date by wire transfer of immediately available funds. The difference, if
any, between such estimated Purchase Price and the actual Purchase Price
computed as of the applicable Closing Date shall be paid by Seller or Purchaser
to the other, as the case may be, no later than ten business days after the
applicable Closing Date.
The Purchaser shall, with respect to any Mortgage Loan purchased hereunder
or pursuant to a duly executed Commitment Letter, be entitled to (1) all
principal due after the applicable Cut-off Date, (2) all other recoveries of
principal collected on or after the applicable Cut-off Date and (3) all payments
of interest on the Mortgage Loans (net of applicable Servicing Fees as provided
in the Residential Servicing Agreement) collected on or after such Cut-off Date.
The outstanding principal balance of each Mortgage Loan as of the applicable
Cut-off Date is determined after application of payments of principal collected
on or before such Cut-off Date, together with any unscheduled principal
prepayments received prior to such Cutoff Date.
SECTION 5. EXAMINATION OF MORTGAGE FILES.
Prior to the date hereof or the date of any duly executed Commitment
Letter, as the case may be, the Seller has or shall have (a) delivered to the
Purchaser or its designee in escrow, for examination with respect to each
Mortgage Loan to be purchased, the related Mortgage File pertaining to each
Mortgage Loan, or (b) made the related Mortgage File available to the Purchaser
for examination at the Seller's offices or such other location as shall
otherwise be agreed upon by the Purchaser and the Seller. The fact that the
Purchaser or its designee has conducted or has failed to conduct any partial or
complete examination of any Mortgage Files shall not affect the Purchaser's (or
any of its successor's) rights to demand repurchase, substitution or other
relief as provided herein.
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER.
SUBSECTION 6.1 POSSESSION OF SERVICING FILES.
The Servicing Files relating to any Mortgage Loans purchased by Purchaser
hereunder or pursuant to a duly executed Commitment Letter shall be retained by
the Servicer in accordance with the terms of the Residential Servicing Agreement
and, as provided therein, shall be appropriately identified in the computer
system and/or books and records of the Servicer, as appropriate, to clearly
reflect the sale of the related Mortgage Loan to the Purchaser.
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SUBSECTION 6.2 BOOKS AND RECORDS.
Record title to each Mortgage Loan as of the applicable Closing Date shall
be in the name of the Seller, or the Purchaser or one or more of its designees,
as the Purchaser shall select. Notwithstanding the foregoing, each Mortgage and
related Mortgage Note shall be possessed solely by the Purchaser or the
appropriate designee of the Purchaser, as the case may be. All rights arising
out of the Mortgage Loans including, but not limited to, all amounts received by
the Seller or the Servicer after the applicable Cut-off Date on or in connection
with a Mortgage Loan (other than amounts due prior to the applicable Cut-off
Date) shall be vested in the Purchaser or one or more of its designees;
provided, however, that all amounts received on or in connection with a Mortgage
Loan (other than amounts due prior to the applicable Cut-off Date) shall be
received and held by the Seller or the Servicer in trust for the benefit of the
Purchaser or its designee, as the case may be, as the owner of the Mortgage
Loans pursuant to the terms of this Agreement.
The sale of each Mortgage Loan shall be reflected on the Seller's balance
sheet and other financial statements as a sale of assets by the Seller.
SUBSECTION 6.3 DELIVERY OF MORTGAGE LOAN DOCUMENTS.
On or prior to each Closing Date, the Seller shall deliver and release to
the Purchaser or its designee the Mortgage Loan Documents with respect to each
Mortgage Loan sold to the Purchaser on such Closing Date, and set forth on the
Mortgage Loan Schedule, except as otherwise provided in the Residential
Servicing Agreement.
The Seller shall forward, or shall cause the Servicer to forward, to the
Purchaser or its designee all original documents evidencing an assumption,
modification, consolidation, conversion or extension of any Mortgage Loan
entered into in accordance with the Residential Servicing Agreement within 30
days of their execution, provided, however, that the Seller shall provide, or
shall cause the Servicer to provide, the Purchaser or its designee with a
certified true copy of any such document submitted for recordation within 30
days of its execution, and shall promptly provide the original of any document
submitted for recordation or a copy of such document certified by the
appropriate public recording office to be a true and complete copy of the
original within ninety (90) days of its submission for recordation (provided,
that with respect to assignments of the Mortgages reflecting the assignment from
the Seller to the Purchaser, one final assignment shall be executed by Seller in
blanket non-recordable form, and no other forms of assignment of such Mortgages
shall be executed or recorded unless and until the Purchaser shall request
execution of individual Assignments of Mortgages pursuant to and in accordance
with Section 25 hereof).
In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the submission for
recordation and in the event that the Seller does not cure such failure within
30 days of discovery or receipt of written notification of such failure from the
Purchaser, the related Mortgage Loan shall, upon the request of the Purchaser,
be repurchased by the Seller at the
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price and in the manner specified in Subsection 8.3. The foregoing repurchase
obligation shall not apply in the event that the Seller cannot deliver, or cause
to be delivered, such original or copy of any document submitted for recordation
to the appropriate public recording office within the specified period due to a
delay caused by the recording office in the applicable jurisdiction; provided
that the Seller shall instead deliver, or cause to be delivered, a recording
receipt of such recording office or, if such recording receipt is not available,
an officer's certificate of a servicing officer of the Servicer, confirming that
such documents have been accepted for recording. Notwithstanding anything herein
to the contrary, under the circumstances described in the preceding sentence,
the Seller shall continue to make all reasonable efforts to obtain the original
of any document submitted for recordation to the appropriate public recording
office.
The Seller shall pay all initial recording fees, if any, for the
Assignments of Mortgage and any other fees or costs in transferring all original
documents to the Purchaser or its designee. The Purchaser or its designee shall
be responsible for recording the Assignments of Mortgage and shall be reimbursed
by the Seller for the reasonable costs associated therewith pursuant to the
preceding sentence.
SECTION 7. SERVICING OF THE MORTGAGE LOANS.
All Mortgage Loans will be sold by the Seller to the Purchaser on a
servicing retained basis.
The Purchaser shall retain the Servicer as independent contract servicer
of the Mortgage Loans pursuant to and in accordance with the terms and
conditions contained in the Residential Servicing Agreement. The Purchaser, the
Seller and the Servicer shall execute the Residential Servicing Agreement on or
before the Initial Closing Date in the form attached hereto as Exhibit B.
Pursuant to the Residential Servicing Agreement, the Servicer shall
service the Mortgage Loans on behalf of the Purchaser and shall be entitled to
the Servicing Fee and any Ancillary Income with respect to each Mortgage Loan
from the Closing Date with respect to the sale and purchase thereof until the
termination of the Residential Servicing Agreement with respect to such Mortgage
Loan as set forth in the Residential Servicing Agreement. The Servicer shall
conduct such servicing in accordance with the terms of the Residential Servicing
Agreement. In the event that the Purchaser elects to terminate the servicing by
the Servicer of a Mortgage Loan which has gone into Nonaccrual Status or has
been foreclosed and as to which title to the related Mortgage Property has been
transferred to the Purchaser ("REO Property"), pursuant to the terms of the
Residential Servicing Agreement, at the Purchaser's election and direction, the
Seller shall service such Mortgage Loan or REO Property on behalf of the
Purchaser in the same manner in which Seller services its own Mortgage Loans and
REO of similar kind. The Seller shall be entitled to servicing compensation with
respect to those transferred Mortgage Loans which have gone into Non-accrual
Status on the same basis as the Servicer under the Residential Servicing
Agreement.
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SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER; REMEDIES FOR
BREACH.
SUBSECTION 8.1 REPRESENTATIONS AND WARRANTIES REGARDING THE SELLER.
The Seller represents, warrants and covenants to the Purchaser that as of
the date hereof and as of each Closing Date:
(a) DUE ORGANIZATION AND AUTHORITY; ENFORCEABILITY. The Seller is a stock
savings bank duly organized, validly existing and in good standing under the
laws of the United States of America and has all licenses necessary to carry on
its business as now being conducted and is licensed, qualified and in good
standing in each state wherein it owns or leases any material properties or
where a Mortgaged Property is located, if the laws of such state require
licensing or qualification in order to conduct business of the type conducted by
the Seller, and in any event the Seller is in compliance with the laws of any
such state to the extent necessary to ensure the enforceability of the related
Mortgage Loan in accordance with the terms of this Agreement; the Seller has the
full corporate power, authority and legal right to hold, transfer and convey the
Mortgage Loans and to execute and deliver this Agreement and to perform its
obligations hereunder; the execution, delivery and performance of this Agreement
(including all instruments of transfer to be delivered pursuant to this
Agreement) by the Seller and the consummation of the transactions contemplated
hereby have been duly and validly authorized; this Agreement and all agreements
contemplated hereby have been duly executed and delivered and constitute the
valid, legal, binding and enforceable obligations of the Seller subject to
bankruptcy laws and other similar laws of general application affecting rights
of creditors and subject to the application of the rules of equity, including
those respecting the availability of specific performance, none of which will
materially interfere with the realization of the benefits provided thereunder,
regardless of whether such enforcement is sought in a proceeding in equity or at
law; and all requisite corporate action has been taken by the Seller to make
this Agreement and all agreements contemplated hereby valid and binding upon the
Seller in accordance with their terms;
(b) ORDINARY COURSE OF BUSINESS. The consummation of the transactions
contemplated by this Agreement are in the ordinary course of business of the
Seller, and the transfer, assignment and conveyance of the Mortgage Notes and
the Mortgages by the Seller pursuant to this Agreement are not subject to the
bulk transfer or any similar statutory provisions in effect in any applicable
jurisdiction;
(c) NO CONFLICTS. Neither the execution and delivery of this Agreement,
the sale of the Mortgage Loans to the Purchaser, the consummation of the
transactions contemplated hereby, nor the fulfillment of or compliance with the
terms and conditions of this Agreement, will conflict with or result in a breach
of any of the terms, conditions or provisions of the Seller's charter or bylaws
or any legal restriction or any agreement or instrument to which the Seller is
now a party or by which it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the violation of any law,
rule, regulation, order, judgment or decree to which the Seller or its
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property is subject, or result in the creation or imposition of any lien, charge
or encumbrance that would have an adverse effect upon any of its properties
pursuant to the terms of any mortgage, contract, deed of trust or other
instrument or impair the ability of the Purchaser to realize on the Mortgage
Loans, impair the value of the Mortgage Loans, impair the ability of the
Purchaser to realize the full amount of any mortgage insurance benefits accruing
pursuant to this Agreement or impair the ability of the Seller to perform its
obligations hereunder;
(d) ABILITY TO PERFORM; SOLVENCY. The Seller does not believe, nor does it
have any reason or cause to believe, that it cannot perform each and every
covenant contained in this Agreement. The Seller is solvent and the sale of the
Mortgage Loans will not cause the Seller to become insolvent. The sale of the
Mortgage Loans is not undertaken with the intent to hinder, delay or defraud any
of the Seller's creditors;
(e) NO LITIGATION PENDING. There is no action, suit, proceeding or
investigation pending or threatened against the Seller, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, could result in any material adverse change in the business,
operations, financial condition, properties or assets of the Seller, or in any
material impairment of the right or ability of the Seller to carry on its
business substantially as now conducted, or which would draw into question the
validity of this Agreement or any Mortgage Loan or of any action taken or to be
taken in connection with the obligations of the Seller contemplated herein, or
which would be likely to impair materially the ability of the Seller to perform
under the terms of this Agreement;
(f) NO CONSENT REQUIRED. No consent, approval, authorization or order of,
or registration or filing with, or notice to any court or governmental agency or
body is required for the execution, delivery and performance by the Seller of or
compliance by the Seller with this Agreement or the Mortgage Loans, the delivery
of a portion of the Mortgage Files to the Purchaser or its designee or the sale
of the Mortgage Loans or the consummation of the transactions contemplated by
this Agreement, or if required, such approval has been obtained prior to the
applicable Closing Date;
(g) SELECTION PROCESS. The Mortgage Loans were selected from among the
outstanding mortgage loans in the Seller's portfolio as of the applicable
Closing Date as to which the representations and warranties set forth in
Subsection 8.2 could be made and such selection was not made in a manner so as
to affect adversely the interests of the Purchaser;
(h) INITIAL PORTFOLIO. The aggregate characteristics of the Mortgage Loans
set forth in the Initial Portfolio Mortgage Loan Schedule are as set forth under
the heading "Business and Strategy--Description of Initial Portfolio" in the
Prospectus relating to the Series A Preferred Shares of the Purchaser, dated
September 30, 1997;
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(i) NO UNTRUE INFORMATION. Neither this Agreement nor any information,
statement, tape, diskette, report, form, or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains or will contain any untrue statement of a material
fact or omits or will omit to state a material fact necessary to make the
statements contained herein or therein not misleading; and
(j) NO BROKERS. The Seller has not dealt with any broker, investment
banker, agent or other person that may be entitled to any commission or
compensation in connection with the sale of the Mortgage Loans.
SUBSECTION 8.2 REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL
MORTGAGE LOANS.
The Seller hereby represents and warrants to the Purchaser, as to each
Mortgage Loan and as of the applicable Closing Date for such Mortgage Loan (or
as of such other date as may be specified below), that:
(a) MORTGAGE LOANS AS DESCRIBED. The information set forth in the
applicable Mortgage Loan Schedule is complete, true and correct in all material
respects as of the date indicated thereon;
(b) PAYMENTS CURRENT; STATUS. All payments required to be made up to, but
not including, the applicable Cut-off Date for the Mortgage Loan under the terms
of the Mortgage Note have been made and credited. No payment required under the
Mortgage Loan is delinquent nor has any payment under the Mortgage Loan been 30
days or more delinquent more than once within the period falling twelve (12)
months prior to the applicable Cut-off Date. The Mortgage Loan is not, and has
not been at any time in the twelve months immediately preceding the applicable
Cut-off Date, (i) Classified, (ii) in Non-accrual Status or (iii) renegotiated
due to the financial deterioration of the Mortgagor;
(c) NO OUTSTANDING CHARGES. There are no defaults in complying with the
terms of the Mortgage, and all taxes, governmental assessments, insurance
premiums, water, sewer and municipal charges, leasehold payments or ground rents
which previously became due and owing have been paid, or an escrow of funds or
payment plan has been established in an amount sufficient to pay for every such
item which remains unpaid and which has been assessed but is not yet due and
payable. The Seller has not advanced funds, or induced, solicited or knowingly
received any advance of funds by a party other than the Mortgagor, directly or
indirectly, for the payment of any amount required under the Mortgage Loan,
except for interest accruing from the date of the Mortgage Note or date of
disbursement of the Mortgage Loan proceeds, whichever is earlier, to the day
which precedes by one month the Due Date of the first installment of principal
and interest;
(d) ORIGINAL TERMS UNMODIFIED. The terms of the Mortgage Note and Mortgage
have not been impaired, waived, altered or modified in any respect, from the
date of origination except
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as contained in the Mortgage Loan Documents, and the terms of which are
reflected in the related Mortgage Loan Schedule, if applicable. The terms of any
such waiver, alteration or modification are reflected on the related Mortgage
Loan Schedule, if applicable, and either (i) the substance of such terms has
been approved by the title insurer, if any, to the extent required by the
policy, or (ii) such waiver, alteration or modification has not and will not
affect the priority of the related Mortgage. No Mortgagor has been released, in
whole or in part, except in connection with an assumption agreement, which
assumption agreement is part of the Mortgage Loan File delivered to the
Purchaser or its designee and the terms of which are reflected in the related
Mortgage Loan Schedule;
(e) NO DEFENSES. The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including without limitation the
defense of usury, nor will the operation of any of the terms of the Mortgage
Note or the Mortgage, or the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in part and no such
right of rescission, set-off, counterclaim or defense has been asserted with
respect thereto, and no Mortgagor is now or was, at the time of origination of
the related Mortgage Loan, a debtor in any state or Federal bankruptcy or
insolvency proceeding;
(f) HAZARD INSURANCE. Pursuant to the terms of the Mortgage, all buildings
or other improvements upon the Mortgaged Property are insured by a generally
acceptable insurer against loss by fire, hazards of extended coverage and such
other hazards as are set forth in the Residential Servicing Agreement attached
hereto as Exhibit B. If required by the Flood Disaster Protection Act of 1973,
as amended, the Mortgage Loan is covered by a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration,
which policy conforms to FNMA, as well as all additional requirements set forth
in the Residential Servicing Agreement attached hereto as Exhibit B. All
individual insurance policies contain a standard mortgagee clause naming the
Seller and its successors and assigns as mortgagee, and all premiums thereon
have been paid. The Mortgage for each Mortgage Loan obligates the Mortgagor
thereunder to maintain the hazard insurance policy at the Mortgagor's cost and
expense, and on the Mortgagor's failure to do so, authorizes the holder of the
Mortgage to obtain and maintain such insurance at such Mortgagor's cost and
expense, and to seek reimbursement therefor from the Mortgagor. Where required
by state law or regulation, the Mortgagor has been given an opportunity to
choose the carrier of the required hazard insurance, provided the policy is not
a "master" or "blanket" hazard insurance policy covering a condominium, or any
hazard insurance policy covering the common facilities of a planned unit
development. To the best knowledge of the Seller, the hazard insurance policy is
the valid and binding obligation of the insurer, is in full force and effect,
and will be in full force and effect and inure to the benefit of the Purchaser
upon the consummation of the transactions contemplated by this Agreement. No
action, inaction or event has occurred and no state of facts exists or has
existed that has resulted or could result in the exclusion from, denial of, or
defense to coverage under any hazard insurance policy. The Seller has not
engaged in, and has no knowledge of the Mortgagor's having engaged in, any act
or omission which would impair the coverage of any such policy, the benefits of
the endorsement provided for herein, or the validity and binding effect of
either including, without limitation, no unlawful fee, commission, kickback or
other unlawful compensation or value of any kind has been or will be received,
retained or realized by any attorney,
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firm or other person or entity, and no such unlawful items have been received,
retained or realized by the Seller;
(g) COMPLIANCE WITH APPLICABLE LAWS. Any and all requirements of any
federal, state or local law including, without limitation, usury,
truth-in-lending, real estate settlement procedures, consumer credit protection,
fair housing, equal credit opportunity and disclosure laws applicable to the
Mortgage Loan have been complied with in all material respects, the consummation
of the transactions contemplated hereby will not involve the violation of any
such laws or regulations, and the Seller or the Servicer shall maintain in its
possession, available for the Purchaser's inspection, and shall deliver to the
Purchaser upon demand, evidence of compliance with all such requirements;
(h) NO SATISFACTION OF MORTGAGE. The Mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the Mortgaged
Property has not been released from the lien of the Mortgage, in whole or in
part, nor has any instrument been executed that would effect any such release,
cancellation, subordination or rescission. Neither the Seller, the Servicer nor
any other Person has waived the performance by the Mortgagor of any action, if
the Mortgagor's failure to perform such action would cause the Mortgage Loan to
be in default, nor has the Seller, the Servicer nor any other Person waived any
default resulting from any action or inaction by the Mortgagor;
(i) LOCATION AND TYPE OF MORTGAGED PROPERTY. The Mortgaged Property is
located in the state identified in the related Mortgage Loan Schedule and
consists of a single parcel of real property with a detached single family
residence erected thereon, or a townhouse, or a two-to four-family dwelling, or
an individual condominium unit in a condominium project, or an individual unit
in a planned unit development, provided, however, that any condominium unit or
planned unit development shall conform with requirements acceptable to FNMA
regarding such dwellings and that no residence or dwelling is a single parcel of
real property with a cooperative housing corporation erected thereon, a mobile
home or a manufactured dwelling. As of the date of origination, no portion of
the Mortgaged Property is used for commercial purposes and, to the best
knowledge of Seller, since the date of origination, no portion of the Mortgaged
Property is used for commercial purposes;
(j) VALID FIRST LIEN. The Mortgage is a valid, subsisting, enforceable and
perfected first lien on the Mortgaged Property, including all buildings,
improvements and fixtures on the Mortgaged Property and all installations and
mechanical, electrical, plumbing, heating and air conditioning systems located
in or annexed to such buildings, and all additions, alterations and replacements
made at any time with respect to the foregoing as set forth in each Mortgage.
The lien of the Mortgage is subject only to:
(1) the lien of current real property taxes and assessments not yet
due and payable;
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(2) covenants, conditions and restrictions, rights of way, easements
and other matters of the public record as of the date of recording
acceptable to prudent mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy delivered
to the originator of the Mortgage Loan and (a) specifically referred to or
otherwise considered in the appraisal made for the originator of the
Mortgage Loan or (b) which do not adversely affect the Appraised Value of
the Mortgaged Property set forth in such appraisal; and
(3) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security
intended to be provided by the Mortgage or the use, enjoyment, value or
marketability of the related Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document related to
and delivered in connection with the Mortgage Loan establishes and creates a
valid, subsisting, enforceable and perfected first lien and first priority
security interest on the property described therein and the Seller has full
right to sell and assign the same to the Purchaser. The Mortgaged Property was
not, as of the date of origination of the Mortgage Loan, subject to a mortgage,
deed of trust, deed to secure debt or other security instrument creating a lien
subordinate to the lien of the Mortgage (except any such subordinate loan which
was created in connection with the origination of the related Mortgage Loan
details of which are contained in the related Mortgage File);
(k) VALIDITY OF MORTGAGE DOCUMENTS. The Mortgage Note and the Mortgage and
any other agreement executed and delivered by a Mortgagor in connection with a
Mortgage Loan are genuine, and each is the legal, valid and binding obligation
of the maker thereof enforceable in accordance with its terms. To the best
knowledge of the Seller, all parties to the Mortgage Note, the Mortgage and any
other such related agreement had legal capacity to enter into the Mortgage Loan
and to execute and deliver the Mortgage Note, the Mortgage and any such
agreement, and the Mortgage Note, the Mortgage and any other such related
agreement have been duly and properly executed by such parties. To the best
knowledge of the Seller, no fraud, error, omission, misrepresentation,
negligence or similar occurrence with respect to a Mortgage Loan has taken place
on the part of any Person, including without limitation, the Mortgagor, any
appraiser, any builder or developer, or any other party involved in the
origination of the Mortgage Loan;
(l) FULL DISBURSEMENT OF PROCEEDS. The Mortgage Loan has been closed and
the proceeds of the Mortgage Loan have been fully disbursed and there is no
requirement for future advances thereunder, and any and all requirements as to
completion of any on-site or off-site improvement and as to disbursements of any
escrow funds therefor have been complied with. All costs, fees and expenses
incurred in making or closing the Mortgage Loan and the recording of the
Mortgage were paid, and the Mortgagor is not entitled to any refund of any
amounts paid or due under the Mortgage Note or Mortgage;
(m) OWNERSHIP. The Seller is the sole owner of record and holder of the
Mortgage Loan and the indebtedness evidenced by each Mortgage Note, except for
the assignments of mortgage
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which have been sent for recording, and upon recordation the Purchaser will be
the sole owner of record and holder of each Mortgage and the indebtedness
evidenced by each Mortgage Note, and upon the sale of the Mortgage Loans to the
Purchaser, the Servicer will retain the Mortgage Files or any part thereof not
delivered to the Purchaser or its designee in trust only for the purpose of
servicing and supervising the servicing of each Mortgage Loan. The Mortgage Loan
is not assigned or pledged, and the Seller has good and indefeasible title
thereto, and has full right to transfer and sell the Mortgage Loan to the
Purchaser free and clear of any encumbrance, equity, participation interest,
lien, pledge, charge, claim or security interest, and has full right and
authority subject to no interest or participation of, or agreement with, any
other party, to sell and assign each Mortgage Loan pursuant to this Agreement
and following the sale of each Mortgage Loan, the Purchaser will own such
Mortgage Loan free and clear of any encumbrance, equity, participation interest,
lien, pledge, charge, claim or security interest except as created by Purchaser.
The Seller intends to relinquish all rights to possess, control and monitor the
Mortgage Loan. After the applicable Closing Date, the Seller will have no right
to modify or alter the terms of the sale of any Mortgage Loan and the Seller
will have no obligation or right to repurchase such Mortgage Loan or substitute
another Mortgage Loan therefor, except as provided in this Agreement;
(n) DOING BUSINESS. All parties which have had any interest in the
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or,
during the period in which they held and disposed of such interest, were) (1) in
compliance with any and all applicable licensing requirements of the laws of the
state wherein the Mortgaged Property is located and (2) either (i) organized
under the laws of such state, or (ii) qualified to do business in such state, or
(iii) a federal savings and loan association, a savings bank or a national bank
having a principal office in such state, or (3) not doing business in such
state;
(o) PMI POLICY. Each Mortgage Loan which at the time of its origination
was required to be insured as to payment defaults by a PMI Policy in accordance
with the underwriting policies customarily employed by the Seller or one of its
predecessors in interest during the period of such origination was so insured.
All provisions of each PMI Policy have been and are being complied with, each
such policy is valid and remains in full force and effect, and all premiums due
thereunder have been paid. To the best knowledge of the Seller, no action,
inaction, or event has occurred and no state of facts exists that has, or will
result in the exclusion from, denial of, or defense to coverage by the PMI
Policy (including, without limitation, any exclusions, denials or defenses which
would limit or reduce the availability of the timely payment of the full amount
of the loss otherwise due thereunder to the insured) whether arising out of
actions, representations, errors, omissions, negligence, or fraud of the Seller,
the related Mortgagor or any party involved in the application for such
coverage, including the appraisal, plans and specifications and other exhibits
or documents submitted therewith to the insurer under such insurance policy, or
for any other reason under such coverage, but not including the failure of such
insurer to pay by reason of such insurer's breach of such insurance policy or
such insurer's financial inability to pay. Any Mortgage Loan subject to a PMI
Policy obligates the Mortgagor thereunder to maintain the PMI Policy and to pay
all premiums and charges in connection therewith.
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(p) TITLE INSURANCE. The Mortgage Loan is covered by an ALTA lender's
title insurance policy or other form of policy or insurance acceptable to FNMA
and each such title insurance policy is issued by a title insurer acceptable to
FNMA and qualified to do business in the jurisdiction where the Mortgaged
Property is located, insuring the Seller, its successors and assigns, as to the
first priority lien of the Mortgage in the original principal amount of the
Mortgage Loan, subject only to the exceptions contained in clauses (1), (2) and
(3) of paragraph (j) of this Subsection 8.2, and against any loss by reason of
the invalidity or unenforceability of the lien resulting from the provisions of
the Mortgage providing for adjustment to the Mortgage Interest Rate and Monthly
Payment. Where required by state law or regulation, the Mortgagor has been given
the opportunity to choose the carrier of the required mortgage title insurance.
Additionally, such lender's title insurance policy affirmatively insures ingress
and egress, and against encroachments by or upon the Mortgaged Property or any
interest therein. The Seller, its successor and assigns, are the sole insureds
of such lender's title insurance policy, and such lender's title insurance
policy is valid and remains in full force and effect and will be in force and
effect upon the consummation of the transactions contemplated by this Agreement.
No claims have been made under such lender's title insurance policy and, neither
the Seller nor, to the best knowledge of Seller, any other prior holder of the
related Mortgage, has done, by act or omission, anything which would impair the
coverage of such lender's title insurance policy, including without limitation,
no unlawful fee, commission, kickback or other unlawful compensation or value of
any kind has been or will be received, retained or realized by any attorney,
firm or other person or entity, and no such unlawful items have been received,
retained or realized by the Seller;
(q) NO DEFAULTS. There is no default, breach, violation or event which
would permit acceleration existing under the Mortgage or the Mortgage Note and
no event which, with the passage of time or with notice and the expiration of
any grace or cure period, would constitute a default, breach, violation or event
which would permit acceleration, and neither the Seller nor its predecessors
have waived any default, breach, violation or event which would permit
acceleration;
(r) NO MECHANICS' LIENS. To the best knowledge of Seller, there is no
mechanics' or similar liens or claims filed for work, labor or material (and no
rights are outstanding that under law could give rise to such liens) affecting
the Mortgaged Property which are or may be liens prior to, or equal or
coordinate with, the lien of the related Mortgage;
(s) LOCATION OF IMPROVEMENTS; NO ENCROACHMENTS. With respect to each
Mortgage Loan, to the best knowledge of Seller, all improvements which were
considered in determining the Appraised Value of the Mortgaged Property lay
wholly within the boundaries and building restriction lines of the Mortgaged
Property, and no improvements on adjoining properties encroach upon the
Mortgaged Property. To the best knowledge of Seller, no improvement located on
or being part of the Mortgaged Property is in violation of any applicable zoning
law or regulation;
(t) ORIGINATION: PAYMENT TERMS. The Mortgage Loan was originated by a
mortgagee approved by the Secretary of HUD pursuant to Sections 203 and 211 of
the Act, a savings and loan association, a savings bank, a commercial bank,
credit union, insurance company or similar
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institution which is supervised and examined by a federal or state authority. To
the best knowledge of the Seller, the documents, instruments and agreements
submitted for loan underwriting were not falsified and contain no untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the information and statements therein not
misleading. Principal payments on the Mortgage Loan commenced no more than sixty
(60) days after funds were disbursed in connection with the Mortgage Loan. The
Mortgage Interest Rate, as well as the Lifetime Rate Cap and the Periodic Rate
Cap if the Mortgage Loan is an Adjustable Rate Mortgage Loan, are as set forth
on the applicable Mortgage Loan Schedule. The Mortgage Note is payable each
month in equal monthly installments of principal and interest, which
installments of interest are subject to change if the Mortgage Loan is an
Adjustable Rate Mortgage Loan due to the adjustments to the Mortgage Interest
Rate on each Interest Rate Adjustment Date, with interest calculated and payable
in arrears, sufficient to amortize the Mortgage Loan fully by the stated
maturity date, over an original term of not more than forty years from
commencement of amortization. Each Convertible Mortgage Loan contains a
provision allowing the Mortgagor to convert the Mortgage Note from an adjustable
interest rate Mortgage Note to a fixed interest rate Mortgage Note in accordance
with the terms of the Mortgage Note or a rider to the related Mortgage Note;
(u) CUSTOMARY PROVISIONS. The Mortgage contains customary and enforceable
provisions such as to render the rights and remedies of the holder thereof
adequate for the realization against the Mortgaged Property of the benefits of
the security provided thereby, including, (i) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial
foreclosure. For Mortgage Loans secured by Mortgaged Property located in
California, there is no homestead or other exemption available to a Mortgagor
which would interfere with the right to sell the Mortgaged Property at a
trustee's sale or the right to foreclose the Mortgage, subject to applicable
federal and state laws and judicial precedent with respect to bankruptcy and
right of redemption or similar law;
(v) CONFORMANCE WITH UNDERWRITING STANDARDS. The Mortgage Loan was
underwritten in accordance with the underwriting standards of the Seller or one
of its predecessors in interest, as applicable, or FNMA's underwriting standards
(except that the principal balance of certain Mortgage Loans may have exceeded
the limits of FNMA), in each case in effect at the time the Mortgage Loan was
originated. The Mortgage Note and Mortgage are on forms acceptable to the
Purchaser, in its sole discretion, as evidenced by the Purchaser's purchase of
the related Mortgage Loans, and the Seller has not made any representations to a
Mortgagor that are inconsistent with the Mortgage and the Mortgage Note;
(w) OCCUPANCY OF THE MORTGAGED PROPERTY. With respect to each Mortgage
Loan, the related Mortgaged Property is lawfully occupied under applicable law.
To the best knowledge of Seller, all inspections, licenses and certificates
required to be made or issued with respect to all occupied portions of the
Mortgaged Property and, with respect to the use and occupancy of the same,
including but not limited to certificates of occupancy and fire underwriting
certificates, have been made or obtained from the appropriate authorities;
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(x) NO ADDITIONAL COLLATERAL. The Mortgage Note is not and has not been
secured by any collateral except the lien of the corresponding Mortgage and the
security interest of any applicable security agreement or chattel mortgage
referred to in clause (j) above;
(y) DEEDS OF TRUST. In the event the Mortgage constitutes a deed of trust,
a trustee, authorized and duly qualified under applicable law to serve as such,
has been properly designated and currently so serves and is named in the
Mortgage, and no fees or expenses are or will become payable by the Purchaser to
the trustee under the deed of trust, except in connection with a trustee's sale
after default by the Mortgagor;
(z) VALUE AND MARKETABILITY. The Seller has no actual knowledge of any
circumstances or conditions with respect to the Mortgage, the Mortgaged
Property, the Mortgagor, the Mortgage File or the Mortgagor's credit standing
that can reasonably be expected to cause the Mortgage Loan to become delinquent,
or adversely affect the value or marketability of the Mortgage Loan;
(aa) DELIVERY OF MORTGAGE DOCUMENTS. The Mortgage Note, the Mortgage, the
Assignment of Mortgage and any other Mortgage Loan Documents (except for Primary
Insurance Policies held by the Servicer) for each Mortgage Loan have been
delivered to the Purchaser or its designee. The Seller and the Servicer are in
possession of a complete, true and accurate Mortgage File in compliance with
Exhibit A hereto, except for such documents the originals of which have been
delivered to the Purchaser or its designee;
(bb) CONDOMINIUMS/PLANNED UNIT DEVELOPMENTS. If the Mortgaged Property is
a condominium unit or a planned unit development, such condominium or planned
unit development project which would be acceptable to FNMA.
(cc) [Reserved]
(dd) ASSUMABILITY. Either (i) the Mortgage Loan Documents provide that a
related Mortgage Loan may only be assumed if the party assuming such Mortgage
Loan meets certain credit requirements stated in such documents, or (ii) the
Mortgage Note with respect to such Mortgage Loan contains a "due-on-sale"
provision which prevents the assumption of the Mortgage Loan by a proposed
transferee and accelerates the payment of the outstanding principal balance of
such Mortgage Loan;
(ee) NO BUYDOWN PROVISIONS; NO GRADUATED PAYMENTS OR CONTINGENT INTERESTS.
The Mortgage Loan does not contain provisions pursuant to which Monthly Payments
are paid or partially paid with funds deposited in any separate account
established by the Seller, the Mortgagor, or anyone on behalf of the Mortgagor,
or paid by any source other than the Mortgagor nor does it contain any other
similar provisions which may constitute a "buydown" provision. The Mortgage Loan
is not a graduated payment mortgage loan and the Mortgage Loan does not have a
shared appreciation or other contingent interest feature;
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(ff) [Reserved]
(gg) MORTGAGED PROPERTY UNDAMAGED; NO CONDEMNATION PROCEEDINGS. To the
best knowledge of Seller, there is no proceeding pending or to the best
knowledge of Seller threatened for the total or partial condemnation of the
Mortgaged Property. To the best knowledge of Seller, the Mortgaged Property is
undamaged by waste, fire, earthquake or earth movement, windstorm, flood,
tornado or other casualty so as to affect adversely the value of the Mortgaged
Property as security for the Mortgage Loan or the use for which the premises
were intended and each Mortgaged Property is in good repair;
(hh) COLLECTION PRACTICES; ESCROW DEPOSITS; INTEREST RATE ADJUSTMENTS. The
origination and collection practices used by the Seller and the Servicer with
respect to the Mortgage Loan have been in all material respects in compliance
with Accepted Servicing Practices, applicable laws and regulations, and have
been in all material respects legal and proper. With respect to escrow deposits
and Escrow Payments, all such payments are in the possession of, or under the
control of, the Servicer and, to the best knowledge of the Seller, there exist
no deficiencies in connection therewith for which customary arrangements for
repayment thereof have not been made. To the best knowledge of the Seller, all
Escrow Payments have been collected in full compliance with state and federal
law and the provisions of the related Mortgage Note and Mortgage. An escrow of
funds is not prohibited by applicable law and has been established in an amount
sufficient to pay for every item that remains unpaid and has been assessed but
is not yet due and payable if required under the Mortgage Loan. No escrow
deposits or Escrow Payments or other charges or payments due the Servicer have
been capitalized under the Mortgage or the Mortgage Note. To the best knowledge
of the Seller, all Mortgage Interest Rate adjustments and adjustments to the
Monthly Payment, if the Mortgage Loan is an Adjustable Rate Mortgage Loan, have
been made in strict compliance with state and federal law and the terms of the
related Mortgage and Mortgage Note on the related Interest Rate Adjustment Date.
With respect to each Adjustable Rate Mortgage Loan, the Mortgage Interest Rate
adjusts annually, semiannually or monthly as set forth in the applicable
Mortgage Notes. If, pursuant to the terms of the Mortgage Note, another index
was selected for determining the Mortgage Interest Rate, the same index was used
with respect to each Mortgage Note which required a new index to be selected,
and such selection did not conflict with the terms of the related Mortgage Note.
To the best knowledge of the Seller, the Servicer executed and delivered any and
all notices required under applicable law and the terms of the related Mortgage
Note and Mortgage regarding the Mortgage Interest Rate and the Monthly Payment
adjustments. Any interest required to be paid pursuant to state, federal and
local law has been properly paid and credited;
(ii) OTHER INSURANCE POLICIES. In connection with the placement of any
hazard insurance policy or PMI Policy, no commission, fee, or other compensation
has been or will be received by the Seller or by any officer, director, or
employee of the Seller or any designee of the Seller or any corporation in which
the Seller or any officer, director, or employee had a financial interest at the
time of placement of such insurance;
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(jj) NO VIOLATION OF ENVIRONMENTAL LAWS. To the best knowledge of Seller,
there is no pending action or proceeding directly involving the Mortgaged
Property in which compliance with any environmental law, rule or regulation is
an issue, there is no violation of any environmental law, rule or regulation
with respect to the Mortgaged Property, and nothing further remains to be done
to satisfy in full all requirements of each such law, rule or regulation
constituting a prerequisite to use and enjoyment of said property;
(kk) SOLDIERS' AND SAILORS' CIVIL RELIEF ACT. The Mortgagor has not
notified the Seller and the Seller has no knowledge of any relief requested or
allowed to the Mortgagor under the Soldiers' and Sailors' Civil Relief Act of
1940;
(ll) APPRAISAL. The Mortgage File contains an appraisal of the related
Mortgaged Property signed prior to the approval of the Mortgage Loan by a
Qualified Appraiser who had no interest, direct or indirect in the Mortgaged
Property or in any loan made on the security thereof, and whose compensation is
not affected by the approval or disapproval of the Mortgage Loan, and, if
applicable on the date the Mortgage Loan was originated, the appraisal and
appraiser both satisfy the requirements of FNMA and Title XI of the Federal
Institutions Reform, Recovery, and Enforcement Act of 1989 and the regulations
promulgated thereunder;
(mm) [Reserved]
(nn) [Reserved]
(oo) [Reserved]
(pp) ESCROW ANALYSIS. With respect to each Mortgage Loan for which an
Escrow Account exists, Seller has analyzed or has caused the Servicer to
analyze, within the last twelve months (unless such Mortgage Loan was originated
within such twelve month period) the required Escrow Payments for each Mortgage
Loan and adjusted the amount of such payments so that, assuming all required
payments are timely made, any deficiency will be eliminated on or before the
first anniversary of such analysis, or any overage will be refunded to the
Mortgagor, in accordance with RESPA and any other applicable law; and
(qq) PRIOR SERVICING. Each Mortgage Loan has been serviced in all material
respects in compliance with Accepted Servicing Practices; provided that, in the
event of any breach of the representation and warranty set forth in this
Subsection (qq), the Seller shall not be required to repurchase any such
Mortgage Loan unless such breach had, and continues to have, a material and
adverse effect on the value of the related Mortgage Loan or the interest of the
Purchaser therein.
SUBSECTION 8.3 REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES.
It is understood and agreed that the representations and warranties set
forth in Subsections 8.1 and 8.2 shall survive the sale of the Mortgage Loans to
the Purchaser and shall inure to the
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benefit of the Purchaser, notwithstanding any restrictive or qualified
endorsement on any Mortgage Note or Assignment of Mortgage or the examination or
failure to examine any Mortgage File. Upon discovery by either the Seller or the
Purchaser of a breach of any of the foregoing representations and warranties
which materially and adversely affects the interests of the Purchaser in the
related Mortgage Loan, the party discovering such breach shall give prompt
written notice to the other.
The Seller, promptly after discovery of a breach of any such
representation or warranty, shall notify the Purchaser of such breach and the
details thereof. Within sixty (60) days of the earlier of (i) notice by the
Seller pursuant to the immediately preceding sentence or (ii) notice by the
Purchaser to the Seller of any breach of a representation or warranty with
respect to a Mortgage Loan, the Seller shall use its best efforts promptly to
cure such breach in all material respects. If such breach can ultimately be
cured but is not reasonably expected to be cured within the 60 day period,
Seller shall have such additional time as is reasonably determined by Purchaser
(not to exceed 120 days) to cure or correct such breach provided Seller has
commenced curing or correcting such breach and is diligently pursuing same. If
such breach cannot be or has not been cured, the Seller shall, upon the
expiration of the cure period described above, at the Purchaser's option and
subject to the provisions of this Subsection 8.3, repurchase such Mortgage Loan
at the Repurchase Price, unless the Seller elects to substitute a Qualified
Substitute Mortgage Loan for such Mortgage Loan pursuant to this Subsection 8.3.
The Seller may, at the Seller's option and provided that the Seller has a
Qualified Substitute Mortgage Loan, rather than repurchase the Mortgage Loan as
provided above, remove such Mortgage Loan (a "Deleted Mortgage Loan") and
substitute in its place a Qualified Substitute Mortgage Loan or Loans. If the
Seller has no Qualified Substitute Mortgage Loan, it shall repurchase the
deficient Mortgage Loan. Any repurchase of a Mortgage Loan or Mortgage Loans
pursuant to the foregoing provisions of this Subsection 8.3 shall be
accomplished by either (a) if the Residential Servicing Agreement is in effect,
deposit in the Custodial Account of the amount of the Repurchase Price for
payment to the Purchaser on the next scheduled Remittance Date, after deducting
therefrom any amount received in respect of such repurchased Mortgage Loan or
Loans and being held in the Custodial Account for future distribution or (b) if
the Residential Servicing Agreement is no longer in effect, by direct remittance
of the Repurchase Price to the Purchaser or its designee in accordance with the
Purchaser's instructions.
At the time of repurchase or substitution, the Purchaser and the Seller
shall arrange for the reassignment of the Deleted Mortgage Loan to the Seller
and the delivery to the Seller of any documents held by the Purchaser or its
designee relating to the Deleted Mortgage Loan. In addition, upon any such
repurchase, all funds maintained in the Escrow Account with respect to such
Deleted Mortgage Loan shall be transferred to the Seller. In the event of a
repurchase or substitution, the Seller shall, simultaneously with such
reassignment, give written notice to the Purchaser that such repurchase or
substitution has taken place, amend the related Mortgage Loan Schedule to
reflect the withdrawal of the Deleted Mortgage Loan from this Agreement, and, in
the case of substitution, identify a Qualified Substitute Mortgage Loan and
amend the related Mortgage Loan Schedule to reflect the addition of such
Qualified Substitute Mortgage Loan to this Agreement. In connection with any
such substitution, the Seller shall be deemed to have made as to such Qualified
Substitute Mortgage Loan the representations and warranties set forth in this
Agreement except that all such
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representations and warranties set forth in this Agreement shall be deemed made
as of the date of such substitution. The Seller shall effect such substitution
by delivering to the Purchaser or its designee for such Qualified Substitute
Mortgage Loan the documents required by Subsection 6.3, with the Mortgage Note
endorsed as required by Subsection 6.3. The Seller shall deposit in the
Custodial Account the Monthly Payment, or in the event that the Residential
Servicing Agreement is no longer in effect, remit directly to the Purchaser or
its designee in accordance with the Purchaser's instructions the Monthly Payment
less the Servicing Fee collected, if any, on such Qualified Substitute Mortgage
Loan or Loans in the month following the date of such substitution. Monthly
Payments collected with respect to Qualified Substitute Mortgage Loans in the
month of substitution shall be retained by the Seller. For the month of
substitution, payments to the Purchaser shall include the Monthly Payment
collected on any Deleted Mortgage Loan in the month of substitution, and the
Seller shall thereafter be entitled to retain all amounts subsequently received
by the Seller in respect of such Deleted Mortgage Loan.
For any month in which the Seller substitutes a Qualified Substitute
Mortgage Loan for a Deleted Mortgage Loan, the Seller shall determine the amount
(if any) by which the aggregate principal balance of all Qualified Substitute
Mortgage Loans as of the date of substitution is less than the aggregate Stated
Principal Balance of all Deleted Mortgage Loans (after application of principal
payments collected as of the date of substitution). The amount of such shortfall
shall be distributed by the Seller directly to the Purchaser or its designee in
accordance with the Purchaser's instructions within two (2) Business Days of
such substitution.
In addition to such repurchase or substitution obligation, the Seller
shall indemnify the Purchaser and hold it harmless against any losses, damages,
penalties, fines, forfeitures, reasonable and necessary legal fees and related
costs, judgments, and other costs and expenses (but excluding any consequential,
indirect, special, exemplary or punitive damages ("Special Damages"), except for
such Special Damages which the Purchaser is required by law to pay to a third
party) resulting from any claim, demand, defense or assertion based on or
grounded upon, or resulting from, a breach of the Seller representations and
warranties contained in this Agreement. It is understood and agreed that the
obligations of the Seller set forth in this Subsection 8.3 to cure, substitute
for or repurchase a defective Mortgage Loan and to indemnify the Purchaser as
provided in this Subsection 8.3 constitute the sole remedies of the Purchaser
respecting a breach of the foregoing representations and warranties.
Any cause of action against the Seller relating to or arising out of the
breach of any representations and warranties made in Subsections 8.1 and 8.2
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the
Seller to cure such breach or repurchase such Mortgage Loan as specified above,
and (iii) demand upon the Seller by the Purchaser for compliance with this
Agreement.
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SECTION 9. CLOSING.
The closing for the purchase and sale of any Mortgage Loans shall take
place on (i) the Initial Closing Date with respect to the purchase and sale of
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
(ii) on the Closing Date set forth in a duly executed Commitment Letter with
respect to the purchase and sale of Mortgage Loans pursuant thereto. At the
Purchaser's option, any closing shall be either: by telephone, confirmed by
letter or wire as the parties shall agree, or conducted in person, at such place
as the parties shall agree.
The closing for the purchase and sale of Mortgage Loans to be purchased on
any Closing Date shall be subject to each of the following conditions:
(a) all of the representations and warranties of the Seller under this
Agreement shall be true and correct as of such Closing Date, no
default shall have occurred and no event shall have occurred which,
with notice or the passage of time or both, would constitute a
default under this Agreement;
(b) the Purchaser shall have received, or the Purchaser's attorneys
shall have received in escrow, all closing documents as specified in
Section 10 of this Agreement, in such forms as are agreed upon and
acceptable to the Purchaser, duly executed by all signatories other
than the Purchaser as required pursuant to the terms hereof;
(c) the Seller shall have delivered and released to the Purchaser or its
designee all Mortgage Loan Documents with respect to each Mortgage
Loan not otherwise required under the Residential Servicing
Agreement to be in the possession of, and actually in the possession
of the Servicer; and
(d) all other terms and conditions of this Agreement shall have been
complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the Seller
on the applicable Closing Date the applicable Purchase Price, plus accrued
interest pursuant to Section 4 of this Agreement, by wire transfer of
immediately available funds to the account designated by the Seller.
SECTION 10. CLOSING DOCUMENTS.
The closing documents for the Mortgage Loans to be purchased on any
Closing Date shall consist of fully executed originals of the following
documents:
1. on the Initial Closing Date only, this Agreement (and on all
subsequent Closing Dates, a Commitment Letter in the form of Exhibit
I hereto);
2. on the Initial Closing Date only, the Residential Servicing
Agreement, dated as of the Initial Cut-off Date, in the form of
Exhibit B hereto;
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3. an Officer's Certificate, in the form of Exhibit C hereto, including
all attachments thereto;
4. an Opinion of Counsel of the Seller (who may be an employee of the
Seller), in the form of Exhibit D hereto;
5. a Notice of Sale and Release of Collateral, in the form of Exhibit E
hereto;
6. a Security Release Certification, in the form of Exhibit F hereto
executed by any person, as requested by the Purchaser, if any of the
Mortgage Loans have at any time been subject to any security
interest, pledge or hypothecation for the benefit of such person;
and
7. a certificate or other evidence of merger or acquisition, if any of
the Mortgage Loans being purchased were acquired by Seller by merger
or acquisition.
The Seller shall bear the risk of loss of any closing documents and
Mortgage Loan documents until such time as they are received by the Purchaser or
its attorneys or designees, as applicable.
SECTION 11. COSTS.
The Purchaser shall pay any commissions due its salesmen and the legal
fees and expenses of its attorneys. All other costs and expenses incurred in
connection with the transfer and delivery of the Mortgage Loans including
recording fees, fees for recording Assignments of Mortgages, fees for title
policy endorsements and continuations and, if applicable, the Seller's
attorney's fees, shall be paid by the Seller.
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER.
The Seller will keep in full effect its existence, rights and franchises
as a corporation under the laws of the state of its incorporation except as
permitted herein, and will obtain and preserve its qualification to do business
as a foreign corporation in each jurisdiction in which such qualification is or
shall be necessary to protect the validity and enforceability of this Agreement,
or any of the Mortgage Loans and to perform its duties under this Agreement. In
the event Seller or any of its successors or assigns (i) consolidates with or
merges into any other Person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger, or (ii) transfers or
conveys all or substantially all of its properties and assets to any Person,
then, and in each such case, proper provision shall be made so that the
successors and assigns of Seller assume the obligations of Seller set forth in
this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any
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Person succeeding to the business of the Seller, shall be the successor of the
Seller hereunder, without the execution or filing of any paper or any further
act on the part of any of the parties hereto, anything herein to the contrary
notwithstanding; provided, however, that the successor or surviving Person shall
have a tangible net worth of at least $30,000,000.
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST.
The sale and delivery on any Closing Date of the Mortgage Loans described
on the applicable Mortgage Loan Schedule is mandatory from and after the date of
the execution of this Agreement or a Commitment Letter, as the case may be, it
being specifically understood and agreed that each Mortgage Loan is unique and
identifiable and that an award of money damages would be insufficient to
compensate the Purchaser for the losses and damages incurred by the Purchaser
(including damages to prospective purchasers of the Mortgage Loans) in the event
of the Seller's failure to deliver (i) each of the Mortgage Loans or (ii) one or
more Qualified Substitute Mortgage Loans or (iii) one or more Mortgage Loans
otherwise acceptable to the Purchaser on or before such Closing Date. The Seller
hereby grants to the Purchaser a lien on and a continuing security interest in
each Mortgage Loan set forth on the Initial Portfolio Mortgage Loan Schedule and
each document and instrument evidencing each such Mortgage Loan to secure the
performance by the Seller of its obligations under this Agreement, and the
Seller agrees that it shall hold such Mortgage Loans in custody for the
Purchaser subject to the Purchaser's (i) right to reject any Mortgage Loan (or
Qualified Substitute Mortgage Loan) under the terms of this Agreement and to
require another Mortgage Loan (or Qualified Substitute Mortgage Loan) to be
substituted therefor, and (ii) obligation to pay the Initial Purchase Price plus
accrued interest as set forth in Section 4 hereof for the Mortgage Loans. All
rights and remedies of the Purchaser under this Agreement are distinct from, and
cumulative with, any other rights or remedies under this Agreement or afforded
by law or equity and all such rights and remedies may be exercised concurrently,
independently or successively.
SECTION 14. NOTICES.
All demands, notices and communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed, by registered or certified
mail, return receipt requested, or, if by other means, when received by the
other party at the address as follows:
(i) if to the Seller:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
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(ii) if to the Purchaser:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 15. SEVERABILITY CLAUSE.
Any part, provision, representation or warranty of this Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law which prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part, provision, representation or warranty of this Agreement shall deprive any
party of the economic benefit intended to be conferred by this Agreement, the
parties shall negotiate, in good faith, to develop a structure the economic
effect of which is nearly as possible the same as the economic effect of this
Agreement without regard to such invalidity.
SECTION 16. COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
SECTION 17. GOVERNING LAW.
This Agreement shall be deemed to have been made in the State of
California. The Agreement shall be construed in accordance with the laws of the
State of California and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with the substantive laws of the
State of California (without regard to conflicts of laws principles), except to
the extent preempted by Federal law.
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SECTION 18. INTENTION OF THE PARTIES.
It is the intention of the parties that the Purchaser is purchasing, and
the Seller is selling the Mortgage Loans and not a debt instrument of the Seller
or another security. Accordingly, the parties hereto each intend to treat the
transaction for Federal income tax purposes as a sale by the Seller, and a
purchase by the Purchaser, of the Mortgage Loans.
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF PURCHASE AGREEMENT.
This Agreement shall bind and inure to the benefit of and be enforceable
by the Seller and the Purchaser and the respective permitted successors and
assigns of the Seller and the successors and assigns of the Purchaser. This
Agreement shall not be assigned, pledged or hypothecated by the Seller to a
third party without the consent of the Purchaser. Subject to any applicable
requirements of the Residential Servicing Agreement, this Agreement may be
assigned, pledged or hypothecated by the Purchaser without the prior consent of
the Seller. If the Purchaser assigns all or any of its rights as Purchaser
hereunder, the assignee of the Purchaser will become the "Purchaser" hereunder
to the extent of such assignment, provided that at no time shall there be more
than fifteen (15) persons having the status of "Purchaser" hereunder. Any
assignment by the Purchaser shall be accompanied by the delivery and execution
of an Assignment and Assumption Agreement (the "Assignment and Assumption
Agreement") substantially in the form attached hereto as Exhibit G. Subject to
any applicable requirements of the Residential Servicing Agreement, the Servicer
shall be required to remit all amounts required to be remitted to the Purchaser
hereunder to said assignee commencing with the first Remittance Date falling
after receipt of said copy of the related Assignment and Assumption Agreement
provided that the Servicer receives said copy no later than three (3) Business
Days immediately prior to the first day of the month of the related Remittance
Date.
SECTION 20. WAIVERS.
No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
SECTION 21. ENTIRE AGREEMENT; AMENDMENT.
This Agreement (including the Schedules and Exhibits annexed hereto or
referred to herein) and any Commitment Letter duly executed by the parties
hereto contain the entire agreement between the parties with respect to the
transactions contemplated hereby and supersede all prior agreements, written or
oral, with respect thereto. No amendment, modification or alteration of the
terms or provisions of this Agreement shall be binding unless the same shall be
in writing and duly executed by the authorized representatives of the parties
hereto, provided, however, that as long as any Series A Preferred Shares remain
outstanding, no material amendment to or modification or
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alteration of this Agreement may be entered into or approved by the Purchaser
without the approval of a majority of the Independent Directors.
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES.
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to them
in this Agreement and include the plural as well as the singular, and the use of
any gender herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
(c) references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other subdivisions without reference to a document are to
designated Articles, Sections, Subsections, Paragraphs and other subdivisions of
this Agreement;
(d) reference to a Subsection without further reference to a Section is a
reference to such Subsection as contained in the same Section in which the
reference appears, and this rule shall also apply to Paragraphs and other
subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular provision;
and
(f) the term "include" or "including" shall mean without limitation by
reason of enumeration.
SECTION 23. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at any closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process but solely for the
purposes set forth in this Agreement. The parties agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
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SECTION 24. FURTHER AGREEMENTS.
The Seller and the Purchaser each agree to execute and deliver to the
other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of this
Agreement.
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE.
The Seller shall execute a blanket assignment of the Mortgages underlying
each Mortgage Loan sold to the Purchaser pursuant to this Agreement or a duly
executed Commitment Letter. Upon the written request of Purchaser (whether due
to the proposed sale of any Mortgage Loan by Purchaser or otherwise), or to the
extent deemed necessary by the Servicer in connection with servicing a Mortgage
Loan pursuant to the terms of the Residential Servicing Agreement, the Seller
shall promptly prepare and execute individual Assignments of Mortgage to be
recorded in all appropriate public offices for real property records in all the
counties or other comparable jurisdictions in which any or all of the Mortgaged
Properties are situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by the Purchaser or Purchaser's
designee, but in any event, at the Seller's expense for a single recordation
with respect to each Assignment of Mortgage.
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IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
PEOPLE'S PREFERRED CAPITAL
CORPORATION
/s/ J. MICHAEL HOLMES
By: ---------------------
Name: J. MICHAEL HOLMES
Title: EXECUTIVE VICE PRESIDENT/
CHIEF FINANCIAL OFFICER
PEOPLE'S BANK OF CALIFORNIA
/s/ J. MICHAEL HOLMES
By: ---------------------
Name: J. MICHAEL HOLMES
Title: EXECUTIVE VICE PRESIDENT/
CHIEF FINANCIAL OFFICER
/s/ WILLIAM W. FLADER
By: ---------------------
Name: WILLIAM W. FLADER
Title: EXECUTIVE VICE PRESIDENT
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<PAGE>
EXHIBIT A
CONTENTS OF EACH MORTGAGE FILE
With respect to each Mortgage Loan, the Mortgage File shall include each
of the following items (to the extent such items are applicable and exist within
the Seller's Mortgage File), which shall be available for inspection by the
Purchaser and any prospective Purchaser, and which shall be delivered to the
Purchaser or its designee pursuant to Section 6.03 of the Mortgage Loan Purchase
and Warranties Agreement to which this Exhibit is attached (the "Agreement"):
1. The original Mortgage Note (or, with respect to the Mortgage Loan
listed on Schedule I hereto, a lost note affidavit, executed by an
officer of the Seller, with a copy of the original note attached
thereto) bearing all intervening endorsements, endorsed "Pay to the
order of ____________ without recourse" (except as otherwise
provided in the Agreement) and signed in the name of the Seller by
an authorized officer. To the extent that there is no room on the
face of the Mortgage Notes for endorsements, the endorsement may be
contained on an allonge, if state law so allows. If the Mortgage
Loan was acquired by the Seller in a merger, the endorsement must be
by "[Seller], successor by merger to [name of predecessor]". If the
Mortgage Loan was acquired or originated by the Seller while doing
business under another name, the endorsement must be by "[Seller],
formerly known as [previous name]".
2. The original of any guarantee executed in connection with the
Mortgage Note.
3. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or
cause to be delivered the original Mortgage with evidence of
recording thereon on or prior to the Closing Date because of a delay
caused by the public recording office where such Mortgage has been
delivered for recordation, a photocopy of such Mortgage certified by
the Seller to be true and correct will be delivered; if such
Mortgage has been lost or if such public recording office retains
the original recorded Mortgage, the Seller shall deliver or cause to
be delivered to the Purchaser, a photocopy of such Mortgage,
certified by such public recording office to be a true and complete
copy of the original recorded Mortgage.
4. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon or
certified copies of such documents if the originals thereof are
unavailable.
5. The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all Mortgage Loans and signed in the name of
the Seller by an
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authorized officer. If the Mortgage Loan was acquired by the Seller
in a merger, the Assignment of Mortgage must be made by "[Seller],
successor by merger to [name of predecessor]". If the Mortgage Loan
was acquired or originated by the Seller while doing business under
another name, the Assignment of Mortgage must be by "[Seller],
formerly known as [previous name]". With respect to Co-op Loans, the
Assignment of Mortgage shall include an assignment of Security
Instruments.
6. Originals of all intervening assignments of the Mortgage with
evidence of recording thereon if such intervening assignment has
been recorded.
7. The original mortgagee policy of title insurance or, in the event
such original title policy is unavailable, a certified true copy of
the related policy binder or commitment for title certified to be
true and complete by the title insurance company.
8. Any original security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
9. The original hazard insurance policy and, if required by law, flood
insurance policy, in accordance with Section 8.02(f) of the
Agreement.
10. Residential loan application.
11. Mortgage Loan closing statement.
12. Verification of employment and income.
13. Verification of acceptable evidence of source and amount of down
payment.
14. Credit report on the Mortgagor.
15. Residential appraisal report.
16. Photograph of the Mortgaged Property.
17. Survey of the Mortgaged Property, if any.
18. To the extent applicable, copy of each instrument necessary to
complete identification of any exception set forth in the exception
schedule in the title policy, i.e., map or plat, restrictions,
easements, sewer agreements, home association declarations, etc.
A-2
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19. All required disclosure statements.
20. If available, termite report, structural engineer's report, water
portability and septic certification.
21. Sales contract, if any.
22. Tax receipts, insurance premium receipts, ledger sheets, insurance
claim files, correspondence, current and historical computerized
data files, and all other processing, underwriting and closing
papers and records which are customarily contained in a mortgage
loan file and which are required to document the Mortgage Loan or to
service the Mortgage Loan.
23. For Mortgage Loans with original LTV's greater than 80%, evidence of
a Primary Insurance Policy.
The Servicer (as defined in the Agreement) retains possession of the
originals of those items identified in Items 9-23 of this Exhibit A.
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EXHIBIT B
B-1
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EXHIBIT C
FORM OF SELLER'S OFFICER'S CERTIFICATE
I, _____________, hereby certify that I am the duly elected Executive Vice
President of People's Bank of California, a federal savings bank organized under
the laws of the United States (the "Seller") and further as follows:
1. Attached hereto as Exhibit 1 is a true, correct and complete copy of
the restated Federal Stock Charter of the Seller which is in full force and
effect on the date hereof and which has been in effect without amendment,
waiver, rescission or modification since
2. Attached hereto as Exhibit 2 is a true, correct and complete copy of
the bylaws of the Seller which are in effect on the date hereof and which have
been in effect without amendment, waiver, rescission or modification since
_____________.
3. Attached hereto as Exhibit 3 is an original certificate of good
standing of the Seller issued within ten days of the date hereof, and no event
has occurred since the date thereof which would impair such standing.
4. Attached hereto as Exhibit 4 is a true, correct and complete copy of
the corporate resolutions of the Board of Directors or Committees thereof of the
Seller authorizing the Seller to execute and deliver each of the Residential
Mortgage Loan Purchase and Warranties Agreement, dated as of __________, 1997,
by and between People's Preferred Capital Corporation (the "Purchaser") and the
Seller (the "Purchase Agreement"), the Commitment Letter, dated as of _______,
by and between the Purchaser and the Seller [if applicable] and to endorse the
mortgage notes and execute the assignments of mortgages by original or facsimile
signature, and such resolutions are in effect on the date hereof and have been
in effect without amendment, waiver, rescission or modification since
5. Either (i) no consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Seller of or compliance by the Seller with the Purchase
Agreement [and the Commitment Letter], the sale of the mortgage loans or the
consummation of the transactions contemplated by the Purchase Agreement; or (ii)
any required consent, approval, authorization or order has been obtained by the
Seller.
6. Neither the consummation of the transactions contemplated by, nor the
fulfillment of the terms of, the Purchase Agreement [or the Commitment Letter]
conflicts or will conflict with or results or will result in a breach of or
constitutes or will constitute a default under the charter or bylaws of the
Seller, the terms of any indenture or other agreement or instrument to which the
Seller is a party or by which it is bound or to which it is subject, or any
statute or order, rule, regulations, writ, injunction or decree of any court,
governmental authority or regulatory body to which the Seller is subject or by
which it is bound.
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7. To the best of my knowledge, there is no action, suit, proceeding or
investigation pending or threatened against the Seller which, in my judgment,
either in any one instance or in the aggregate, may result in any material
adverse change in the business, operations, financial condition, properties or
assets of the Seller or in any material impairment of the right or ability of
the Seller to carry on its business substantially as now conducted or in any
material liability on the part of the Seller or which would draw into question
the validity of the Purchase Agreement [or the Commitment Letter] or the
mortgage loans or of any action taken or to be taken in connection with the
transactions contemplated hereby, or which would be likely to impair materially
the ability of the Seller to perform under the terms of the Purchase Agreement
[and the Commitment Letter].
8. Each person listed on Exhibit 5 attached hereto who, as an officer or
representative of the Seller, signed the Purchase Agreement [and the Commitment
Letter] and any other document delivered prior to or on the date hereof in
connection with any purchase described in the Purchase Agreement was, at the
respective times of such signing and delivery, and is now, a duly elected or
appointed, qualified and acting officer or representative of the Seller, who
holds the office set forth opposite his or her name on Exhibit 5, and the
signatures of such persons appearing on such documents are their genuine
signatures.
9. The Seller is duly authorized to engage in the transactions described
and contemplated in the Purchase Agreement [and the Commitment Letter].
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<PAGE>
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of
the Seller.
Dated:____________, 1997 By:_________________________________
Name: J. Michael Holmes
[Seal] Title: Executive Vice President
I, William W. Flader, an Executive Vice President of People's Bank of
California, hereby certify that J. Michael Holmes is the duly elected, qualified
and acting Executive Vice President of the Seller and that the signature
appearing above is his genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:____________, 1997 By:_________________________________
Name: William W. Flader
Title: Executive Vice President
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EXHIBIT 5
TO SELLER'S OFFICER'S CERTIFICATE
Name Title Signature
- ------------------------- ------------------------ ------------------------
C-4
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EXHIBIT D
FORM OF OPINION OF COUNSEL TO THE SELLER
_________________, 1997
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Dear Sirs:
You have requested my opinion, as General Counsel to People's Bank of
California (the "Seller"), with respect to certain matters in connection with
the sale by the Seller of the Mortgage Loans pursuant to that certain
Residential Mortgage Loan Purchase and Warranties Agreement by and between the
Seller and People's Preferred Capital Corporation (the "Purchaser"), dated as of
__________, 1997 (the "Purchase Agreement") which sale is in the form of whole
loans, delivered pursuant to the Purchase Agreement and serviced pursuant to a
Residential Servicing Agreement, dated as of __________, 1997, by and between
Temple-Inland Mortgage Corporation, the Seller and the Purchaser (the "Servicing
Agreement"). Capitalized terms not otherwise defined herein have the meanings
set forth in the Purchase Agreement and the Servicing Agreement.
I have examined the following documents:
1. the Purchase Agreement [and, if applicable, the Commitment Letter
dated ______________________;]
2. the Servicing Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes; and
5. such other documents, records and papers as I have deemed necessary
and relevant as a basis for this opinion.
To the extent I have deemed necessary and proper, I have relied upon the
representations and warranties of the Seller contained in the Purchase
Agreement. I have assumed the authenticity of all documents submitted to me as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents.
D-1
<PAGE>
Based upon the foregoing, it is my opinion that:
1. The Seller is a federal savings bank duly organized, validly
existing and in good standing under the laws of the United States
and is qualified to transact business in, and is in good standing
under, the laws of the United States.
2. The Seller has the power to engage in the transactions contemplated
by the Purchase Agreement [and, if applicable, the Commitment Letter
dated ____________________;] and all requisite power, authority and
legal right to execute and deliver the Purchase Agreement and to
perform and observe the terms and conditions of such agreements.
3. The Purchase Agreement has been duly authorized, executed and
delivered by the Seller and is a legal, valid and binding agreement
enforceable in accordance with its respective terms against the
Seller, subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the
application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder
or with the Purchaser's ownership of the Mortgage Loans.
4. The Seller has been duly authorized to allow certain specified
officers to execute any and all documents by original signature in
order to complete the transactions contemplated by the Purchase
Agreement and by original or facsimile signature in order to execute
the endorsements to the Mortgage Notes and the Assignments of
Mortgages, and the original or facsimile signature of the officer of
the Seller executing the endorsements to the Mortgage Notes and the
Assignments of Mortgages represents the legal and valid signature of
said officer of the Seller.
5. Either (i) no consent, approval, authorization or order of any court
or governmental agency or body is required for the execution,
delivery and performance by the Seller of or compliance by the
Seller with the Purchase Agreement and the sale of the Mortgage
Loans or the consummation of the transactions contemplated by the
Purchase Agreement or (ii) any required consent, approval,
authorization or order has been obtained by the Seller.
6. Neither the consummation of the transactions contemplated by, nor
the fulfillment of the terms of, the Purchase Agreement conflicts or
will conflict with or results or will result in a breach of or
constitutes or will constitute a default under the charter or bylaws
of the Seller, the terms of any indenture or other agreement or
instrument to which the Seller is a party or by which it is bound or
to which it is subject, or violates any statute or order, rule,
regulations, writ, injunction or decree of any court,
D-2
<PAGE>
governmental authority or regulatory body to which the Seller is
subject or by which it is bound.
7. There is no action, suit, proceeding or investigation pending or, to
the best of my knowledge, threatened against the Seller which, in my
judgment, either in any one instance or in the aggregate, may result
in any material adverse change in the business, operations,
financial condition, properties or assets of the Seller or in any
material impairment of the right or ability of the Seller to carry
on its business substantially as now conducted or in any material
liability on the part of the Seller or which would draw into
question the validity of the Purchase Agreement or the Mortgage
Loans or of any action taken or to be taken in connection with the
transactions contemplated thereby, or which would be likely to
impair materially the ability of the Seller to perform under the
terms of the Purchase Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the manner
contemplated by the Purchase Agreement is sufficient to fully
transfer to the Purchaser all right, title and interest of the
Seller thereto as noteholder and mortgagee.
I am licensed to practice law in the State of California and express no
opinion as to the laws of any jurisdiction other than the State of California or
the federal banking laws of the United States; accordingly, my opinions extend
only to questions of law of such jurisdictions. I note that certain of the
agreements upon which I express an opinion herein are governed by the laws of a
jurisdiction other than the State of California. I have assumed with your
consent for the purposes of giving these opinions that the law of any state
other than the State of California which may be applied to such agreements is
substantially identical to the laws of the State of California. The opinions
expressed herein are subject to statutory, regulatory and case law developments
after the date hereof.
This opinion is given to you for your sole benefit, and no other person or
entity is entitled to rely hereon.
Very truly yours,
--------------------------------
Doreen J. Blauschild
General Counsel
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EXHIBIT E
______________________, 1997
Federal Home Loan Bank of
San Francisco (the "Association")
600 California Street
San Francisco, California 94108
Attention:
-------------------------
-------------------------
Re: Notice of Sale and Release of Collateral
Dear Sirs:
This letter serves as notice that People's Bank of California, a federal
savings bank, organized pursuant to the laws of the United States (the "Bank")
has committed to sell to People's Preferred Capital Corporation under a
Residential Mortgage Loan Purchase and Warranties Agreement, dated as of
__________, 1997, certain mortgage loans owned by the Bank. The Bank warrants
that the mortgage loans to be sold to People's Preferred Capital Corporation are
in addition to and beyond any collateral required to secure advances made by the
Association to the Bank.
The Bank acknowledges that the mortgage loans to be sold to People's
Preferred Capital Corporation shall not be used as additional or substitute
collateral for advances made by the Association. People's Preferred Capital
Corporation understands that the balance of the Bank's mortgage loan portfolio
may be used as collateral or additional collateral for advances made by the
Association, and confirms that it has no interest therein.
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Execution of this letter by the Association shall constitute a full and
complete release of any security interest, claim, or lien which the Association
may have against the mortgage loans to be sold to People's Preferred Capital
Corporation.
Very truly yours,
--------------------------------------
By: __________________________________
Name: ________________________________
Title: _______________________________
Date:_________________________________
Acknowledged and approved:
FEDERAL HOME LOAN BANK OF
SAN FRANCISCO
By: _________________________
Name: _______________________
Title: ______________________
Date:________________________
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EXHIBIT F
FORM OF SECURITY RELEASE CERTIFICATION
I. RELEASE OF SECURITY INTEREST
The financial institution named below hereby relinquishes any and all
right, title and interest it may have in all Mortgage Loans to be purchased by
People's Preferred Capital Corporation from People's Bank of California pursuant
to that certain Residential Mortgage Loan Purchase and Warranties Agreement,
dated as of __________, 1997, and certifies that all notes, mortgages,
assignments and other documents in its possession relating to such Mortgage
Loans have been delivered and released to People's Bank of California or its
designees, as of the date and time of the sale of such Mortgage Loans to
People's Preferred Capital Corporation.
Name and Address of Financial Institution
- ------------------------------------
(name)
- ------------------------------------
(Address)
By:_________________________________
II. CERTIFICATION OF RELEASE
People's Bank of California hereby certifies to People's Preferred Capital
Corporation that, as of the date and time of the sale of the above-mentioned
Mortgage Loans to People's Preferred Capital Corporation, the security interests
in the Mortgage Loans released by the above-named financial institution comprise
all security interests relating to or affecting any and all such Mortgage Loans.
People's Bank of California warrants that, as of such time, there are and will
be no other security interests affecting any or all of such Mortgage Loans.
-----------------------------------
By: _______________________________
Title: ____________________________
Date:______________________________
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EXHIBIT G
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT, dated _________, between
____________, a __________ corporation ("Assignor") and __________, a
________________ corporation ("Assignee"):
For good and valuable consideration the receipt and sufficiency of which
hereby are acknowledged, and of the mutual covenants herein contained, the
parties hereto hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to Assignee, as
purchaser, all of the right, title and interest of Assignor with respect to the
mortgage loans listed on Exhibit A attached hereto (the "Mortgage Loans"), and
with respect to such Mortgage Loans, in, to and under (a) that certain
Residential Mortgage Loan Purchase and Warranties Agreement dated __________,
1997 by and between People's Bank of California (the "Seller") and People's
Preferred Capital Corporation (the "Purchaser") (the "Purchase Agreement"), and
(b) that certain Assignment, Assumption and Recognition Agreement dated as of
_______, 1997, by and between the Seller, the Purchaser and Temple-Inland
Mortgage Corporation (the "Servicer") (the "Residential Servicing Agreement";
the Residential Servicing Agreement and the Purchase Agreement are collectively
referred to as the "Agreements").
2. The Assignor warrants and represents to, and covenants with, the
Assignee that:
a. The Assignor is the lawful owner of the Mortgage Loans with
the full right to transfer the Mortgage Loans free from any
and all claims and encumbrances whatsoever;
b. The Assignor has not received notice of, and has no knowledge
of, any offsets, counterclaims or other defenses available to
the Seller with respect to the Agreements or the Mortgage
Loans;
c. The Assignor has not waived or agreed to any waiver under, or
agreed to any amendment or other modification of, the
Agreements. The Assignor has no knowledge of, and has not
received notice of, any waivers under or amendments or other
modifications of, or assignments of rights or obligations
under, the Agreements; and
d. Neither the Assignor nor anyone acting on its behalf has
offered, transferred, pledged, sold or otherwise disposed of
the Mortgage Loans or any interest in the Mortgage Loans, or
solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans, or any interest in
the Mortgage Loans or otherwise approached or negotiated with
respect to the Mortgage Loans, or any interest in the Mortgage
with any person in any manner, or
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made any general solicitation by means of general advertising
or in any other manner, or taken any other action which would
constitute a distribution of the Mortgage Loans under the
Securities Act of 1933, as amended (the "1933 Act") or which
would render the disposition of the Mortgage Loans a violation
of Section 5 of the 1933 Act or require registration pursuant
thereto.
3. The Assignee warrants and represents to, and covenants with, the
Assignor and the Seller pursuant to the Agreements that:
a. The Assignee is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, and has all requisite corporate power and
authority to acquire, own and purchase the Mortgage Loans;
b. The Assignee has full corporate power and authority to
execute, deliver and perform under this Assignment and
Assumption Agreement, and to consummate the transactions set
forth herein. The execution, delivery and performance of the
Assignee of this Assignment and Assumption Agreement, and the
consummation by it of the transactions contemplated hereby,
have been duly authorized by all necessary corporate action of
the Assignee. This Assignment and Assumption Agreement has
been duly executed and delivered by the Assignee and
constitutes the valid and legally binding obligation of the
Assignee enforceable against the Assignee in accordance with
its respective terms;
c. To the best of Assignee's knowledge, no material consent,
approval, order or authorization of, or declaration, filing or
registration with, any governmental entity is required to be
obtained or made by the Assignee in connection with the
execution, delivery or performance by the Assignee of this
Assignment and Assumption Agreement, or the consummation by it
of the transactions contemplated hereby;
d. The Assignee agrees to be bound, as Purchaser, by all of the
terms, covenants and conditions of the Agreements, the
Mortgage Loans, and from and after the date hereof, the
Assignee assumes for the benefit of each of the Seller and the
Assignor all of the Assignor' s obligations as Purchaser
thereunder, including, without limitation, the limitation on
assignment set forth in Section 19 of the Purchase Agreement;
e. The Assignee understands that the Mortgage Loans have not been
registered under the 1933 Act or the securities laws of any
state;
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f. The purchase price being paid by the Assignee for the Mortgage
Loans is in excess of $250,000 and will be paid by cash
remittance of the full purchase price within sixty (60) days
of the sale;
g. The Assignee is acquiring the Mortgage Loans for investment
for its own account only and not for any other person;
h. The Assignee considers itself a sophisticated institutional
investor having such knowledge and experience in financial and
business matters that it is capable of evaluating the merits
and risks of investment in the Mortgage Loans;
I. The Assignee has been furnished with all information regarding
the Mortgage Loans that it has requested from the Assignor or
the Seller;
j. Neither the Assignee nor anyone acting on its behalf has
offered, transferred, pledged, sold or otherwise disposed of
the Mortgage Loans or any interest in the Mortgage Loans, or
solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans or any interest in the
Mortgage Loans, or otherwise approached or negotiated with
respect to the Mortgage Loans or any interest in the Mortgage
Loans with any person in any manner which would constitute a
distribution of the Mortgage Loans under the 1933 Act or which
would render the disposition of the Mortgage Loans a violation
of Section 5 of the 1933 Act or require registration pursuant
thereto, nor will it act, nor has it authorized or will it
authorize any person to act, in such manner with respect to
the Mortgage Loans; and
k. Either: (1) the Assignee is not an employee benefit plan
("Plan") within the meaning of section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")
or a plan (also "Plan") within the meaning of section
4975(e)(1) of the Internal Revenue Code of 1986 ("Code"), and
the Assignee is not directly or indirectly purchasing the
Mortgage Loans on behalf of, investment manager of, as named
fiduciary of, as Trustee of, or with assets of, a Plan; or (2)
the Assignee's purchase of the Mortgage Loans will not result
in a prohibited transaction under section 406 of ERISA or
section 4975 of the Code.
G-3
<PAGE>
4. (a) The Assignee's address for purposes of all notices and
correspondence related to the Mortgage Loans and the Agreements is:
---------------------------
---------------------------
---------------------------
The Assignee's wire instructions for purposes of all remittances and
payments related to the Mortgage Loans are:
---------------------------
---------------------------
---------------------------
(b) The Assignor's address for purposes for all notices and correspondence
related to the Mortgage Loans and this Agreement is:
---------------------------
---------------------------
---------------------------
5. This Agreement shall be construed in accordance with the substantive
laws of the State of California (without regard to conflicts of laws principles)
and the obligations, rights and remedies of the parties hereunder shall be
determined in accordance with such laws, except to the extent preempted by
federal law.
6. This Agreement shall inure to the benefit of the successors and assigns
of the parties hereto. This Agreement may not be assigned by the Assignee
without the express written consent of the Assignor. Any entity into which the
Assignor or Assignee may be merged or consolidated shall, without the
requirement for any further writing, be deemed the Assignor or Assignee,
respectively, hereunder.
7. No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
8. This Agreement shall survive the conveyance of the Mortgage Loans and
the assignment of the Agreements by the Assignor.
G-4
<PAGE>
9. Notwithstanding the assignment of the Agreements by either the Assignor
or Assignee, this Agreement shall not be deemed assigned by the Assignor or the
Assignee unless assigned by separate written instrument.
10. For the purpose for facilitating the execution of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute and be one
and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption
Agreement to be executed by their duly authorized officers as of the date first
above written.
- --------------------------------- ---------------------------------
Assignor Assignee
By: _____________________________ By: ______________________________
Its: ____________________________ Its: _____________________________
Taxpayer Identification Taxpayer Identification
No.: _______________ No.: ________________
G-5
<PAGE>
EXHIBIT H
INITIAL PORTFOLIO MORTGAGE LOAN SCHEDULE
H-1
<PAGE>
EXHIBIT I
FORM OF COMMITMENT LETTER
[Date]
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Ladies and Gentlemen:
People's Preferred Capital Corporation, a Maryland corporation
("Purchaser"), hereby agrees to purchase from you ("Seller"), and you hereby
agree to sell, transfer, assign and convey to Purchaser, on ________________
(the "Closing Date"), all of your right, title and interest in and to those
residential mortgage loans (the "Mortgage Loans") set forth on Schedule I (the
"Mortgage Loan Schedule") attached hereto, the related Mortgage Files and all
rights and obligations of Seller arising under the documents contained therein,
subject to the terms and conditions set forth in this Commitment Letter and in
that certain Residential Mortgage Loan Purchase and Warranties Agreement, dated
as of ______________, 1997 (the "Purchase Agreement"), by and between Purchaser
and Seller.
The Mortgage Loans shall have an aggregate principal balance on
____________ (the "Cutoff Date") of $_______, or such amount as Purchaser and
Seller shall agree upon as evidenced by the aggregate principal balance of the
Mortgage Loans accepted by Purchaser on the Closing Date. The purchase price
payable by Purchaser to Seller at the Closing in consideration for the Mortgage
Loans set forth on the Mortgage Loan Schedule shall be $_______ (the "Purchase
Price"), or such other amount as Purchaser and Seller shall agree upon as
evidenced by the aggregate principal balance of the Mortgage Loans accepted by
Purchaser on the Closing Date.
I-1
<PAGE>
The purchase and sale of the Mortgage Loans contemplated hereby shall be
consummated by Purchaser and Seller subject to and in accordance with the terms
and conditions of the Purchase Agreement, including, without limitation, the
representations and warranties of Seller contained in Section 8 thereof and the
provisions relating to the purchase and sale of Mortgage Loans and delivery of
related documents in connection therewith set forth in Sections 4, 5, 6, 9 and
10 thereof. Capitalized terms used but not defined herein shall have the
meanings ascribed to such terms in the Purchase Agreement.
Very truly yours,
PEOPLE'S PREFERRED CAPITAL
CORPORATION
By: ______________________________________
Name:
Title:
Agreed and accepted as of the day first written above:
PEOPLE'S BANK OF CALIFORNIA
By: ____________________________
Name:
Title:
I-2
<PAGE>
Exhibit 10.(a)(i)
SECOND AMENDMENT TO RESIDENTIAL MORTGAGE
LOAN PURCHASE AND WARRANTIES AGREEMENT
This Second Amendment to the Residential Mortgage Loan Purchase and
Warranties Agreement ("Second Amendment") is made and entered into effective as
of the _______ day of August, 1999, by and between People's Bank of California,
a federal savings bank ("Seller"), and People's Preferred Capital Corporation, a
Maryland corporation ("Purchaser").
W I T N E S S E T H:
WHEREAS, the Seller and the Purchaser entered into a Residential Mortgage
Loan Purchase and Warranties Agreement, dated as of October 3, 1997 ("Purchase
Agreement"), whereby the Seller agreed to sell and the Purchaser agreed to
purchase certain Mortgage Loans (as defined in the Purchase Agreement) from time
to time, on a servicing retained basis;
WHEREAS, the Purchase Agreement was modified pursuant to an amendment
effective as of June 2, 1998 (the "First Amendment"), whereby the parties agreed
that the Seller, rather than Temple - Inland Mortgage Corporation, would act as
the servicer with respect to certain specified Mortgage Loans as well as with
respect to Mortgage Loans which the Seller may thereafter sell to the Purchaser
and which are designated to be serviced by the Seller;
WHEREAS, in order to more formally provide for the Seller to conduct
itself as a servicer of Mortgage Loans for the Purchaser, the Seller and the
Purchaser have as of the date of this Second Amendment entered into a
Residential Servicing Agreement; and
WHEREAS, in order to conform the terms of the Purchase Agreement and the
terms of the Residential Servicing Agreement, the parties hereto deem it
appropriate to enter into this Second Amendment.
NOW, THEREFORE, in consideration of the foregoing, the mutual promises and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Seller and the
Purchaser hereby agree as follows:
1. The introductory paragraph to Section 1 of the Purchase Agreement is
hereby deleted in its entirety and replaced with the following:
For purposes of this Agreement and any Commitment Letter (as defined
herein), the following capitalized terms shall have the respective
meanings set forth below. Other capitalized terms used in this Agreement
and not defined herein shall have the respective meanings set forth in the
Residential Servicing Agreement.
<PAGE>
2. The defined terms "Independent Directors", "Residential Servicing
Agreement" and "Servicer" set forth in the Purchase Agreement are deleted in
their entirety and replaced with the following:
"Independent Directors" means the members of the Board of Directors
of the Purchaser who are not current employees or officers of the
Purchaser or current employees, officers or directors of the Seller or any
affiliate of the Seller. In addition, any members of the Board of
Directors of the Purchaser elected by holders of the preferred stock of
the Purchaser, including but not limited to the Series A Preferred Shares
and the Series B Preferred Shares, will be deemed to be "Independent
Directors" for purposes of approving actions requiring the approval of a
majority of the Independent Directors.
"Residential Servicing Agreement" means as the context requires,
either (i) the Assignment, Assumption and Recognition Agreement, attached
as Exhibit B to the Agreement, entered into on October 3, 1997 by the
Seller, the Purchaser and Temple-Inland Mortgage Corporation, as servicer,
providing for Temple-Inland Mortgage Corporation to service certain
Mortgage Loans for the Purchaser as specified by the Assignment,
Assumption and Recognition Agreement or (ii) the agreement, attached as
Annex A to the Second Amendment, to be entered into by the Purchaser and
the Seller to service Mortgage Loans as specified by such agreement.
"Servicer" means as the context requires, either (i) Temple-Inland
Mortgage Corporation or (ii) the Seller.
3. The following defined term is added to the Purchase Agreement:
"Series B Preferred Shares" means the ____% Noncumulative
Exchangeable Preferred Stock, Series B, par value $.01 per share, of the
Purchaser.
4. Subsection 8.2(f) of the Purchase Agreement is deleted in its entirety
and replaced with the following:
(f) HAZARD INSURANCE. Pursuant to the terms of the Mortgage, all
buildings or other improvements upon the Mortgaged Property are insured by
a generally acceptable insurer against loss by fire, hazards of extended
coverage and such other hazards as are set forth in the Residential
Servicing Agreement. If required by the Flood Disaster Protection Act of
1973, as amended, the Mortgage Loan is covered by a flood insurance policy
meeting the requirements of the current guidelines of the Federal
Insurance Administration, which policy conforms to FNMA, as well as all
additional requirements set forth in the Residential Servicing Agreement.
All individual insurance policies contain a standard mortgagee clause
naming the Seller and its successors and assigns as mortgagee, and all
premiums
2
<PAGE>
thereon have been paid. The Mortgage for each Mortgage Loan obligates the
Mortgagor thereunder to maintain the hazard insurance policy at the
Mortgagor's cost and expense, and on the Mortgagor's failure to do so,
authorizes the holder of the Mortgage to obtain and maintain such
insurance at such Mortgagor's cost and expense, and to seek reimbursement
therefor from the Mortgagor. Where required by state law or regulation,
the Mortgagor has been given an opportunity to choose the carrier of the
required hazard insurance, provided the policy is not a "master" or
"blanket" hazard insurance policy covering a condominium, or any hazard
insurance policy covering the common facilities of a planned unit
development. To the best knowledge of the Seller, the hazard insurance
policy is the valid and binding obligation of the insurer, is in full
force and effect, and will be in full force and effect and inure to the
benefit of the Purchaser upon the consummation of the transactions
contemplated by this Agreement. No action, inaction or event has occurred
and no state of facts exists or has existed that has resulted or could
result in the exclusion from, denial of, or defense to coverage under any
hazard insurance policy. The Seller has not engaged in, and has no
knowledge of the Mortgagor's having engaged in, any act or omission which
would impair the coverage of any such policy, the benefits of the
endorsement provided for herein, or the validity and binding effect of
either including, without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of any kind has been or
will be received, retained or realized by any attorney, firm or other
person or entity, and no such unlawful items have been received, retained
or realized by the Seller;
5. Section 21 of the Purchase Agreement is deleted in its entirety and
replaced with the following:
This Agreement (including the Schedules and Exhibits annexed hereto
or referred to herein) and any Commitment Letter duly executed by the
parties hereto contain the entire agreement between the parties with
respect to the transactions contemplated hereby and supersede all prior
agreements, written or oral, with respect thereto. No amendment,
modification or alteration of the terms or provisions of this Agreement
shall be binding unless the same shall be in writing and duly executed by
the authorized representatives of the parties hereto, provided, however,
that as long as any shares of preferred stock of the Purchaser, including
but not limited to the Series A Preferred Shares or Series B Preferred
Shares, remain outstanding, no material amendment to or modification or
alteration of this Agreement may be entered into or approved by the
Purchaser without the approval of a majority of the Independent Directors.
6. With respect to a Commitment Letter (as defined in the Purchase
Agreement) entered into subsequent to the date of this Second Amendment,
paragraph 3 of the First Amendment is of no force or effect.
Except as expressly set forth in this Second Amendment, the terms and
conditions of the Purchase Agreement and the First Amendment shall remain
unchanged and in full force and effect.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Second Amendment under
seal as of the date and year first above written.
PEOPLE'S PREFERRED CAPITAL
CORPORATION
By: ______________________________
Name: ______________________________
Title: ______________________________
PEOPLE'S BANK OF CALIFORNIA
By: ______________________________
Name: ______________________________
Title: ______________________________
By: ______________________________
Name: ______________________________
Title: ______________________________
4
<PAGE>
Exhibit 10.(b)
- --------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
PEOPLE'S PREFERRED CAPITAL CORPORATION
PURCHASER
PEOPLE'S BANK OF CALIFORNIA
SELLER
DATED AS OF OCTOBER 3, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. Definitions................................................ 1
SECTION 2. Agreement to Purchase Initial Portfolio.................... 9
SECTION 3. Subsequent Purchases....................................... 10
SECTION 4. Payment of Purchase Price.................................. 10
SECTION 5. Examination of Mortgage Files.............................. 10
SECTION 6. Conveyance from Seller to Purchaser........................ 11
SUBSECTION 6.01 Possession of Servicing Files...................... 11
SUBSECTION 6.02 Books and Records.................................. 11
SUBSECTION 6.03 Delivery of Custodian's File....................... 11
SECTION 7. Servicing of the Mortgage Loans............................ 12
SECTION 8. Representations, Warranties and Covenants of the
Seller; Remedies for Breach................................ 13
SUBSECTION 8.01 Representations and Warranties Regarding the Seller 13
SUBSECTION 8.02 Representations and Warranties Regarding
Individual Mortgage Loans.................................. 15
SUBSECTION 8.03 Remedies for Breach of Representations and
Warranties................................................. 25
SECTION 9. Closing.................................................... 27
SECTION 10. Closing Documents.......................................... 28
SECTION 11. Costs...................................................... 29
SECTION 12. Merger or Consolidation of the Seller...................... 29
SECTION 13. Mandatory Delivery; Grant of Security Interest............. 29
SECTION 14. Notices.................................................... 30
SECTION 15. Severability Clause........................................ 31
SECTION 16. Counterparts............................................... 31
SECTION 17. Governing Law.............................................. 31
SECTION 18. Intention of the Parties................................... 31
SECTION 19. Successors and Assigns; Assignment of Purchase Agreement... 31
SECTION 20. Waivers.................................................... 32
SECTION 21. Entire Agreement, Amendment................................ 32
SECTION 22. General Interpretive Principles............................ 32
SECTION 23. Reproduction of Documents.................................. 33
SECTION 24. Further Agreements......................................... 33
SECTION 25. Recordation of Assignments of Mortgage..................... 33
i
<PAGE>
EXHIBITS
EXHIBIT A Contents of Each Mortgage File
EXHIBIT B Commercial Mortgage Servicing Agreement
EXHIBIT C Form of Seller's Officer's Certificate
EXHIBIT D Form of Opinion of Counsel to the Seller
EXHIBIT E Notice of Sale and Release of Collateral
EXHIBIT F Form of Security Release Certification
EXHIBIT G Form of Assignment and Assumption Agreement
EXHIBIT H Initial Portfolio Mortgage Loan Schedule
EXHIBIT I Form of Commitment Letter
ii
<PAGE>
COMMERCIAL MORTGAGE LOAN PURCHASE
AND WARRANTIES AGREEMENT
This COMMERCIAL MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT (the
"Agreement"), dated as of October 3, 1997, by and between People's Preferred
Capital Corporation, a Maryland corporation, having an office at 5900 Wilshire
Boulevard, Los Angeles, California 90036 (the "Purchaser") and People's Bank of
California, a federal stock savings bank organized under the laws of the United
States, having an office at 5900 Wilshire Boulevard, Los Angeles, California
90036 (the "Seller").
W I T N E S S E T H:
WHEREAS, the Seller desires to sell to the Purchaser, and the Purchaser
desires to purchase from the Seller, from time to time, certain conventional
commercial mortgage loans (the "Mortgage Loans") on a servicing retained basis
as described herein, and which shall be delivered as whole loans;
WHEREAS, each Mortgage Loan is secured by a mortgage, deed of trust or
other security instrument creating a first lien on a commercial property
indicated on the Mortgage Loan Schedule; and
WHEREAS, the Purchaser and the Seller wish to prescribe the manner of the
conveyance, servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the promises and mutual agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Purchaser and the Seller agree
as follows:
SECTION 1. DEFINITIONS.
For purposes of this Agreement and any Commitment Letter (as defined
herein) the following capitalized terms shall have the respective meanings set
forth below. Other capitalized terms used in this Agreement and not defined
herein shall have the respective meanings set forth in the Commercial Servicing
Agreement attached as Exhibit B hereto.
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of
1
<PAGE>
voting securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agreement" means this Commercial Mortgage Loan Purchase and Warranties
Agreement and all amendments hereof and supplements hereto.
"ALTA" means The American Land Title Association or any successor thereto.
"Ancillary Income" means all late charges, assumption fees, escrow account
benefits, reinstatement fees, and similar types of fees arising from or in
connection with any Mortgage, to the extent not otherwise payable to the
Mortgagor under applicable law or pursuant to the terms of the related Mortgage
Note.
"Appraised Value" means the value of the Mortgaged Property set forth in
an appraisal made in connection with the origination of the related Mortgage
Loan as the value of the Mortgaged Property or such later appraisal, if
applicable.
"Assignment and Assumption Agreement" has the meaning set forth in Section
19.
"Assignment of Mortgage" means an assignment of the Mortgage delivered in
blank, notice of transfer or equivalent instrument in recordable form,
sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the sale of the Mortgage to the Purchaser.
"Business Day" means any day other than (i) a Saturday or Sunday, or (ii)
a day on which banking and savings and loan institutions, in the State of
California or the state in which the Seller's servicing operations are located,
are authorized or obligated by law or executive order to be closed.
"Classified" is used herein generally to describe a Mortgage Loan which is
deemed substandard, doubtful or loss with respect to collectibility.
"Closing Date" means the Initial Closing Date and any other date on which
the parties hereto shall agree to close a sale of Mortgage Loans hereunder as
set forth in a duly executed Commitment Letter.
"Code" means Internal Revenue Code of 1986, as amended.
"Commercial Servicing Agreement" means the agreement, attached as Exhibit
B hereto, to be entered into by the Purchaser and the Seller, as servicer,
providing for the Seller to service the Mortgage Loans as specified by the
Commercial Servicing Agreement.
2
<PAGE>
"Commitment Letter" means a letter agreement executed by the Purchaser and
the Seller providing for the purchase and sale of Mortgage Loans and
substantially in the form of Exhibit I hereto.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Custodial Account" means the separate trust account created and
maintained pursuant to the Commercial Servicing Agreement.
"Cut-off Date" means the Initial Cut-off Date and any other date as of
which the principal balance of Mortgage Loans will be determined for purposes of
calculating the Purchase Price for the purchase and sale of Mortgage Loans,
which date shall be set forth in the related Commitment Letter.
"Deleted Mortgage Loan" means a Mortgage Loan that is repurchased or
replaced with a Qualified Substitute Mortgage Loan by the Seller in accordance
with the terms of this Agreement.
"Due Date" means the day of the month on which the Monthly Payment is due
on a Mortgage Loan, exclusive of any days of grace.
"Escrow Account" means the separate account created and maintained
pursuant to the Commercial Servicing Agreement with respect to each Mortgage
Loan, as specified in the Commercial Servicing Agreement.
"Escrow Payments" means, with respect to any Mortgage Loan, any payments
required to be escrowed by the Mortgagor with the mortgagee pursuant to the
Mortgage or any other document (whether referred to as escrow, impound or
otherwise), including without limitation the amounts constituting ground rents,
taxes, assessments, water rates, sewer rents, municipal charges, mortgage
insurance premiums, fire and hazard insurance premiums.
"Independent Directors" means the members of the Board of Directors of the
Purchaser who are not current employees or officers of the Purchaser or current
employees, officers or directors of the Seller or any affiliate of the Seller.
In addition, any members of the Board of Directors of the Purchaser elected by
holders of the preferred stock of the Purchaser, including the Series A
Preferred Shares, will be deemed to be "Independent Directors" for purposes of
approving actions requiring the approval of a majority of the Independent
Directors.
"Initial Closing Date" means October 3, 1997, or such other date as the
parties hereto may mutually agree.
3
<PAGE>
"Initial Cut-off Date" means September 22, 1997.
"Initial Portfolio Mortgage Loan Schedule" means the schedule of Mortgage
Loans to be purchased by the Purchaser on the Initial Closing Date, attached
hereto as Exhibit H.
"Initial Portfolio Purchase Price" means the amount set forth in Section 2
of this Agreement.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds
of insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Interest Rate Adjustment Date" means, with respect to each Variable Rate
Mortgage Loan, the date, specified in the related Mortgage Note, on which the
Mortgage Interest Rate is adjusted.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of the Mortgage Loan.
"Loan-to-Value Ratio" or "LTV" means, with respect to any Mortgage Loan,
the ratio (expressed as a percentage) of the original principal amount of the
Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged Property
at origination and (b) if the Mortgage Loan was made to finance the acquisition
of the related Mortgaged Property, the purchase price of the Mortgaged Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other instrument securing
a Mortgage Note, including any riders, addendums, assumptions, modifications or
extensions thereto, which creates a first lien on an unsubordinated estate in
fee simple in real property securing the Mortgage Note; except that with respect
to real property located in jurisdictions in which the use of leasehold estates
for commercial properties is a widely accepted practice, the mortgage, deed of
trust or other instrument securing the Mortgage Note may secure and create a
first lien upon a leasehold estate of the Mortgagor.
"Mortgage File" means the items pertaining to a particular Mortgage Loan
referred to in Exhibit A annexed hereto, and any additional documents required
to be added to the Mortgage File pursuant to this Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which, in the case of a Variable Rate Mortgage Loan, shall be
adjusted from time to time, with respect to each Mortgage Loan.
4
<PAGE>
"Mortgage Loan" means an individual Mortgage Loan which is the subject of
this Agreement, each Mortgage Loan originally sold and subject to this Agreement
being identified on Exhibit H attached hereto, and each Mortgage Loan sold
pursuant to a Commitment Letter being identified on the applicable Mortgage Loan
Schedule, and each of which Mortgage Loan includes without limitation the
Mortgage File, the Monthly Payments, Principal Prepayments, Liquidation
Proceeds, Condemnation Proceeds, Insurance Proceeds, and all other rights,
benefits, proceeds and obligations arising from or in connection with such
Mortgage Loan, excluding replaced or repurchased mortgage loans.
"Mortgage Loan Documents" means, with respect to each Mortgage Loan, the
following documents pertaining to such Mortgage Loan:
a. The original Mortgage Note (or, with respect to the Mortgage Loans
listed on Schedule I to Exhibit A hereto, a lost note affidavit,
executed by an officer of the Seller, with a copy of the original
note attached thereto) bearing all intervening endorsements,
endorsed "Pay to the order of ( IN BLANK ) without recourse" and
signed in the name of the Seller by an authorized officer. To the
extent that there is no room on the face of the Mortgage Notes for
endorsements, the endorsement may be contained on an allonge, if
state law so allows. If the Mortgage Loan was acquired by the Seller
in a merger, the endorsement must be by "[Seller], successor by
merger to [name of predecessor]". If the Mortgage Loan was acquired
or originated by the Seller while doing business under another name,
the endorsement must be by "[Seller], formerly known as [previous
name]"; and
b. The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all of the Mortgage Loans in form and
substance acceptable for recording endorsed and signed in the name
of the Seller. If the Mortgage Loan was acquired by the Seller in a
merger, the Assignment of Mortgage must be made by "[Seller],
successor by merger to [name of predecessor]". If the Mortgage Loan
was acquired or originated by the Seller while doing business under
another name, the Assignment of Mortgage must be by "[Seller],
formerly known as [previous name]".
c. The original of any guarantee executed in connection with the
Mortgage Note.
d. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or
cause to be delivered the original Mortgage with evidence of
recording thereon on or prior to the Closing Date because of a delay
caused by the public recording office where such Mortgage has been
delivered for recordation, a photocopy of such Mortgage certified by
the Seller to be true and correct will be delivered; if such
Mortgage has been lost or if such public recording office retains
the original recorded Mortgage, the Seller shall deliver or cause to
be delivered to the Purchaser, a photocopy of such Mortgage,
5
<PAGE>
certified by such public recording office to be a true and complete
copy of the original recorded Mortgage.
e. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon if
such agreements have been recorded, or certified copies of such
documents if the originals are unavailable.
f. Originals of all intervening Assignments of the Mortgage with
evidence of recording thereon, or if any such intervening assignment
has not been returned from the applicable recording office, a
photocopy of each such assignment certified by the Seller to be true
and correct will be delivered, or if such assignment has been lost
or if such public recording office retains the original recorded
assignments of mortgage, the Seller shall deliver or cause to be
delivered to the Purchaser, a photocopy of such intervening
assignment, certified by such public recording office to be a true
and complete copy of the original recorded intervening assignment.
g. The original mortgagee policy of title insurance or, in the event
such original title policy is unavailable, a certified true copy of
the related policy binder or commitment for title certified to be
true and complete by the title insurance company; provided that the
original mortgagee policy of title insurance shall be delivered
promptly after receipt by the Seller thereof but in no event later
than one hundred twenty (120) days from and after the Closing Date.
h. Any other security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
"Mortgage Loan Schedule" means (a) the Initial Portfolio Mortgage Loan
Schedule attached hereto as Exhibit H and (b) any schedule of Mortgage Loans in
similar form attached to and constituting part of a duly executed Commitment
Letter, in each case setting forth at least the following information with
respect to each Mortgage Loan: (1) the Seller's Mortgage Loan identifying
number; (2) the Mortgagor's name; (3) the street address of the Mortgaged
Property including the state; (4) the type of commercial property constituting
the Mortgaged Property; (5) the type of Mortgage Loan (i.e., whether the
Mortgage Loan bears interest at a fixed or variable rate); (6) the original
months to maturity or the remaining months to maturity from the applicable
Cut-off Date, in any case based on the original amortization schedule and, if
different, the maturity expressed in the same manner but based on the actual
amortization schedule; (7) the Loan-to-Value Ratio at origination; (8) the
Mortgage Interest Rate as of the applicable Cut-off Date; (9) the stated
maturity date; (10) the amount of the Monthly Payment as of the applicable
Cut-off Date; (11) the original principal amount of the Mortgage Loan; (12) the
principal balance of the Mortgage Loan as of the close of business on the
applicable Cut-off Date; (13) a code indicating the purpose of the loan (i.e.,
purchase and refinance); (14) the Interest Rate Adjustment Date with respect to
any Variable Rate Mortgage Loan, frequency of interest rate adjustments,
interest rate caps, floors and ceilings; (15) the Servicing Fee Rate; and (16)
with respect to any Variable Rate Mortgage Loan, the index and
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margin pursuant to which the Mortgage Interest Rate is determined. With respect
to the Mortgage Loans in the aggregate, the Mortgage Loan Schedule shall set
forth the following information, as of the applicable Cut-off Date: (1) the
number of Mortgage Loans; (2) the current aggregate outstanding principal
balance of the Mortgage Loans; (3) the weighted average interest rate; and (4)
the weighted average servicing fee.
"Mortgage Note" means the note or other evidence of the indebtedness of a
Mortgagor secured by a Mortgage, including any amendment, modification or
addendum thereto.
"Mortgaged Property" means the real property (or leasehold estate, if
applicable) securing repayment of the debt evidenced by a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
"Non-accrual Status" refers to Mortgage Loans that are 90 days or more
past due in the payment of principal or interest.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President and
by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, and delivered to the Purchaser as required
by this Agreement.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Seller, reasonably acceptable to the Purchaser.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Western
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Price" means the price to be paid on the applicable Closing Date
by the Purchaser to the Seller in consideration for the Mortgage Loans to be
purchased by the Purchaser on such Closing Date (including, without limitation,
the Initial Portfolio Purchase Price to be paid by Purchaser at the Initial
Closing) as set forth in this Agreement or a duly executed Commitment Letter, as
the case may be.
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"Purchaser" means People's Preferred Capital Corporation or its successor
in interest or assigns or any successor to the Purchaser under this Agreement as
herein provided.
"Qualified Appraiser" means an appraiser who had no interest, direct or
indirect in the Mortgaged Property or in any loan made on the security thereof,
and whose compensation is not affected by the approval or disapproval of the
Mortgage Loan, and such appraiser and the appraisal made by such appraiser both
satisfy the requirements of Title XI of the Federal Institutions Reform,
Recovery, and Enforcement Act of 1989 and the regulations promulgated
thereunder, all as in effect on the date the Mortgage Property was appraised.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, and in the two highest rating
categories by Best's with respect to hazard and flood insurance .
"Qualified Substitute Mortgage Loan" means a mortgage loan eligible to be
substituted by the Seller for a Deleted Mortgage Loan which must, on the date of
such substitution, (i) have an outstanding principal balance, after deduction of
all payments collected as of the date of substitution (or in the case of a
substitution of more than one mortgage loan for a Deleted Mortgage Loan, an
aggregate principal balance), not in excess of the outstanding principal balance
of the Deleted Mortgage Loan (the amount of any shortfall will be deposited in
the Custodial Account by the Seller in the month of substitution); (ii) have a
Mortgage Interest Rate and a remaining term to maturity, each of which is as
reasonably comparable as possible to the Mortgage Interest Rate and remaining
term to maturity of the Deleted Mortgage Loan; (iii) be of the same type as the
Deleted Mortgage Loan; and (iv) comply with each representation and warranty
(respecting individual Mortgage Loans) set forth in Section 8.02 hereof.
"Remittance Date" means the date specified in the Commercial Servicing
Agreement.
"Repurchase Price" means, with respect to any Mortgage Loan, a price equal
to (i) the unpaid principal balance of such Mortgage Loan plus (ii) interest net
of servicing fees, on such unpaid principal balance of such Mortgage Loan at the
Mortgage Interest Rate from the last date through which interest has been paid
and distributed to the Purchaser to the date of repurchase, less amounts
received or advanced, if any, by the Seller in respect of such repurchased
Mortgage Loan.
"Seller" means People's Bank of California, its successors in interest and
assigns.
"Series A Preferred Shares" means the ___% Noncumulative Exchangeable
Preferred Stock, Series A, par value $0.01 per share, of the Purchaser.
"Servicing Fee" means, with respect to each Mortgage Loan, subject to the
Commercial Servicing Agreement, the amount of the annual fee the Purchaser shall
pay to the Seller, which shall for a period of one full month be equal to
one-twelfth of the product of (a) the Servicing Fee Rate
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and (b) the outstanding principal balance of such Mortgage Loan. Such fee shall
be payable monthly, and shall be pro rated for any portion of a month during
which the Mortgage Loan is serviced by the Seller under the Servicing Agreement.
The obligation of the Purchaser to pay the Servicing Fee is limited to, and the
Servicing Fee is payable solely from, the interest portion (including recoveries
with respect to interest from Liquidation Proceeds, to the extent permitted by
this Agreement) of such Monthly Payment collected by the Seller, or as otherwise
provided under this Agreement. In addition to the Servicing Fee, the Seller
shall be entitled to retain all Ancillary Income.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the rate
specified in the Mortgage Loan Schedule with respect to such Mortgage Loan.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Seller during the period in which the Seller is acting as
servicer pursuant to the Commercial Servicing Agreement consisting of originals
of all documents in the Mortgage File which are not delivered to the Purchaser
or its designee and copies of the Mortgage Loan Documents.
"Stated Principal Balance" means as to each Mortgage Loan the unpaid
principal balance as of the applicable date of determination of such balance.
"Variable Rate Mortgage Loan" means any individual Mortgage Loan purchased
pursuant to this Agreement the interest rate of which adjusts periodically based
on the index identified in the Mortgage Note.
SECTION 2. AGREEMENT TO PURCHASE INITIAL PORTFOLIO.
The Seller hereby agrees to sell, transfer, assign, set over and convey to
the Purchaser on the Initial Closing Date, without recourse, but subject to the
terms of this Agreement, all right, title and interest of the Seller in and to
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
the related Mortgage Files and all rights and obligations arising under the
documents contained therein. Mortgage Loans on the Initial Portfolio Mortgage
Loan Schedule shall have an aggregate principal balance on the Initial Cut-off
Date in an amount no less than $__________.
The Initial Portfolio Purchase Price payable by the Purchaser in
consideration for the Mortgage Loans listed on the Initial Portfolio Mortgage
Loan Schedule shall be equal to the actual aggregate unpaid principal balance of
the Mortgage Loans as of the Initial Cut-off Date as accepted by the Purchaser
on the Initial Closing Date plus interest accrued on such Mortgage Loans at the
weighted average Mortgage Interest Rate from the last interest paid to date for
each such Mortgage Loan to and including the day prior to the Initial Closing
Date.
SECTION 3. SUBSEQUENT PURCHASES.
From time to time, by executing a Commitment Letter substantially in the
form of Exhibit I hereto, the Seller shall sell, transfer, assign, set over and
convey to the Purchaser, without recourse,
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but subject to the terms of this Agreement, and the Purchaser will purchase, all
the right, title and interest of the Seller, as of the applicable Closing Date,
in and to the Mortgage Loans set forth in the Mortgage Loan Schedule attached to
such Commitment Letter, and the Purchaser shall pay to Seller the Purchase Price
set forth in such Commitment Letter on such Closing Date.
SECTION 4. PAYMENT OF PURCHASE PRICE.
The estimated Purchase Price computed as of the Initial Cut-off Date and
other Cut-off Dates, as applicable, shall be paid on the applicable Closing Date
by wire transfer of immediately available funds. The difference, if any, between
such estimated Purchase Price and the actual Purchase Price computed as of the
applicable Closing Date shall be paid by Seller or Purchaser to the other, as
the case may be, no later than ten business days after the applicable Closing
Date.
The Purchaser shall, with respect to any Mortgage Loan purchased hereunder
or pursuant to a duly executed Commitment Letter, be entitled to (l) all
principal due after the applicable Cut-off Date, (2) all other recoveries of
principal collected on or after the applicable Cut-off Date, and (3) all
payments of interest on the Mortgage Loans net of applicable Servicing Fees
collected on or after the applicable Cut-off Date. The outstanding principal
balance of each Mortgage Loan as of the applicable Cut-off Date is determined
after application of payments of principal collected on or before such Cut-off
Date, together with any unscheduled principal prepayments collected prior to
such Cut-off Date.
SECTION 5. EXAMINATION OF MORTGAGE FILES.
Prior to the date hereof or the date of any duly executed Commitment
Letter, as the case may be, the Seller has or shall have (a) delivered to the
Purchaser or its designee in escrow, for examination with respect to each
Mortgage Loan to be purchased, the related Mortgage File, including a copy of
the Assignment of Mortgage, pertaining to each Mortgage Loan, or (b) made the
related Mortgage File available to the Purchaser for examination at the Seller's
offices or such other location as shall otherwise be agreed upon by the
Purchaser and the Seller. The fact that the Purchaser or its designee has
conducted or has failed to conduct any partial or complete examination of the
Mortgage Files shall not affect the Purchaser's (or any of its successor's)
rights to demand repurchase, substitution or other relief as provided herein.
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER.
SUBSECTION 6.01. POSSESSION OF SERVICING FILES.
The Servicing Files relating to any Mortgage Loans purchased by Purchaser
hereunder or pursuant to a duly executed Commitment Letter shall be retained by
the Seller in accordance with the terms of the Commercial Servicing Agreement
and, as provided therein, shall be appropriately identified in the Seller's
computer system and/or books and records, as appropriate, to clearly reflect the
sale of the related Mortgage Loan to the Purchaser.
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SUBSECTION 6.02. BOOKS AND RECORDS.
Record title to each Mortgage Loan as of the applicable Closing Date shall
be in the name of the Seller or the Purchaser or one or more of its designees,
as the Purchaser shall select. Notwithstanding the foregoing, each Mortgage and
related Mortgage Note shall be possessed solely by the Purchaser or the
appropriate designee of the Purchaser, as the case may be. All rights arising
out of the Mortgage Loans including, but not limited to, all funds received by
the Seller after the applicable Cut-off Date on or in connection with a Mortgage
Loan shall be vested in the Purchaser or one or more of its designees; provided,
however, that all funds received on or in connection with a Mortgage Loan shall
be received and held by the Seller in trust for the benefit of the Purchaser or
its designee, as the case may be, as the owner of the Mortgage Loans pursuant to
the terms of this Agreement.
The sale of each Mortgage Loan shall be reflected on the Seller's balance
sheet and other financial statements as a sale of assets by the Seller.
SUBSECTION 6.03. DELIVERY OF MORTGAGE LOAN DOCUMENTS.
On or prior to each Closing Date, the Seller shall deliver and release to
the Purchaser or its designee on the Closing Date the Mortgage Loan Documents
with respect to each Mortgage Loan sold to the Purchaser and set forth on the
Mortgage Loan Schedule, except as otherwise provided in the Commercial Servicing
Agreement.
The Seller shall forward to the Purchaser or its designee original
documents evidencing an assumption, modification, consolidation, conversion or
extension of any Mortgage Loan entered into in accordance with the Commercial
Servicing Agreement within thirty (30) days of their execution, provided,
however, that the Seller shall provide the Purchaser or its designee with a
certified true copy of any such document submitted for recordation within thirty
(30) days of its execution, and shall promptly provide the original of any
document submitted for recordation or a copy of such document certified by the
appropriate public recording office to be a true and complete copy of the
original within ninety (90) days of its submission for recordation (provided,
that with respect to assignments of the Mortgages reflecting the assignment from
the Seller to the Purchaser, one final assignment shall be executed by Seller in
blanket non-recordable form, and no other forms of assignment of such Mortgages
shall be executed or recorded unless and until the Purchaser shall request
execution of individual Assignments of Mortgages pursuant to and in accordance
with Section 25 hereof).
In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the submission for
recordation, and in the event that the Seller does not cure such failure within
30 days of discovery or receipt of written notification of such failure from the
Purchaser, the related Mortgage Loan shall, upon the request of the Purchaser,
be repurchased by the Seller at the price and in the manner specified in
Subsection 8.03. The foregoing repurchase obligation shall not
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apply in the event that the Seller cannot deliver, or cause to be delivered,
such original or copy of any document submitted for recordation to the
appropriate public recording office within the specified period due to a delay
caused by the recording office in the applicable jurisdiction; provided that the
Seller shall instead deliver, or cause to be delivered, a recording receipt of
such recording office or, if such recording receipt is not available, an
officer's certificate of a servicing officer of the Seller, confirming that such
documents have been accepted for recording. Notwithstanding anything herein to
the contrary, under the circumstances described in the preceding sentence, the
Seller shall continue to make all reasonable efforts to obtain the original of
any document submitted for recordation to the appropriate public recording
office.
The Seller shall pay all initial recording fees, if any, for the
Assignments of Mortgage and any other fees or costs in transferring all original
documents to the Purchaser or its designee. The Purchaser or its designee shall
be responsible for recording the Assignments of Mortgage and shall be reimbursed
by the Seller for the reasonable costs associated therewith pursuant to the
preceding sentence.
SECTION 7. SERVICING OF THE MORTGAGE LOANS.
The Mortgage Loans have been sold by the Seller to the Purchaser on a
servicing retained basis.
The Seller will service the Mortgage Loans pursuant to and in accordance
with the terms and conditions contained in the Commercial Servicing Agreement.
The Purchaser and the Seller shall execute the Commercial Servicing Agreement on
or before the Initial Closing Date in the form attached hereto as Exhibit B.
Pursuant to the Commercial Servicing Agreement, the Seller shall begin
servicing the Mortgage Loans on behalf of the Purchaser and shall be entitled to
the Servicing Fee and any Ancillary Income with respect to such Mortgage Loans
from the Closing Date with respect to the sale and purchase thereof until the
termination of the Commercial Servicing Agreement with respect to any of the
Mortgage Loans as set forth in the Commercial Servicing Agreement. The Seller
shall conduct such servicing in accordance with the terms of the Commercial
Servicing Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER REMEDIES FOR
BREACH.
SUBSECTION 8.01. REPRESENTATIONS AND WARRANTIES REGARDING THE SELLER.
The Seller represents, warrants and covenants to the Purchaser that as of
the date hereof and as of the Closing Date:
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(a) DUE ORGANIZATION AND AUTHORITY; ENFORCEABILITY. The Seller is a
stock savings bank duly organized, validly existing and in good
standing under the laws of the United States and has all licenses
necessary to carry on its business as now being conducted and is
licensed, qualified and in good standing in each state wherein it
owns or leases any material properties or where a Mortgaged Property
is located, if the laws of such state require licensing or
qualification in order to conduct business of the type conducted by
the Seller, and in any event the Seller is in compliance with the
laws of any such state to the extent necessary to ensure the
enforceability of the related Mortgage Loan in accordance with the
terms of this Agreement; the Seller has the full corporate power,
authority and legal right to hold, transfer and convey the Mortgage
Loans and to execute and deliver this Agreement and to perform its
obligations hereunder; the execution, delivery and performance of
this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Seller and the
consummation of the transactions contemplated hereby have been duly
and validly authorized; this Agreement and all agreements
contemplated hereby have been duly executed and delivered and
constitute the valid, legal, binding and enforceable obligations of
the Seller subject to bankruptcy laws and other similar laws of
general application affecting rights of creditors and subject to the
application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder,
regardless of whether such enforcement is sought in a proceeding in
equity or at law; and all requisite corporate action has been taken
by the Seller to make this Agreement and all agreements contemplated
hereby valid and binding upon the Seller in accordance with their
terms;
(b) ORDINARY COURSE OF BUSINESS. The consummation of the transactions
contemplated by this Agreement are in the ordinary course of
business of the Seller, and the transfer, assignment and conveyance
of the Mortgage Notes and the Mortgages by the Seller pursuant to
this Agreement are not subject to the bulk transfer or any similar
statutory provisions in effect in any applicable jurisdiction;
(c) NO CONFLICTS. Neither the execution and delivery of this Agreement,
the sale of the Mortgage Loans to the Purchaser, the consummation of
the transactions contemplated hereby, nor the fulfillment of or
compliance with the terms and conditions of this Agreement, will
conflict with or result in a breach of any of the terms, conditions
or provisions of the Seller's charter or bylaws or any legal
restriction or any agreement or instrument to which the Seller is
now a party or by which it is bound, or constitute a default or
result in an acceleration under any of the foregoing, or result in
the violation of any law, rule, regulation, order, judgment or
decree to which the Seller or its property is subject, or result in
the creation or imposition of any lien, charge or encumbrance that
would have an adverse effect upon any of its properties pursuant to
the terms of any mortgage, contract, deed of trust or other
instrument, or impair the ability of the Purchaser to realize on the
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Mortgage Loans, impair the value of the Mortgage Loans, impair the
ability of the Purchaser to realize the full amount of any mortgage
insurance benefits accruing pursuant to this Agreement or impair the
ability of the Seller to perform its obligations hereunder;
(d) ABILITY TO PERFORM: SOLVENCY. The Seller does not believe, nor does
it have any reason or cause to believe, that it cannot perform each
and every covenant contained in this Agreement. The Seller is
solvent and the sale of the Mortgage Loans will not cause the Seller
to become insolvent. The sale of the Mortgage Loans is not
undertaken with the intent to hinder, delay or defraud any of the
Seller's creditors;
(e) NO LITIGATION PENDING. There is no action, suit, proceeding or
investigation pending or threatened against the Seller, before any
court, administrative agency or other tribunal asserting the
invalidity of this Agreement or the Commercial Servicing Agreement,
seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or the Commercial Servicing Agreement
or which, either in any one instance or in the aggregate, could
result in any material adverse change in the business, operations,
financial condition, properties or assets of the Seller, or in any
material impairment of the right or ability of the Seller to carry
on its business substantially as now conducted, or in any material
liability on the part of the Seller, or which would draw into
question the validity of this Agreement or the Commercial Servicing
Agreement or any Mortgage Loan or of any action taken or to be taken
in connection with the obligations of the Seller contemplated
herein, or which would be likely to impair materially the ability of
the Seller to perform under the terms of this Agreement or the
Commercial Servicing Agreement;
(f) NO CONSENT REQUIRED. No consent, approval, authorization or order
of, or registration or filing with, or notice to any court or
governmental agency or body is required for the execution, delivery
and performance by the Seller of or compliance by the Seller with
this Agreement or the Mortgage Loans, the delivery of a portion of
the Mortgage Files to the Purchaser or its designee or the sale of
the Mortgage Loans or the consummation of the transactions
contemplated by this Agreement, or if required, such approval has
been obtained prior to the Closing Date;
(g) SELECTION PROCESS. The Mortgage Loans were selected from among the
outstanding commercial mortgage loans in the Seller's portfolio as
of the applicable Closing Date as to which the representations and
warranties set forth in Subsection 8.02 could be made and such
selection was not made in a manner so as to affect adversely the
interests of the Purchaser;
(h) INITIAL PORTFOLIO. The aggregate characteristics of the Mortgage
Loans are as set forth under the heading " Business and
Strategy--Description of Initial Portfolio"
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in the Prospectus relating to the Series A Preferred Shares of the
Purchaser dated September 30, 1997;
(i) NO UNTRUE INFORMATION. Neither this Agreement nor any information,
statement, tape, diskette, report, form, or other document furnished
or to be furnished pursuant to this Agreement or in connection with
the transactions contemplated hereby contains or will contain any
untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or
therein not misleading; and
(j) NO BROKERS. The Seller has not dealt with any broker, investment
banker, agent or other person that may be entitled to any commission
or compensation in connection with the sale of the Mortgage Loans.
SUBSECTION 8.02. REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL
MORTGAGE LOANS.
The Seller hereby represents and warrants to the Purchaser that, as to
each Mortgage Loan, as of the applicable Closing Date for such Mortgage Loans
(or as of such other date as may be specified below), that:
(a) MORTGAGE LOANS AS DESCRIBED. The information set forth in the
Mortgage Loan Schedule is complete, true and correct in all material
respects as of the date indicated thereon;
(b) PAYMENTS CURRENT; STATUS. All payments required to be made up to,
but not including, the applicable Cut-off Date for the Mortgage Loan
under the terms of the Mortgage Note have been made and credited. No
payment required under the Mortgage Loan is delinquent nor has any
payment under the Mortgage Loan been 30 days or more delinquent more
than once within the period falling twelve (12) months prior to the
applicable Cut-off Date. The Mortgage Loan is not, and has not been
at any time in the preceding twelve months, (i) Classified, (ii) in
Non-accrual Status or (iii) renegotiated due to the financial
deterioration of the Mortgagor;
(c) NO OUTSTANDING CHARGES. There are no defaults in complying with the
terms of the Mortgage, and all taxes, governmental assessments,
insurance premiums, water, sewer and municipal charges, leasehold
payments or ground rents which previously became due and owing have
been paid, or an escrow of funds or payment plan has been
established in an amount sufficient to pay for every such item which
remains unpaid and which has been assessed but is not yet due and
payable. The Seller has not advanced funds, or induced, solicited or
knowingly received any advance of funds by a party other than the
Mortgagor, directly or indirectly, for the payment of any amount
required under the Mortgage Loan, except for interest accruing from
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the date of the Mortgage Note or date of disbursement of the
Mortgage Loan proceeds, whichever is earlier, to the day which
precedes by one month the Due Date of the first installment of
principal and interest;
(d) ORIGINAL TERMS UNMODIFIED. The terms of the Mortgage Note and
Mortgage have not been impaired, waived, altered or modified in any
respect, from the date of origination except as contained in the
Mortgage Loan Documents and the terms of which are reflected in the
Mortgage Loan Schedule, if applicable. The substance of any such
waiver, alteration or modification has been approved by the title
insurer, if any, to the extent required by the policy, and its terms
are reflected on the Mortgage Loan Schedule, if applicable. No
Mortgagor has been released, in whole or in part, except in
connection with an assumption agreement, which assumption agreement
is part of the Mortgage Loan File delivered to the Purchaser or its
designee and the terms of which are reflected in the Mortgage Loan
Schedule;
(e) NO DEFENSES. The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including without
limitation the defense of usury, nor will the operation of any of
the terms of the Mortgage Note or the Mortgage, or the exercise of
any right thereunder, render either the Mortgage Note or the
Mortgage unenforceable, in whole or in part and no such right of
rescission, set-off, counterclaim or defense has been asserted with
respect thereto, and no Mortgagor is now or was, at the time of
origination of the related Mortgage Loan, a debtor in any state or
Federal bankruptcy or insolvency proceeding;
(f) HAZARD INSURANCE. Pursuant to the terms of the Mortgage, all
buildings or other improvements upon the Mortgaged Property are
insured by a generally acceptable insurer against loss by fire,
hazards of extended coverage. If required by the Flood Disaster
Protection Act of 1973, as amended, the Mortgage Loan is covered by
a flood insurance policy, meeting the requirements of the Federal
Insurance Administration, as well as all additional requirements set
forth in the Commercial Servicing Agreement attached hereto as
Exhibit B. All individual insurance policies contain a standard
mortgagee clause naming the Seller and its successors and assigns as
mortgagee, and all premiums thereon have been paid. The Mortgage
obligates the Mortgagor thereunder to maintain the hazard insurance
policy at the Mortgagor's cost and expense, and on the Mortgagor's
failure to do so, authorizes the holder of the Mortgage to obtain
and maintain such insurance at such Mortgagor's cost and expense,
and to seek reimbursement therefor from the Mortgagor. Where
required by state law or regulation, the Mortgagor has been given an
opportunity to choose the carrier of the required hazard insurance.
To the best knowledge of the Seller, the hazard insurance policy is
the valid and binding obligation of the insurer, is in full force
and effect, and will be in full force and effect and inure to the
benefit of the Purchaser upon the consummation of the transactions
contemplated by this Agreement. No action, inaction or event has
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occurred and no state of facts exists or has existed that has
resulted or could result in the exclusion from, denial of, or
defense to coverage under any hazard insurance policy (including,
without limitation, any exclusions, denials or defenses which would
limit or reduce the availability of the timely payment of the full
amount of the loss otherwise due thereunder to the insured) whether
arising out of actions, representations, errors, omissions,
negligence, or fraud of the Seller, the related Mortgagor or any
party involved in the application for such coverage, including the
appraisal, plans and specifications and other exhibits or documents
submitted therewith to the insurer under such insurance policy, or
for any other reason under such coverage, but not including the
failure of such insurer to pay by reason of such insurer's breach of
such insurance policy or such insurer's financial inability to pay.
The Seller has not engaged in, and has no knowledge of the
Mortgagor's having engaged in, any act or omission which would
impair the coverage of any such policy, the benefits of the
endorsement provided for herein, or the validity and binding effect
of either including, without limitation, no unlawful fee,
commission, kickback or other unlawful compensation or value of any
kind has been or will be received, retained or realized by any
attorney, firm or other person or entity, and no such unlawful items
have been received, retained or realized by the Seller;
(g) COMPLIANCE WITH APPLICABLE LAWS. Any and all requirements of any
federal, state or local law applicable to the Mortgage Loan have
been complied with in all material respects, the consummation of the
transactions contemplated hereby will not involve the violation of
any such laws or regulations, and the Seller shall maintain in its
possession, available for the Purchaser's inspection, and shall
deliver to the Purchaser upon demand, evidence of compliance with
all such requirements;
(h) NO SATISFACTION OF MORTGAGE. The Mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the
Mortgaged Property has not been released from the lien of the
Mortgage, in whole or in part, nor has any instrument been executed
that would effect any such release, cancellation, subordination or
rescission. Neither the Seller, the Servicer nor any other Person
has waived the performance by the Mortgagor of any action, if the
Mortgagor's failure to perform such action would cause the Mortgage
Loan to be in default, nor has the Seller, the Servicer nor any
other Person waived any default resulting from any action or
inaction by the Mortgagor;
(i) LOCATION AND TYPE OF MORTGAGED PROPERTY. The Mortgaged Property is
located in the state identified in the Mortgage Loan Schedule and
consists of a real property improved by a commercial or multi-family
(greater than four residential units) facility erected thereon.
(j) VALID FIRST LIEN. The Mortgage is a valid, subsisting, enforceable
and perfected first lien on the Mortgaged Property, including all
buildings, improvements and fixtures
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on the Mortgaged Property and/or all installations and mechanical,
electrical, plumbing, heating and air conditioning systems located
in or annexed to such buildings, and all additions, alterations and
replacements made at any time with respect to the foregoing as set
forth in each Mortgage. The lien of the Mortgage is subject only to:
(1) the lien of current real property taxes and assessments not
yet due and payable;
(2) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record as of the
date of recording acceptable to prudent mortgage lending
institutions generally and specifically referred to in the
lender's title insurance policy delivered to the originator of
the Mortgage Loan and (a) specifically referred to or
otherwise considered in the appraisal made for the originator
of the Mortgage Loan or (b) which do not adversely affect the
Appraised Value of the Mortgaged Property set forth in such
appraisal; and
(3) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage or the use,
enjoyment, value or marketability of the related Mortgaged
Property.
Any security agreement, chattel mortgage or equivalent document
related to and delivered in connection with the Mortgage Loan
establishes and creates a valid, subsisting, enforceable and
perfected first lien and first priority security interest on the
property described therein and the Seller has full right to sell and
assign the same to the Purchaser. The Mortgaged Property was not, as
of the date of origination of the Mortgage Loan, subject to a
mortgage, deed of trust, deed to secure debt or other security
instrument creating a lien subordinate to the lien of the Mortgage
(except any such subordinate loan which was created in connection
with the origination of the related Mortgage Loan details of which
are contained in the related Mortgage File);
(k) VALIDITY OF MORTGAGE DOCUMENTS. The Mortgage Note and the Mortgage
and any other agreement executed and delivered by a Mortgagor in
connection with a Mortgage Loan are genuine, and each is the legal,
valid and binding obligation of the maker thereof enforceable in
accordance with its terms. To the best knowledge of the Seller, all
parties to the Mortgage Note, the Mortgage and any other such
related agreement had legal capacity to enter into the Mortgage Loan
and to execute and deliver the Mortgage Note, the Mortgage and any
such agreement, and the Mortgage Note, the Mortgage and any other
such related agreement have been duly and properly executed by such
parties. To the best knowledge of the Seller, no
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fraud, error, omission, misrepresentation, negligence or similar
occurrence with respect to a Mortgage Loan has taken place on the
part of any Person, including without limitation, the Mortgagor, any
appraiser, any builder or developer, or any other party involved in
the origination of the Mortgage Loan;
(l) FULL DISBURSEMENT OF PROCEEDS. The Mortgage Loan has been closed and
the proceeds of the Mortgage Loan have been fully disbursed and
there is no requirement for future advances thereunder, and any and
all requirements as to completion of any on-site or off-site
improvement and as to disbursements of any escrow funds therefor
have been complied with. All costs, fees and expenses incurred in
making or closing the Mortgage Loan and the recording of the
Mortgage were paid, and the Mortgagor is not entitled to any refund
of any amounts paid or due under the Mortgage Note or Mortgage;
(m) OWNERSHIP. The Seller or its Affiliate is the sole owner of record
and holder of the Mortgage Loan and the indebtedness evidenced by
each Mortgage Note, except for the assignments of mortgage which
have been sent for recording, and upon recordation the Purchaser
will be the sole owner of record and holder of each Mortgage and the
indebtedness evidenced by each Mortgage Note, and upon the sale of
the Mortgage Loans to the Purchaser, the Seller will retain the
Mortgage Files or any part thereof with respect thereto not
delivered to the Purchaser or its designee in trust only for the
purpose of servicing and supervising the servicing of each Mortgage
Loan. The Mortgage Loan is not assigned or pledged, and the Seller
has good, indefeasible and marketable title thereto, and has full
right to transfer and sell the Mortgage Loan to the Purchaser free
and clear of any encumbrance, equity, participation interest, lien,
pledge, charge, claim or security interest, and has full right and
authority subject to no interest or participation of, or agreement
with, any other party, to sell and assign each Mortgage Loan
pursuant to this Agreement and following the sale of each Mortgage
Loan, the Purchaser will own such Mortgage Loan free and clear of
any encumbrance, equity, participation interest, lien, pledge,
charge, claim or security interest except as created by Purchaser.
The Seller intends to relinquish all rights to possess, control and
monitor the Mortgage Loan, except indirectly for purposes of
servicing the Mortgage Loan as set forth in the Commercial Servicing
Agreement. After the Closing Date, the Seller will have no right to
modify or alter the terms of the sale of the Mortgage Loan and the
Seller will have no obligation or right to repurchase the Mortgage
Loan or substitute another Mortgage Loan, except as provided in this
Agreement;
(n) DOING BUSINESS. All parties which have had any interest in the
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise,
are (or, during the period in which they held and disposed of such
interest, were) (1) in compliance with any and all applicable
licensing requirements of the laws of the state wherein the
Mortgaged Property is located, and (2) either (i) organized under
the laws of such state, or (ii)
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qualified to do business in such state, or (iii) a federal savings
and loan association, a savings bank or a national bank having a
principal office in such state, or (3) not doing business in such
state;
(o) LTV. The original LTV of each Mortgage Loan was not more than 80%;
(p) TITLE INSURANCE. The Mortgage Loan is covered by an ALTA lender's
title insurance policy or other form of policy or insurance and each
such title insurance policy is issued by a title insurer qualified
to do business in the jurisdiction where the Mortgaged Property is
located, insuring the Seller, its successors and assigns, as to the
first priority lien of the Mortgage in the original principal amount
of the Mortgage Loan, subject only to the exceptions contained in
clauses (1), (2) and (3) of paragraph (j) of this Subsection 8.02,
and against any loss by reason of the invalidity or unenforceability
of the lien resulting from the provisions of the Mortgage providing
for adjustment to the Mortgage Interest Rate and Monthly Payment.
Where required by state law or regulation, the Mortgagor has been
given the opportunity to choose the carrier of the required mortgage
title insurance. Additionally, such lender's title insurance policy
affirmatively insures ingress and egress, and against encroachments
by or upon the Mortgaged Property or any interest therein. The
Seller, its successor and assigns, are the sole insurers of such
lender's title insurance policy, and such lender's title insurance
policy is valid and remains in full force and effect and will be in
force and effect upon the consummation of the transactions
contemplated by this Agreement. No claims have been made under such
lender's title insurance policy and, neither the Seller nor, to the
best knowledge of Seller, any other prior holder of the related
Mortgage has done, by act or omission, anything which would impair
the coverage of such lender's title insurance policy, including
without limitation, no unlawful fee, commission, kickback or other
unlawful compensation or value of any kind has been or will be
received, retained or realized by any attorney, firm or other person
or entity, and no such unlawful items have been received, retained
or realized by the Seller;
(q) NO DEFAULTS. There is no default, breach, violation or event which
would permit acceleration existing under the Mortgage or the
Mortgage Note and no event which, with the passage of time or with
notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event which would permit
acceleration, and neither the Seller nor its predecessors have
waived any default, breach, violation or event which would permit
acceleration;
(r) NO MECHANICS' LIENS. With respect to each Mortgage Loan, to the best
knowledge of the Seller, there are no mechanics' or similar liens or
claims which have been filed for work, labor or material (and no
rights are outstanding that under law could
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give rise to such liens) affecting the Mortgaged Property which are
or may be liens prior to, or equal or coordinate with, the lien of
the related Mortgage;
(s) LOCATION OF IMPROVEMENTS; NO ENCROACHMENTS. With respect to each
Mortgage Loan, to the best knowledge of the Seller, all improvements
which were considered in determining the Appraised Value of the
Mortgaged Property lay wholly within the boundaries and building
restriction lines of the Mortgaged Property, and no improvements on
adjoining properties encroach upon the Mortgaged Property. To the
best knowledge of Seller, no improvement located on or being part of
the Mortgaged Property is in violation of any applicable zoning law
or regulation;
(t) ORIGINATION; PAYMENT TERMS. The Mortgage Loan was originated by a
savings and loan association, a savings bank, a commercial bank,
credit union, insurance company or similar institution which is
supervised and examined by a federal or state authority. To the best
knowledge of the Seller, the documents, instruments and agreements
submitted for loan underwriting were not falsified and contain no
untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the information
and statements therein not misleading. Principal payments on the
Mortgage Loan commenced no more than sixty (60) days after funds
were disbursed in connection with the Mortgage Loan. The Mortgage
Interest Rate for each Mortgage Loan are as set forth on the
applicable Mortgage Loan Schedule. The Mortgage Note is payable each
month in equal monthly installments of principal and interest, which
installments of interest are subject to change if the Mortgage Loan
is an Variable Rate Mortgage Loan due to the adjustments to the
Mortgage Interest Rate on each Interest Rate Adjustment Date, with
interest calculated and payable in arrears, sufficient to amortize
the Mortgage Loan fully by the stated maturity date, over an
original term of not more than thirty years from commencement of
amortization.
(u) CUSTOMARY PROVISIONS. The Mortgage contains customary and
enforceable provisions such as to render the rights and remedies of
the holder thereof adequate for the realization against the
Mortgaged Property of the benefits of the security provided thereby,
including, (i) in the case of a Mortgage designated as a deed of
trust, by trustee's sale, and (ii) otherwise by judicial
foreclosure. For Mortgage Loans secured by Mortgage Property in
California, there is no homestead or other exemption available to a
Mortgagor which would interfere with the right to sell the Mortgaged
Property at a trustee's sale or the right to foreclose the Mortgage,
subject to applicable federal and state laws and judicial precedent
with respect to bankruptcy and right of redemption or similar law;
(v) CONFORMANCE WITH UNDERWRITING STANDARDS. The Mortgage Loan was
underwritten in accordance with the underwriting standards of the
Seller or one of its predecessors in interest in effect at the time
the Mortgage Loan was originated. The
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Mortgage Note and Mortgage are on forms acceptable to the Purchaser,
in the Purchaser's sole discretion, as evidenced by the Purchaser's
purchase of the related Mortgage Loans, and, the Seller has not made
any representations to a Mortgagor that are inconsistent with the
Mortgage and the Mortgage Note;
(w) OCCUPANCY OF THE MORTGAGED PROPERTY. As of the Closing Date, to the
best of Seller's knowledge, the Mortgaged Property is lawfully
occupied under applicable law. To the best knowledge of Seller, all
inspections, licenses and certificates required to be made or issued
with respect to all occupied portions of the Mortgaged Property and,
with respect to the use and occupancy of the same, including but not
limited to certificates of occupancy and fire underwriting
certificates, have been made or obtained from the appropriate
authorities;
(x) NO ADDITIONAL COLLATERAL. The Mortgage Note is not and has not been
secured by any collateral except the lien of the corresponding
Mortgage and the security interest of any applicable security
agreement or chattel mortgage referred to in clause (j) above;
(y) DEEDS OF TRUST. In the event the Mortgage constitutes a deed of
trust, a trustee, authorized and duly qualified under applicable law
to serve as such, has been properly designated and currently so
serves and is named in the Mortgage, and no fees or expenses are or
will become payable by the Purchaser to the trustee under the deed
of trust, except in connection with a trustee's sale after default
by the Mortgagor;
(z) VALUE AND MARKETABILITY. The Seller has no actual knowledge of any
circumstances or conditions with respect to the Mortgage, the
Mortgaged Property, the Mortgagor, the Mortgage File or the
Mortgagor's credit standing that can reasonably be expected to cause
the Mortgage Loan to become delinquent, or adversely affect the
value or marketability of the Mortgage Loan;
(aa) DELIVERY OF MORTGAGE DOCUMENTS. The Mortgage Note, the Mortgage, the
Assignment of Mortgage and any other Mortgage Loan Documents for
each Mortgage Loan have been delivered to the Purchaser or its
designee. The Seller is in possession of a complete, true and
accurate Mortgage File in compliance with Exhibit A hereto, except
for such documents the originals of which have been delivered to the
Purchaser or its designee;
(bb) [Reserved]
(cc) TRANSFER OF MORTGAGE LOANS. The Assignment of Mortgage or a blanket
assignment for all of the Mortgage Loans is in recordable form and
is acceptable for recording under the laws of the jurisdiction in
which the Mortgaged Property is located;
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(dd) ASSUMABILITY. Either (i) the Mortgage Loan Documents provide that a
related Mortgage Loan may only be assumed if the party assuming such
Mortgage Loan meets certain credit requirements stated in the
Mortgage Loan Documents, or (ii) the Mortgage Note with respect to
such Mortgage Loan contains a "due-on-sale" provision which prevents
the assumption of the Mortgage Loan by a proposed transferee and
accelerates the payment of the outstanding principal balance of such
Mortgage Loan;
(ee) NO BUYDOWN PROVISIONS; NO GRADUATED PAYMENTS OR CONTINGENT
INTERESTS. The Mortgage Loan does not contain provisions pursuant to
which Monthly Payments are paid or partially paid with funds
deposited in any separate account established by the Seller, the
Mortgagor, or anyone on behalf of the Mortgagor, or paid by any
source other than the Mortgagor nor does it contain any other
similar provisions which may constitute a "buydown" provision. The
Mortgage Loan is not a graduated payment mortgage loan and the
Mortgage Loan does not have a shared appreciation or other
contingent interest feature;
(ff) [Reserved]
(gg) MORTGAGED PROPERTY UNDAMAGED; NO CONDEMNATION PROCEEDINGS. There is
no proceeding pending or, to the best knowledge of Seller,
threatened for the total or partial condemnation of the Mortgaged
Property. The Mortgaged Property is undamaged by waste, fire,
earthquake or earth movement, windstorm, flood, tornado or other
casualty so as to affect adversely the value of the Mortgaged
Property as security for the Mortgage Loan or the use for which the
premises were intended and each Mortgaged Property is in good
repair;
(hh) COLLECTION PRACTICES; ESCROW DEPOSITS; INTEREST RATE ADJUSTMENTS.
The origination and collection practices used by the Seller with
respect to the Mortgage Loan have been in all material respects in
compliance with Accepted Servicing Practices, applicable laws and
regulations, and have been in all material respects legal and
proper. With respect to escrow deposits and Escrow Payments, all
such payments are in the possession of, or under the control of, the
Seller and there exist no deficiencies in connection therewith for
which customary arrangements for repayment thereof have not been
made. All Escrow Payments have been collected in full compliance
with state and federal law and the provisions of the related
Mortgage Note and Mortgage. An escrow of funds is not prohibited by
applicable law and has been established in an amount sufficient to
pay for every item that remains unpaid and has been assessed but is
not yet due and payable if required under the Mortgage Loan. No
escrow deposits or Escrow Payments or other charges or payments due
the Seller have been capitalized under the Mortgage or the Mortgage
Note. All Mortgage Interest Rate adjustments to the Monthly Payment,
if the Mortgage Loan is an Variable Rate Mortgage Loan, have been
made in strict
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compliance with state and federal law and the terms of the related
Mortgage and Mortgage Note on the related Interest Rate Adjustment
Date. With respect to each Variable Rate Mortgage Loan, the Mortgage
Interest Rate adjusts monthly, semi-annually or annually as set
forth in the Mortgage Note. If, pursuant to the terms of the
Mortgage Note, another index was selected for determining the
Mortgage Interest Rate, the same index was used with respect to each
Mortgage Note which required a new index to be selected, and such
selection did not conflict with the terms of the related Mortgage
Note. The Seller executed and delivered any and all notices required
under applicable law and the terms of the related Mortgage Note and
Mortgage regarding the Mortgage Interest Rate and the Monthly
Payment adjustments. Any interest required to be paid pursuant to
state, federal and local law has been properly paid and credited;
(ii) OTHER INSURANCE POLICIES. In connection with the placement of any
hazard insurance, no commission, fee, or other compensation has been
or will be received by the Seller or by any officer, director, or
employee of the Seller or any designee of the Seller or any
corporation in which the Seller or any officer, director, or
employee had a financial interest at the time of placement of such
insurance;
(jj) NO VIOLATION OF ENVIRONMENTAL LAWS. To the best knowledge of Seller,
there is no pending action or proceeding directly involving the
Mortgaged Property in which compliance with any environmental law,
rule or regulation is an issue, there is no violation of any
environmental law, rule or regulation with respect to the Mortgaged
Property, and nothing further remains to be done to satisfy in full
all requirements of each such law, rule or regulation constituting a
prerequisite to use and enjoyment of said property;
(kk) [Reserved]
(ll) APPRAISAL. The Mortgage File contains an appraisal of the related
Mortgaged Property signed prior to the approval of the Mortgage Loan
by a Qualified Appraiser who had no interest, direct or indirect in
the Mortgaged Property or in any loan made on the security thereof,
and whose compensation is not affected by the approval or
disapproval of the Mortgage Loan and, if applicable on the date the
Mortgage Loan was originated, the appraisal and appraiser both
satisfy the requirements of Title XI of the Federal Institutions
Reform, Recovery, and Enforcement Act of 1989 and the regulations
promulgated thereunder.
(mm) [Reserved]
(nn) [Reserved]
(oo) [Reserved]
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(pp) [Reserved]
(qq) PRIOR SERVICING. Each Mortgage Loan has been serviced in all
material respects in compliance with Accepted Servicing Practices;
provided that, in the event of any breach of the representation and
warranty set forth in this Subsection (qq), the Seller shall not be
required to repurchase any such Mortgage Loan unless such breach
had, and continues to have, a material and adverse effect on the
value of the related Mortgage Loan or the interest of the Purchaser
therein.
SUBSECTION 8.03 REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES.
It is understood and agreed that the representations and warranties set
forth in Subsections 8.1 and 8.2 shall survive the sale of the Mortgage Loans to
the Purchaser and shall inure to the benefit of the Purchaser, notwithstanding
any restrictive or qualified endorsement on any Mortgage Note or Assignment of
Mortgage or the examination or failure to examine any Mortgage File. Upon
discovery by either the Seller or the Purchaser of a breach of any of the
foregoing representations and warranties which materially and adversely affects
the interests of the Purchaser in the related Mortgage Loan, the party
discovering such breach shall give prompt written notice to the other.
The Seller, promptly after discovery of a breach of any such
representation or warranty, shall notify the Purchaser of such breach and the
details thereof. Within sixty (60) days of the earlier of (i) notice by the
Seller pursuant to the immediately preceding sentence or (ii) notice by the
Purchaser to the Seller of any breach of a representation or warranty with
respect to a Mortgage Loan, the Seller shall use its best efforts promptly to
cure such breach in all material respects. If such breach can ultimately be
cured but is not reasonably expected to be cured within the 60 day period,
Seller shall have such additional time as is reasonably determined by Purchaser
(not to exceed 120 days) to cure or correct such breach provided Seller has
commenced curing or correcting such breach and is diligently pursuing same. If
such breach cannot be or has not been cured, the Seller shall, upon the
expiration of the cure period described above, at the Purchaser's option and
subject to the provisions of this Subsection 8.3, repurchase such Mortgage Loan
at the Repurchase Price, unless the Seller elects to substitute a Qualified
Substitute Mortgage Loan for such Mortgage Loan pursuant to this Subsection 8.3.
The Seller may, at the Seller's option and provided that the Seller has a
Qualified Substitute Mortgage Loan, rather than repurchase the Mortgage Loan as
provided above, remove such Mortgage Loan (a "Deleted Mortgage Loan") and
substitute in its place a Qualified Substitute Mortgage Loan or Loans. If the
Seller has no Qualified Substitute Mortgage Loan, it shall repurchase the
deficient Mortgage Loan. Any repurchase of a Mortgage Loan or Mortgage Loans
pursuant to the foregoing provisions of this Subsection 8.3 shall be
accomplished by either (a) if the Commercial Servicing Agreement is in effect,
deposit in the Custodial Account of the amount of the Repurchase Price for
payment to the Purchaser on the next scheduled Remittance Date, after deducting
therefrom any amount received in respect of such repurchased Mortgage Loan or
Loans and being held in the Custodial Account for future distribution or (b) if
the Commercial Servicing Agreement is no longer in effect, by direct remittance
of the Repurchase Price to the Purchaser or its designee in accordance with the
Purchaser's instructions.
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At the time of repurchase or substitution, the Purchaser and the Seller
shall arrange for the reassignment of the Deleted Mortgage Loan to the Seller
and the delivery to the Seller of any documents held by the Purchaser or its
designee relating to the Deleted Mortgage Loan. In addition, upon any such
repurchase, all funds maintained in the Escrow Account with respect to such
Deleted Mortgage Loan shall be transferred to the Seller. In the event of a
repurchase or substitution, the Seller shall, simultaneously with such
reassignment, give written notice to the Purchaser that such repurchase or
substitution has taken place, amend the related Mortgage Loan Schedule to
reflect the withdrawal of the Deleted Mortgage Loan from this Agreement, and, in
the case of substitution, identify a Qualified Substitute Mortgage Loan and
amend the related Mortgage Loan Schedule to reflect the addition of such
Qualified Substitute Mortgage Loan to this Agreement. In connection with any
such substitution, the Seller shall be deemed to have made as to such Qualified
Substitute Mortgage Loan the representations and warranties set forth in this
Agreement except that all such representations and warranties set forth in this
Agreement shall be deemed made as of the date of such substitution. The Seller
shall effect such substitution by delivering to the Purchaser or its designee
for such Qualified Substitute Mortgage Loan the documents required by Subsection
6.3, with the Mortgage Note endorsed as required by Subsection 6.3. The Seller
shall deposit in the Custodial Account the Monthly Payment, or in the event that
the Commercial Servicing Agreement is no longer in effect, remit directly to the
Purchaser or its designee in accordance with the Purchaser's instructions the
Monthly Payment less the Servicing Fee collected, if any, on such Qualified
Substitute Mortgage Loan or Loans in the month following the date of such
substitution. Monthly Payments collected with respect to Qualified Substitute
Mortgage Loans in the month of substitution shall be retained by the Seller. For
the month of substitution, payments to the Purchaser shall include the Monthly
Payment collected on any Deleted Mortgage Loan in the month of substitution, and
the Seller shall thereafter be entitled to retain all amounts subsequently
received by the Seller in respect of such Deleted Mortgage Loan.
For any month in which the Seller substitutes a Qualified Substitute
Mortgage Loan for a Deleted Mortgage Loan, the Seller shall determine the amount
(if any) by which the aggregate principal balance of all Qualified Substitute
Mortgage Loans as of the date of substitution is less than the aggregate Stated
Principal Balance of all Deleted Mortgage Loans (after application of principal
payments collected as of the date of substitution). The amount of such shortfall
shall be distributed by the Seller directly to the Purchaser or its designee in
accordance with the Purchaser's instructions within two (2) Business Days of
such substitution.
In addition to such repurchase or substitution obligation, the Seller
shall indemnify the Purchaser and hold it harmless against any losses, damages,
penalties, fines, forfeitures, reasonable and necessary legal fees and related
costs, judgments, and other costs and expenses (but excluding any consequential,
indirect damages, special, exemplary or punitive damages ("Special Damages"),
except for such Special Damages which Purchaser is required by law to pay to a
third party, resulting from any claim, demand, defense or assertion based on or
grounded upon, or resulting from, a breach of the Seller representations and
warranties contained in this Agreement. It is understood and agreed that the
obligations of the Seller set forth in this Subsection 8.3 to cure, substitute
for or repurchase a defective Mortgage Loan and to indemnify the Purchaser as
provided in this Subsection 8.3
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constitute the sole remedies of the Purchaser respecting a breach of the
foregoing representations and warranties.
Any cause of action against the Seller relating to or arising out of the
breach of any representations and warranties made in Subsections 8.1 and 8.2
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the
Seller to cure such breach or repurchase such Mortgage Loan as specified above,
and (iii) demand upon the Seller by the Purchaser for compliance with this
Agreement.
SECTION 9. CLOSING.
The closing for the purchase and sale of any Mortgage Loans shall take
place on (i) the Initial Closing Date with respect to the purchase and sale of
the Mortgage Loans set forth on the Initial Portfolio Mortgage Loan Schedule and
(ii) on the Closing Date set forth in a duly executed Commitment Letter with
respect to the purchase and sale of Mortgage Loans pursuant thereto. At the
Purchaser's option, any closing shall be either: by telephone, confirmed by
letter or wire as the parties shall agree, or conducted in person, at such place
as the parties shall agree.
The closing for the purchase and sale of Mortgage Loans to be purchased on
any Closing Date shall be subject to each of the following conditions:
(a) all of the representations and warranties of the Seller under this
Agreement shall be true and correct as of such Closing Date, no
default shall have occurred and no event shall have occurred which,
with notice or the passage of time or both, would constitute a
default under this Agreement;
(b) the Purchaser shall have received, or the Purchaser's attorneys
shall have received in escrow, all closing documents as specified in
Section 10 of this Agreement, in such forms as are agreed upon and
acceptable to the Purchaser, duly executed by all signatories other
than the Purchaser as required pursuant to the terms hereof;
(c) the Seller shall have delivered and released to the Purchaser or its
designee all Mortgage Loan Documents with respect to each Mortgage
Loan not otherwise required under the Commercial Servicing Agreement
to be in possession of, and actually in the possession of the Seller
in its capacity as servicer; and
(d) all other terms and conditions of this Agreement shall have been
complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the Seller
on the applicable Closing Date the applicable Purchase Price, plus accrued
interest pursuant to Section 4 of this Agreement, by wire transfer of
immediately available funds to the account designated by the Seller.
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SECTION 10. CLOSING DOCUMENTS.
The closing documents for the Mortgage Loans to be purchased on any
Closing Date shall consist of fully executed originals of the following
documents:
1. this Agreement (and on all subsequent Closing Dates, a Commitment
Letter in the form of Exhibit I hereto);
2. on the Initial Closing Date only, the Commercial Servicing
Agreement, dated as of the applicable Cut-off Date, in the form of
Exhibit B hereto;
3. on the Initial Closing Date only, a Custodial Account Letter
Agreement or a Custodial Account Certification, as applicable, as
required under the Commercial Servicing Agreement;
4. on the Initial Closing Date only, an Escrow Account Letter Agreement
or an Escrow Account Certification, as applicable, as required under
the Commercial Servicing Agreement;
5. an Officer's Certificate, in the form of Exhibit C hereto, including
all attachments thereto;
6. an Opinion of Counsel of the Seller (who may be an employee of the
Seller), in the form of Exhibit D hereto;
7. a Security Release Certification, in the form of Exhibit F hereto
executed by any person, as requested by the Purchaser, if any of the
Mortgage Loans have at any time been subject to any security
interest, pledge or hypothecation for the benefit of such person;
and
8. a certificate or other evidence of merger or acquisition, if any of
the Mortgage Loans being purchased were acquired by Seller by merger
or acquisition.
The Seller shall bear the risk of loss of any closing documents and
Mortgage Loan documents until such time as they are received by the Purchaser or
its attorneys or designees, as applicable.
SECTION 11. COSTS.
The Purchaser shall pay any commissions due its salesmen and the legal
fees and expenses of its attorneys. All other costs and expenses incurred in
connection with the transfer and delivery of the Mortgage Loans including
recording fees, fees for recording Assignments of Mortgages, fees
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for title policy endorsements and continuations and, if applicable, the Seller's
attorney's fees, shall be paid by the Seller.
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER.
The Seller will keep in full effect its existence, rights and franchises
as a corporation under the laws of the state of its incorporation except as
permitted herein, and will obtain and preserve its qualification to do business
as a foreign corporation in each jurisdiction in which such qualification is or
shall be necessary to protect the validity and enforceability of this Agreement,
or any of the Mortgage Loans and to perform its duties under this Agreement. In
the event Seller or any of its successors or assigns (i) consolidates with or
merges into any other Person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger, or (ii) transfers or
conveys all or substantially all of its properties and assets to any Person,
then, and in each such case, proper provision shall be made so that the
successors and assigns of Seller assume the obligations of Seller set forth in
this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the Seller,
shall be the successor of the Seller hereunder, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding; provided, however, that the
successor or surviving Person shall have a tangible net worth of at least
$30,000,000.
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST.
The sale and delivery on any Closing Date of the Mortgage Loans described
on the applicable Mortgage Loan Schedule is mandatory from and after the date of
the execution of this Agreement or a Commitment Letter, as the case may be, it
being specifically understood and agreed that each Mortgage Loan is unique and
identifiable and that an award of money damages would be insufficient to
compensate the Purchaser for the losses and damages incurred by the Purchaser
(including damages to prospective purchasers of the Mortgage Loans) in the event
of the Seller's failure to deliver (i) each of the Mortgage Loans or (ii) one or
more Qualified Substitute Mortgage Loans or (iii) one or more Mortgage Loans
otherwise acceptable to the Purchaser on or before such Closing Date. The Seller
hereby grants to the Purchaser a lien on and a continuing security interest in
each Mortgage Loan set forth on the Initial Portfolio Mortgage Loan Schedule and
each document and instrument evidencing each such Mortgage Loan to secure the
performance by the Seller of its obligations under this Agreement, and the
Seller agrees that it shall hold such Mortgage Loans in custody for the
Purchaser subject to the Purchaser's (i) right to reject any Mortgage Loan (or
Qualified Substitute Mortgage Loan) under the terms of this Agreement and to
require another Mortgage Loan (or Qualified Substitute Mortgage Loan) to be
substituted therefor, and (ii) obligation to pay the Initial Purchase Price plus
accrued interest as set forth in Section 4 hereof for the Mortgage Loans. All
rights and remedies of the Purchaser under this Agreement are distinct from, and
cumulative with, any other rights or remedies under this Agreement or afforded
by law
29
<PAGE>
or equity and all such rights and remedies may be exercised concurrently,
independently or successively.
SECTION 14. NOTICES.
All demands, notices and communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed, by registered or certified
mail, return receipt requested, or, if by other means, when received by the
other party at the address as follows:
(i) if to the Seller:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
(ii) if to the Purchaser:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 15. SEVERABILITY CLAUSE.
Any part, provision, representation or warranty of this Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law which prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part, provision, representation or warranty of this Agreement shall deprive any
party of the economic benefit intended to be conferred by this Agreement, the
parties shall negotiate, in good faith, to develop a structure the economic
effect of which is nearly as possible the same as the economic effect of this
Agreement without regard to such invalidity.
30
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SECTION 16. COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
SECTION 17. GOVERNING LAW.
This Agreement shall be deemed to have been made in the State of
California. The Agreement shall be construed in accordance with the laws of the
State of California and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with the substantive laws of the
State of California (without regard to conflicts of laws principles), except to
the extent preempted by Federal law.
SECTION 18. INTENTION OF THE PARTIES.
It is the intention of the parties that the Purchaser is purchasing, and
the Seller is selling the Mortgage Loans and not a debt instrument of the Seller
or another security. Accordingly, the parties hereto each intend to treat the
transaction for Federal income tax purposes as a sale by the Seller, and a
purchase by the Purchaser, of the Mortgage Loans.
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF PURCHASE AGREEMENT.
This Agreement shall bind and inure to the benefit of and be enforceable
by the Seller and the Purchaser and the respective permitted successors and
assigns of the Seller and the successors and assigns of the Purchaser. This
Agreement shall not be assigned, pledged or hypothecated by the Seller to a
third party without the consent of the Purchaser. Subject to any applicable
requirement in the Commercial Servicing Agreement, this Agreement may be
assigned, pledged or hypothecated by the Purchaser without the prior consent of
the Seller. If the Purchaser assigns all or any of its rights as Purchaser
hereunder, the assignee of the Purchaser will become the "Purchaser" hereunder
to the extent of such assignment, provided that at no time shall there be more
than fifteen (15) persons having the status of "Purchaser" hereunder. Any
assignment by the Purchaser shall be accompanied by the delivery and execution
of an Assignment and Assumption Agreement (the "Assignment and Assumption
Agreement") substantially in the form attached hereto as Exhibit G. Subject to
any applicable requirement in the Commercial Servicing Agreement, the Servicer
shall be required to remit all amounts required to be remitted to the Purchaser
hereunder to said assignee commencing with the first Remittance Date falling
after receipt of said copy of the related Assignment and Assumption Agreement
provided that the Seller receives said copy no later than three (3) Business
Days immediately prior to the first day of the month of the related Remittance
Date.
31
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SECTION 20. WAIVERS.
No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
SECTION 21. ENTIRE AGREEMENT; AMENDMENT.
This Agreement (including the Schedules and Exhibits annexed hereto or
referred to herein) and any Commitment Letter duly executed by the parties
hereto contain the entire agreement between the parties with respect to the
transactions contemplated hereby and supersede all prior agreements, written or
oral, with respect thereto. No amendment, modification or alteration of the
terms or provisions of this Agreement shall be binding unless the same shall be
in writing and duly executed by the authorized representatives of the parties
hereto, provided, however, that as long as any Series A Preferred Shares remain
outstanding, no material amendment to or modification or alteration of this
Agreement may be entered into or approved by the Purchaser without the approval
of a majority of the Independent Directors.
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES.
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to them
in this Agreement and include the plural as well as the singular, and the use of
any gender herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
(c) references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other subdivisions without reference to a document are to
designated Articles, Sections, Subsections, Paragraphs and other subdivisions of
this Agreement;
(d) reference to a Subsection without further reference to a Section is a
reference to such Subsection as contained in the same Section in which the
reference appears, and this rule shall also apply to Paragraphs and other
subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular provision;
and
(f) the term "include" or "including" shall mean without limitation by
reason of enumeration.
32
<PAGE>
SECTION 23. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at any closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process but solely for the
purposes set forth in this Agreement. The parties agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
SECTION 24. FURTHER AGREEMENTS.
The Seller and the Purchaser each agree to execute and deliver to the
other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of this
Agreement.
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE.
The Seller shall execute a blanket assignment of the Mortgages underlying
each Mortgage Loan sold to the Purchaser pursuant to this Agreement or a duly
executed Commitment Letter. Upon the written request of Purchaser (whether due
to the proposed sale of any Mortgage Loan by Purchaser or otherwise), or to the
extent deemed necessary by the servicer in connection with servicing a Mortgage
Loan pursuant to the terms of the Commercial Servicing Agreement, the Seller
shall promptly prepare and execute individual Assignments of Mortgage to be
recorded in all appropriate public offices for real property records in all the
counties or other comparable jurisdictions in which any or all of the Mortgaged
Properties are situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by the Purchaser or Purchaser's
designee, but in any event, at the Seller's expense for a single recordation
with respect to each Assignment of Mortgage.
33
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
PEOPLE'S PREFERRED CAPITAL
CORPORATION
By: /s/ J. MICHAEL HOLMES
-------------------------
Name: J. MICHAEL HOLMES
Title: EXECUTIVE VICE PRESIDENT/
CHIEF FINANCIAL OFFICER
PEOPLE'S BANK OF CALIFORNIA
By: /s/ J. MICHAEL HOLMES
-------------------------
Name: J. MICHAEL HOLMES
Title: EXECUTIVE VICE PRESIDENT/
CHIEF FINANCIAL OFFICER
By: /s/ WILLIAM W. FLADER
-------------------------
Name: WILLIAM W. FLADER
Title: EXECUTIVE VICE PRESIDENT
34
<PAGE>
EXHIBIT A
CONTENTS OF EACH MORTGAGE FILE
With respect to each Mortgage Loan, the Mortgage File shall include each
of the following items (to the extent such items are applicable and exist within
the Seller's Mortgage File), which shall be available for inspection by the
Purchaser and any prospective Purchaser, and which shall be delivered to the
Purchaser or its designee pursuant to Section 6.03 of the Mortgage Loan Purchase
and Warranties Agreement to which this Exhibit is attached (the "Agreement"):
1. The original Mortgage Note (or, with respect to the Mortgage Loan
listed on Schedule I hereto, a lost note affidavit, executed by an
officer of the Seller, with a copy of the original note attached
thereto) bearing all intervening endorsements, endorsed "Pay to the
order of ____________ without recourse" (except as otherwise
provided in the Agreement) and signed in the name of the Seller by
an authorized officer. To the extent that there is no room on the
face of the Mortgage Notes for endorsements, the endorsement may be
contained on an allonge, if state law so allows. If the Mortgage
Loan was acquired by the Seller in a merger, the endorsement must be
by "[Seller], successor by merger to [name of predecessor]". If the
Mortgage Loan was acquired or originated by the Seller while doing
business under another name, the endorsement must be by "[Seller],
formerly known as [previous name]".
2. The original of any guarantee executed in connection with the
Mortgage Note.
3. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or
cause to be delivered the original Mortgage with evidence of
recording thereon on or prior to the Closing Date because of a delay
caused by the public recording office where such Mortgage has been
delivered for recordation, a photocopy of such Mortgage certified by
the Seller to be true and correct will be delivered; if such
Mortgage has been lost or if such public recording office retains
the original recorded Mortgage, the Seller shall deliver or cause to
be delivered to the Purchaser, a photocopy of such Mortgage,
certified by such public recording office to be a true and complete
copy of the original recorded Mortgage.
4. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon or
certified copies of such documents if the originals thereof are
unavailable.
5. The original Assignment of Mortgage for each Mortgage Loan or a
blanket assignment for all Mortgage Loans endorsed and signed in the
name of the Seller by an authorized officer. If the Mortgage Loan
was acquired by the Seller in a merger,
A-1
<PAGE>
the Assignment of Mortgage must be made by "[Seller], successor by
merger to [name of predecessor]". If the Mortgage Loan was acquired
or originated by the Seller while doing business under another name,
the Assignment of Mortgage must be by "[Seller], formerly known as
[previous name]".
6. Originals of all intervening assignments of the Mortgage with
evidence of recording thereon if such intervening assignment has
been recorded.
7. The original mortgagee policy of title insurance or, in the event
such original title policy is unavailable, a certified true copy of
the related policy binder or commitment for title certified to be
true and complete by the title insurance company.
8. Any original security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
9. The original hazard insurance policy and, if required by law, flood
insurance policy, in accordance with Section 8.02(f) of the
Agreement.
10. Mortgage Loan closing statement.
11. Credit report on the Mortgagor.
12. All appraisal and inspection reports, if applicable.
13. Photograph of the Mortgaged Property.
14. To the extent applicable, copy of each instrument necessary to
complete identification of any exception set forth in the exception
schedule in the title policy, i.e., map or plat, restrictions,
easements, sewer agreements, home association declarations, etc.
15. All required disclosure statements.
16. Sales contract, if any.
17. Tax receipts, insurance premium receipts, ledger sheets, insurance
claim files, correspondence, current and historical computerized
data files, and all other processing, underwriting and closing
papers and records which are customarily contained in a mortgage
loan file and which are required to document the Mortgage Loan or to
service the Mortgage Loan.
18. Property operating statements in Seller's possession.
A-2
<PAGE>
19. Corporate authorization documents and good standing certifications
in Seller's possession.
20. Borrower and key principal financial statements in Seller's
possession.
A-3
<PAGE>
EXHIBIT B
B-1
<PAGE>
EXHIBIT C
FORM OF SELLER'S OFFICER'S CERTIFICATE
I, _____________, hereby certify that I am the duly elected Executive Vice
President of People's Bank of California, a federal savings bank organized under
the laws of the United States (the "Seller") and further as follows:
1. Attached hereto as Exhibit 1 is a true, correct and complete copy of
the restated Federal Stock Charter of the Seller which is in full force and
effect on the date hereof and which has been in effect without amendment,
waiver, rescission or modification since
2. Attached hereto as Exhibit 2 is a true, correct and complete copy of
the bylaws of the Seller which are in effect on the date hereof and which have
been in effect without amendment, waiver, rescission or modification since
_____________.
3. Attached hereto as Exhibit 3 is an original certificate of good
standing of the Seller issued within ten days of the date hereof, and no event
has occurred since the date thereof which would impair such standing.
4. Attached hereto as Exhibit 4 is a true, correct and complete copy of
the corporate resolutions of the Board of Directors or Committees thereof of the
Seller authorizing the Seller to execute and deliver each of the Commercial
Mortgage Loan Purchase and Warranties Agreement, dated as of __________, 1997,
by and between People's Preferred Capital Corporation (the "Purchaser") and the
Seller (the "Purchase Agreement"), the Commitment Letter, dated as of _______,
by and between the Purchaser and the Seller [if applicable] and to endorse the
mortgage notes and execute the assignments of mortgages by original or facsimile
signature, and such resolutions are in effect on the date hereof and have been
in effect without amendment, waiver, rescission or modification since
5. Either (i) no consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Seller of or compliance by the Seller with the Purchase
Agreement [and the Commitment Letter], the sale of the mortgage loans or the
consummation of the transactions contemplated by the Purchase Agreement; or (ii)
any required consent, approval, authorization or order has been obtained by the
Seller.
6. Neither the consummation of the transactions contemplated by, nor the
fulfillment of the terms of, the Purchase Agreement [or the Commitment Letter]
conflicts or will conflict with or results or will result in a breach of or
constitutes or will constitute a default under the charter or bylaws of the
Seller, the terms of any indenture or other agreement or instrument to which the
Seller is a party or by which it is bound or to which it is subject, or any
statute or order, rule, regulations, writ, injunction or decree of any court,
governmental authority or regulatory body to which the Seller is subject or by
which it is bound.
C-1
<PAGE>
7. To the best of my knowledge, there is no action, suit, proceeding or
investigation pending or threatened against the Seller which, in my judgment,
either in any one instance or in the aggregate, may result in any material
adverse change in the business, operations, financial condition, properties or
assets of the Seller or in any material impairment of the right or ability of
the Seller to carry on its business substantially as now conducted or in any
material liability on the part of the Seller or which would draw into question
the validity of the Purchase Agreement [or the Commitment Letter] or the
mortgage loans or of any action taken or to be taken in connection with the
transactions contemplated hereby, or which would be likely to impair materially
the ability of the Seller to perform under the terms of the Purchase Agreement
[and the Commitment Letter].
8. Each person listed on Exhibit 5 attached hereto who, as an officer or
representative of the Seller, signed the Purchase Agreement [and the Commitment
Letter] and any other document delivered prior to or on the date hereof in
connection with any purchase described in the Purchase Agreement was, at the
respective times of such signing and delivery, and is now, a duly elected or
appointed, qualified and acting officer or representative of the Seller, who
holds the office set forth opposite his or her name on Exhibit 5, and the
signatures of such persons appearing on such documents are their genuine
signatures.
9. The Seller is duly authorized to engage in the transactions described
and contemplated in the Purchase Agreement [and the Commitment Letter].
C-2
<PAGE>
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of
the Seller.
Dated:____________, 1997 By:_________________________________
Name: J. Michael Holmes
[Seal] Title: Executive Vice President
I, William W. Flader, an Executive Vice President of People's Bank of
California, hereby certify that J. Michael Holmes is the duly elected, qualified
and acting Executive Vice President of the Seller and that the signature
appearing above is his genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:____________, 1997 By:_________________________________
Name: William W. Flader
Title: Executive Vice President
C-3
<PAGE>
EXHIBIT 5
TO SELLER'S OFFICER'S CERTIFICATE
Name Title Signature
- ------------------------- ------------------------ ------------------------
C-4
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL TO THE SELLER
_________________, 1997
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Dear Sirs:
You have requested my opinion, as General Counsel to People's Bank of
California (the "Seller"), with respect to certain matters in connection with
the sale by the Seller of the Mortgage Loans pursuant to that certain Commercial
Mortgage Loan Purchase and Warranties Agreement by and between the Seller and
People's Preferred Capital Corporation (the "Purchaser"), dated as of
__________, 1997 (the "Purchase Agreement") which sale is in the form of whole
loans, delivered pursuant to the Purchase Agreement and serviced pursuant to a
Commercial Servicing Agreement, dated as of __________, 1997, by and between the
Seller and the Purchaser (the "Servicing Agreement"). Capitalized terms not
otherwise defined herein have the meanings set forth in the Purchase Agreement
and the Servicing Agreement.
I have examined the following documents:
1. the Purchase Agreement and, if applicable, the Commitment Letter;
2. the Servicing Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes; and
5. such other documents, records and papers as I have deemed necessary
and relevant as a basis for this opinion.
To the extent I have deemed necessary and proper, I have relied upon the
representations and warranties of the Seller contained in the Purchase
Agreement. I have assumed the authenticity of all documents submitted to me as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents.
Based upon the foregoing, it is my opinion that:
D-1
<PAGE>
1. The Seller is a federal savings bank duly organized, validly
existing and in good standing under the laws of the United States
and is qualified to transact business in, and is in good standing
under, the laws of the United States.
2. The Seller has the power to engage in the transactions contemplated
by the Purchase Agreement and, if applicable, the Commitment Letter,
and all requisite power, authority and legal right to execute and
deliver the Purchase Agreement and to perform and observe the terms
and conditions of such agreements.
3. The Purchase Agreement has been duly authorized, executed and
delivered by the Seller and is a legal, valid and binding agreement
enforceable in accordance with its respective terms against the
Seller, subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the
application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder
or with the Purchaser's ownership of the Mortgage Loans.
4. The Seller has been duly authorized to allow certain specified
officers to execute any and all documents by original signature in
order to complete the transactions contemplated by the Purchase
Agreement and by original or facsimile signature in order to execute
the endorsements to the Mortgage Notes and the Assignments of
Mortgages, and the original or facsimile signature of the officer of
the Seller executing the endorsements to the Mortgage Notes and the
Assignments of Mortgages represents the legal and valid signature of
said officer of the Seller.
5. Either (i) no consent, approval, authorization or order of any court
or governmental agency or body is required for the execution,
delivery and performance by the Seller of or compliance by the
Seller with the Purchase Agreement and the sale of the Mortgage
Loans or the consummation of the transactions contemplated by the
Purchase Agreement or (ii) any required consent, approval,
authorization or order has been obtained by the Seller.
6. Neither the consummation of the transactions contemplated by, nor
the fulfillment of the terms of, the Purchase Agreement conflicts or
will conflict with or results or will result in a breach of or
constitutes or will constitute a default under the charter or bylaws
of the Seller, the terms of any indenture or other agreement or
instrument to which the Seller is a party or by which it is bound or
to which it is subject, or violates any statute or order, rule,
regulations, writ, injunction or decree of any court, governmental
authority or regulatory body to which the Seller is subject or by
which it is bound.
D-2
<PAGE>
7. There is no action, suit, proceeding or investigation pending or, to
the best of my knowledge, threatened against the Seller which, in my
judgment, either in any one instance or in the aggregate, may result
in any material adverse change in the business, operations,
financial condition, properties or assets of the Seller or in any
material impairment of the right or ability of the Seller to carry
on its business substantially as now conducted or in any material
liability on the part of the Seller or which would draw into
question the validity of the Purchase Agreement or the Mortgage
Loans or of any action taken or to be taken in connection with the
transactions contemplated thereby, or which would be likely to
impair materially the ability of the Seller to perform under the
terms of the Purchase Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the manner
contemplated by the Purchase Agreement is sufficient to fully
transfer to the Purchaser all right, title and interest of the
Seller thereto as noteholder and mortgagee.
I am licensed to practice law in the State of California and express no
opinion as to the laws of any jurisdiction other than the State of California or
the federal banking laws of the United States; accordingly, my opinions extend
only to questions of law of such jurisdictions. I note that certain of the
agreements upon which I express an opinion herein are governed by the laws of a
jurisdiction other than the State of California. I have assumed with your
consent for the purposes of giving these opinions that the law of any state
other than the State of California which may be applied to such agreements is
substantially identical to the laws of the State of California. The opinions
expressed herein are subject to statutory, regulatory and case law developments
after the date hereof.
This opinion is given to you for your sole benefit, and no other person or
entity is entitled to rely hereon.
Very truly yours,
--------------------------------
Doreen J. Blauschild
General Counsel
D-3
<PAGE>
EXHIBIT E
______________________, 1997
Federal Home Loan Bank of
San Francisco (the "Association")
600 California Street
San Francisco, California 94108
Attention:
-------------------------
-------------------------
Re: Notice of Sale and Release of Collateral
Dear Sirs:
This letter serves as notice that People's Bank of California, a banking
corporation, organized pursuant to the laws of the United States (the "Bank")
has committed to sell to People's Preferred Capital Corporation under a
Commercial Mortgage Loan Purchase and Warranties Agreement, dated as of
__________, 1997, certain mortgage loans owned by the Bank. The Bank warrants
that the mortgage loans to be sold to People's Preferred Capital Corporation are
in addition to and beyond any collateral required to secure advances made by the
Association to the Bank.
The Bank acknowledges that the mortgage loans to be sold to People's
Preferred Capital Corporation shall not be used as additional or substitute
collateral for advances made by the Association. People's Preferred Capital
Corporation understands that the balance of the Bank's mortgage loan portfolio
may be used as collateral or additional collateral for advances made by the
Association, and confirms that it has no interest therein.
E-1
<PAGE>
Execution of this letter by the Association shall constitute a full and
complete release of any security interest, claim, or lien which the Association
may have against the mortgage loans to be sold to People's Preferred Capital
Corporation.
Very truly yours,
--------------------------------------
By: __________________________________
Name: ________________________________
Title: _______________________________
Date:_________________________________
Acknowledged and approved:
FEDERAL HOME LOAN BANK OF
SAN FRANCISCO
By: _________________________
Name: _______________________
Title: ______________________
Date:________________________
E-2
<PAGE>
EXHIBIT F
FORM OF SECURITY RELEASE CERTIFICATION
I. RELEASE OF SECURITY INTEREST
The financial institution named below hereby relinquishes any and all
right, title and interest it may have in all Mortgage Loans to be purchased by
People's Preferred Capital Corporation from People's Bank of California pursuant
to that certain Commercial Mortgage Loan Purchase and Warranties Agreement,
dated as of __________, 1997, and certifies that all notes, mortgages,
assignments and other documents in its possession relating to such Mortgage
Loans have been delivered and released to People's Bank of California or its
designees, as of the date and time of the sale of such Mortgage Loans to
People's Preferred Capital Corporation.
Name and Address of Financial Institution
- ------------------------------------
(name)
- ------------------------------------
(Address)
By:_________________________________
II. CERTIFICATION OF RELEASE
People's Bank of California hereby certifies to People's Preferred Capital
Corporation that, as of the date and time of the sale of the above-mentioned
Mortgage Loans to People's Preferred Capital Corporation, the security interests
in the Mortgage Loans released by the above-named financial institution comprise
all security interests relating to or affecting any and all such Mortgage Loans.
Peoples's Bank of California warrants that, as of such time, there are and will
be no other security interests affecting any or all of such Mortgage Loans.
----------------------------------
By: _______________________________
Title: ____________________________
Date:______________________________
F-1
<PAGE>
EXHIBIT G
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT, dated _________, between
_______________________, a __________ corporation ("Assignor") and
_______________, a ________________ corporation ("Assignee"):
For good and valuable consideration the receipt and sufficiency of which
hereby are acknowledged, and of the mutual covenants herein contained, the
parties hereto hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to Assignee, as
purchaser, all of the right, title and interest of Assignor with respect to the
mortgage loans listed on Exhibit A attached hereto (the "Mortgage Loans"), and
with respect to such Mortgage Loans, in, to and under (a) that certain
Commercial Mortgage Loan Purchase and Warranties Agreement dated __________,
1997 by and between People's Bank of California (the "Seller") and People's
Preferred Capital Corporation (the "Purchaser") (the "Purchase Agreement"), and
(b) that certain Commercial Servicing Agreement dated as of _______, 1997, by
and between the Purchaser and the Seller ("Servicer") (the "Commercial Servicing
Agreement"; the Commercial Servicing Agreement and the Purchase Agreement are
collectively referred to as the "Agreements").
2. The Assignor warrants and represents to, and covenants with, the
Assignee that:
a. The Assignor is the lawful owner of the Mortgage Loans with
the full right to transfer the Mortgage Loans free from any
and all claims and encumbrances whatsoever;
b. The Assignor has not received notice of, and has no knowledge
of, any offsets, counterclaims or other defenses available to
the Seller with respect to the Agreements or the Mortgage
Loans;
c. The Assignor has not waived or agreed to any waiver under, or
agreed to any amendment or other modification of, the
Agreements. The Assignor has no knowledge of, and has not
received notice of, any waivers under or amendments or other
modifications of, or assignments of rights or obligations
under, the Agreements; and
d. Neither the Assignor nor anyone acting on its behalf has
offered, transferred, pledged, sold or otherwise disposed of
the Mortgage Loans or any interest in the Mortgage Loans, or
solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans, or any interest in
the Mortgage Loans or otherwise approached or negotiated with
respect to the Mortgage Loans, or any interest in the Mortgage
with any person in any manner, or made any general
solicitation by means of general advertising or in any other
G-1
<PAGE>
manner, or taken any other action which would constitute a
distribution of the Mortgage Loans under the Securities Act of
1933, as amended (the "1933 Act") or which would render the
disposition of the Mortgage Loans a violation of Section 5 of
the 1933 Act or require registration pursuant thereto.
3. The Assignee warrants and represents to, and covenants with, the
Assignor and the Seller pursuant to the Agreements that:
a. The Assignee is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, and has all requisite corporate power and
authority to acquire, own and purchase the Mortgage Loans;
b. The Assignee has full corporate power and authority to
execute, deliver and perform under this Assignment and
Assumption Agreement, and to consummate the transactions set
forth herein. The execution, delivery and performance of the
Assignee of this Assignment and Assumption Agreement, and the
consummation by it of the transactions contemplated hereby,
have been duly authorized by all necessary corporate action of
the Assignee. This Assignment and Assumption Agreement has
been duly executed and delivered by the Assignee and
constitutes the valid and legally binding obligation of the
Assignee enforceable against the Assignee in accordance with
its respective terms;
c. To the best of Assignee's knowledge, no material consent,
approval, order or authorization of, or declaration, filing or
registration with, any governmental entity is required to be
obtained or made by the Assignee in connection with the
execution, delivery or performance by the Assignee of this
Assignment and Assumption Agreement, or the consummation by it
of the transactions contemplated hereby;
d. The Assignee agrees to be bound, as Purchaser, by all of the
terms, covenants and conditions of the Agreements, the
Mortgage Loans, and from and after the date hereof, the
Assignee assumes for the benefit of each of the Seller and the
Assignor all of the Assignor' s obligations as Purchaser
thereunder, including, without limitation, the limitation on
assignment set forth in Section 19 of the Purchase Agreement;
e. The Assignee understands that the Mortgage Loans have not been
registered under the 1933 Act or the securities laws of any
state;
G-2
<PAGE>
f. The purchase price being paid by the Assignee for the Mortgage
Loans is in excess of $250,000 and will be paid by cash
remittance of the full purchase price within sixty (60) days
of the sale;
g. The Assignee is acquiring the Mortgage Loans for investment
for its own account only and not for any other person;
h. The Assignee considers itself a sophisticated institutional
investor having such knowledge and experience in financial and
business matters that it is capable of evaluating the merits
and risks of investment in the Mortgage Loans;
I. The Assignee has been furnished with all information regarding
the Mortgage Loans that it has requested from the Assignor or
the Seller;
j. Neither the Assignee nor anyone acting on its behalf has
offered, transferred, pledged, sold or otherwise disposed of
the Mortgage Loans or any interest in the Mortgage Loans, or
solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans or any interest in the
Mortgage Loans, or otherwise approached or negotiated with
respect to the Mortgage Loans or any interest in the Mortgage
Loans with any person in any manner which would constitute a
distribution of the Mortgage Loans under the 1933 Act or which
would render the disposition of the Mortgage Loans a violation
of Section 5 of the 1933 Act or require registration pursuant
thereto, nor will it act, nor has it authorized or will it
authorize any person to act, in such manner with respect to
the Mortgage Loans; and
k. Either: (1) the Assignee is not an employee benefit plan
("Plan") within the meaning of section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")
or a plan (also "Plan") within the meaning of section
4975(e)(1) of the Internal Revenue Code of 1986 ("Code"), and
the Assignee is not directly or indirectly purchasing the
Mortgage Loans on behalf of, investment manager of, as named
fiduciary of, as Trustee of, or with assets of, a Plan; or (2)
the Assignee's purchase of the Mortgage Loans will not result
in a prohibited transaction under section 406 of ERISA or
section 4975 of the Code.
G-3
<PAGE>
4. (a) The Assignee's address for purposes of all notices and
correspondence related to the Mortgage Loans and the Agreements is:
---------------------------
---------------------------
---------------------------
The Assignee's wire instructions for purposes of all remittances and
payments related to the Mortgage Loans are:
---------------------------
---------------------------
---------------------------
(b) The Assignor's address for purposes for all notices and correspondence
related to the Mortgage Loans and this Agreement is:
---------------------------
---------------------------
---------------------------
5. This Agreement shall be construed in accordance with the substantive
laws of the State of California (without regard to conflicts of laws principles)
and the obligations, rights and remedies of the parties hereunder shall be
determined in accordance with such laws, except to the extent preempted by
federal law.
6. This Agreement shall inure to the benefit of the successors and assigns
of the parties hereto. This Agreement may not be assigned by the Assignee
without the express written consent of the Assignor. Any entity into which the
Assignor or Assignee may be merged or consolidated shall, without the
requirement for any further writing, be deemed the Assignor or Assignee,
respectively, hereunder.
7. No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
8. This Agreement shall survive the conveyance of the Mortgage Loans and
the assignment of the Agreements by the Assignor.
G-4
<PAGE>
9. Notwithstanding the assignment of the Agreements by either the Assignor
or Assignee, this Agreement shall not be deemed assigned by the Assignor or the
Assignee unless assigned by separate written instrument.
10. For the purpose for facilitating the execution of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute and be one
and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption
Agreement to be executed by their duly authorized officers as of the date first
above written.
- --------------------------------- ---------------------------------
Assignor Assignee
By: _____________________________ By: ______________________________
Its: ____________________________ Its: _____________________________
Taxpayer Identification Taxpayer Identification
No.: _______________ No.: ________________
G-5
<PAGE>
EXHIBIT H
INITIAL PORTFOLIO MORTGAGE LOAN SCHEDULE
H-1
<PAGE>
EXHIBIT I
FORM OF COMMITMENT LETTER
[Date]
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Ladies and Gentlemen:
People's Preferred Capital Corporation, a Maryland corporation
("Purchaser"), hereby agrees to purchase from you ("Seller"), and you hereby
agree to sell, transfer, assign and convey to Purchaser, on ________________
(the "Closing Date"), all of your right, title and interest in and to those
commercial mortgage loans (the "Mortgage Loans") set forth on Schedule I (the
"Mortgage Loan Schedule") attached hereto, the related Mortgage Files and all
rights and obligations of Seller arising under the documents contained therein,
subject to the terms and conditions set forth in this Commitment Letter and in
that certain Commercial Mortgage Loan Purchase and Warranties Agreement, dated
as of ______________, 1997 (the "Purchase Agreement"), by and between Purchaser
and Seller.
The Mortgage Loans shall have an aggregate principal balance on
____________ (the "Cutoff Date") of $_______, or such amount as Purchaser and
Seller shall agree upon as evidenced by the aggregate principal balance of the
Mortgage Loans accepted by Purchaser on the Closing Date. The purchase price
payable by Purchaser to Seller at the Closing in consideration for the Mortgage
Loans set forth on the Mortgage Loan Schedule shall be $_______ (the "Purchase
Price"), or such other amount as Purchaser and Seller shall agree upon as
evidenced by the aggregate principal balance of the Mortgage Loans accepted by
Purchaser on the Closing Date.
I-1
<PAGE>
The purchase and sale of the Mortgage Loans contemplated hereby
shall be consummated by Purchaser and Seller subject to and in accordance
with the terms and conditions of the Purchase Agreement, including,
without limitation, the representations and warranties of Seller contained
in Section 8 thereof and the provisions relating to the purchase and sale
of Mortgage Loans and delivery of related documents in connection
therewith set forth in Sections 4, 5, 6, 9 and 10 thereof. Capitalized
terms used but not defined herein shall have the meanings ascribed to such
terms in the Purchase Agreement.
Very truly yours,
PEOPLE'S PREFERRED CAPITAL
CORPORATION
By: ________________________________
Name:
Title:
Agreed and accepted as of the day first written above:
PEOPLE'S BANK OF CALIFORNIA
By: ____________________________
Name:
Title:
I-2
<PAGE>
Exhibit 10.(d)
ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT
This is an Assignment, Assumption and Recognition Agreement (the
"Agreement") made this 3rd day of October, 1997, among People's Bank of
California (the "Seller"), People's Preferred Capital Corporation (the
"Purchaser"), and Temple-Inland Mortgage Corporation (the "Servicer").
In consideration of the mutual promises contained herein, the parties
hereto agree as follows with respect to the mortgage loans (the "Mortgage
Loans") identified on the Mortgage Loan Schedule attached hereto as Schedule A.
The Mortgage Loans are currently being serviced by the Servicer, pursuant to
that certain Loan Servicing Agreement, dated as of March 31, 1997 (the
"Servicing Agreement"), among the Servicer, and the Seller as Investor
thereunder. A true, accurate and complete copy of the Servicing Agreement is
attached hereto as Exhibit Two.
WARRANTIES
1. The Seller and Purchaser warrant and represent to the Servicer that
attached hereto as Exhibit One is a true, accurate and complete copy of the
Residential Mortgage Loan Purchase and Warranties Agreement (the "Purchase
Agreement"), dated as of October 3, 1997 between the Seller and the Purchaser,
with respect to Seller's sale and Purchaser's purchase of the Mortgage Loans.
The Purchase Agreement is in full force and effect as of the date hereof and no
notice of termination has been given thereunder.
2. The Seller warrants and represents to Servicer that immediately prior
to payment of the purchase price for the Mortgage Loans as specified in the
Purchase Agreement, the Seller is the lawful owner of the Mortgage Loans and has
the full right to transfer the Mortgage Loans subject to Article Seven of the
Servicing Agreement, free from any and all claims and encumbrances whatsoever.
ASSIGNMENT AND ASSUMPTION
3. (a) Seller grants, transfers and assigns to the Purchaser all of its
right, title and interest in and to the Mortgage Loans pursuant to the Purchase
Agreement, and the Purchaser hereby assumes all of the Seller's obligations as
Investor under the Servicing Agreement with respect to the Mortgage Loans from
and after the date hereof.
(b) It is hereby acknowledged and agreed that the Purchaser,
pursuant to this Agreement and the execution of the Purchase Agreement, shall be
entitled to all payments of principal and interest on the Mortgage Loans
collected after September 22, 1997.
RECOGNITION OF THE PURCHASER
4. From and after the date hereof, the Seller and the Servicer shall
recognize the Purchaser
<PAGE>
as the owner of the Mortgage Loans. The Servicer shall service the Mortgage
Loans for the Purchaser as if the Purchaser and the Servicer had entered into a
separate servicing agreement for the servicing of the Mortgage Loans in the form
of the Servicing Agreement with the Seller, the terms of which are incorporated
herein by reference with respect to the Mortgage Loans, and as if the Purchaser
is the Investor thereunder; provided, however, that (i) it is the intention of
the Seller, the Servicer and the Purchaser that this Agreement will be a
separate and distinct servicing agreement, and the entire agreement, among the
Servicer, the Seller and the Purchaser with respect to the servicing of the
Mortgage Loans, shall be binding upon and for the benefit of the respective
successors and assigns of such parties hereto; (ii) the Servicer shall remit all
payments and proceeds (that the Purchaser is entitled to pursuant to the
provisions of this Agreement and the Servicing Agreement) with respect to the
Mortgage Loans to Account Number 91-220806, ABA Number 322270466 (short name:
Peoples Bk Ca LA), Attention: J. Michael Holmes.
REPRESENTATIONS OF THE SELLER
5. The Seller hereby represents and warrants that the representations and
warranties contained in Article V of that certain Mortgage Servicing Purchase
and Sale Agreement between Seller and Servicer dated as of March 31, 1997 ("P &
S Agreement") were true and correct with respect to the Mortgage Loans on the
date such representations and warranties were made by the Seller pursuant to the
P & S Agreement.
NOTICES
6. All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered or mailed by
registered mail, postage prepaid, return receipt requested, to the following
addresses: if to the Purchaser, addressed to the Purchaser at 5900 Whilshire
Boulevard, 16th Floor, Los Angeles, CA 90036, Attention: J. Michael Holmes, or
to such other address as the Purchaser may designate in writing to the Seller;
or if to the Seller, addressed to the Seller at 5900 Wilshire Boulevard 16th
Floor, Los Angeles, CA 90036, Attention: J. Michael Holmes, or to such other
address as the Seller may designate in writing; or if to the Servicer, addressed
to the Interim Servicer at 301 Congress Avenue, Suite 375, Austin, Texas 78701,
Attention: Richard Magel or to such other address as the Interim Servicer may
designate in writing.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and
year first above written.
PEOPLE'S BANK OF CALIFORNIA,
Seller
By: /s/ J. Michael Holmes
-------------------------
Name: J. Michael Holmes
-----------------------
Title: Executive Vice President/
-------------------------
Chief Financial Officer
-------------------------
By: /s/ William W. Flader
------------------------
Name: William W. Flader
----------------------
Title: Executive Vice President
---------------------------
PEOPLE'S PREFERRED CAPITAL
CORPORATION,
Purchaser
By: /s/ J. Michael Holmes
--------------------------
Name: J. Michael Holmes
------------------------
Title: Exexutive Vice President/
-------------------------
Chief Financial Officer
-----------------------
TEMPLE-INLAND MORTGAGE
CORPORATION,
Servicer
By: /s/ Richard K. Magel
------------------------
Name: Richard K. Magel
----------------------
Title: Senior Vice President
------------------------
<PAGE>
SCHEDULE A
MORTGAGE LOAN SCHEDULE
<PAGE>
Exhibit 10.(e)
- --------------------------------------------------------------------------------
RESIDENTIAL SERVICING AGREEMENT
BETWEEN
PEOPLE'S PREFERRED CAPITAL CORPORATION
PURCHASER
PEOPLE'S BANK OF CALIFORNIA
SELLER
DATED AS OF ______ __, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS
Section 1. Definitions............................................... 1
ARTICLE II
SERVICING
Section 2.01 Seller to Act as Servicer................................. 5
Section 2.02 Liquidation of Mortgage Loans............................. 7
Section 2.03 Collection of Mortgage Loan Payments...................... 8
Section 2.04 Establishment of and Deposits to Custodial Account........ 8
Section 2.05 Permitted Withdrawals From Custodial Account.............. 10
Section 2.06 Establishment of and Deposits to Escrow Account........... 10
Section 2.07 Permitted Withdrawals From Escrow Account................. 11
Section 2.08 Payment of Taxes, Insurance and Other Charges,............
Tax Contracts........................................ 12
Section 2.09 Protection of Accounts.................................... 12
Section 2.10 Maintenance of Hazard Insurance........................... 13
Section 2.11 Maintenance of Mortgage Impairment Insurance.............. 14
Section 2.12 Maintenance of Fidelity Bond and Errors and Omissions.....
Insurance............................................ 14
Section 2.13 Inspections............................................... 15
Section 2.14 Restoration of Mortgaged Property......................... 15
Section 2.15 Maintenance of PMI, Claims................................ 16
Section 2.16 Deteriorating Mortgage Loans.............................. 16
Section 2.17 Title, Management and Disposition of REO Property......... 16
Section 2.18 Permitted Withdrawals with respect to REO Property........ 18
Section 2.19 Real Estate Owned Reports................................. 18
Section 2.20 Liquidation Reports....................................... 18
Section 2.21 Reports Of Foreclosures and Abandonments.................. 18
Section 2.22 Notification of Adjustments............................... 18
Section 2.23 Notification of Maturity Date............................. 19
ARTICLE III
PAYMENTS TO PURCHASER
Section 3.01 Remittances............................................... 19
Section 3.02 Statements to Purchaser................................... 20
<PAGE>
ARTICLE IV
GENERAL SERVICING PROCEDURES
Section 4.01 Transfers of Mortgaged Property........................... 20
Section 4.02 Satisfaction of Mortgages and Release of Mortgage Files... 21
Section 4.03 Servicing Compensation.................................... 22
Section 4.04 Annual Statement as to Compliance......................... 22
Section 4.05 Annual Independent Public Accountants' Servicing Report... 22
Section 4.06 Right to Examine Seller Records........................... 22
ARTICLE V
SELLER TO COOPERATE
Section 5.01 Provision of Information.................................. 23
Section 5.02 Financial Statements; Servicing Facilities................ 23
ARTICLE VI
TERMINATION
Section 6.01 Agency Suspension......................................... 24
Section 6.02 Damages................................................... 24
Section 6.03 Termination............................................... 24
Section 6.04 Termination Without Cause................................. 24
ARTICLE VII
BOOKS AND RECORDS
Section 7.01 Possession of Servicing Files............................. 25
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
Section 8.01 Indemnification........................................... 26
Section 8.02 Limitation on Liability of Seller and Others.............. 26
Section 8.03 Limitation on Registration and Assignment by Seller....... 26
Section 8.04 Assignment by Purchaser................................... 27
Section 8.05 Merger or Consolidation of the Seller..................... 27
Section 8.06 Successor to the Seller................................... 28
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
Section 9.01 Due Organization and Authority............................ 29
Section 9.02 No Conflicts.............................................. 29
Section 9.03 Ability to Perform........................................ 29
<PAGE>
Section 9.04 No Litigation Pending..................................... 29
Section 9.05 No Consent Required....................................... 30
Section 9.06 Assistance................................................ 30
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER
Section 10.01 Due Organization and Authority............................ 30
Section 10.02 Ordinary Course of Business............................... 30
Section 10.03 No Conflicts.............................................. 30
Section 10.04 Ability to Service........................................ 31
Section 10.05 Ability to Perform........................................ 31
Section 10.06 No Litigation Pending..................................... 31
Section 10.07 No Consent Required....................................... 31
Section 10.08 No Untrue Information..................................... 31
Section 10.09 Reasonable Servicing Fee.................................. 32
Section 10.10 Financial Statements...................................... 32
Section 10.11 Conflict of Interest...................................... 32
ARTICLE XI
DEFAULT
Section 11.01 Events of Default......................................... 32
Section 11.02 Waiver of Defaults........................................ 34
ARTICLE XII
MISCELLANEOUS PROVISIONS
Section 12.01 Notices................................................... 34
Section 12.02 Waivers................................................... 34
Section 12.03 Entire Agreement; Amendment............................... 34
Section 12.04 Execution; Binding Effect................................. 35
Section 12.05 Headings.................................................. 35
Section 12.06 Applicable Law............................................ 35
Section 12.07 Relationship of Parties................................... 35
Section 12.08 Severability of Provisions................................ 35
Section 12.09 Exhibits.................................................. 35
<PAGE>
EXHIBITS
EXHIBIT A Form of Monthly Remittance Advice
EXHIBIT B Form of Custodial Account Certification
EXHIBIT C Form of Custodial Account Letter Agreement
EXHIBIT D Form of Escrow Account Certification
EXHIBIT E Form of Escrow Account Letter Agreement
<PAGE>
RESIDENTIAL SERVICING AGREEMENT
This Residential Servicing Agreement (the "Agreement") is entered into as
of ______ __, 1999, by and between PEOPLE'S BANK OF CALIFORNIA (the "Seller"), a
federal stock savings bank incorporated under the laws of the United States, and
PEOPLE'S PREFERRED CAPITAL CORPORATION, a Maryland corporation (the
"Purchaser").
WHEREAS, the Purchaser and the Seller entered into a Residential Mortgage
Loan Purchase and Warranties Agreement dated as of October 3, 1997 (the
"Purchase Agreement") pursuant to which the Purchaser agreed to purchase from
the Seller certain residential, first mortgage loans (the "Mortgage Loans") to
be delivered as whole loans, with the Seller retaining servicing rights in
connection with the purchase of such Mortgage Loans;
WHEREAS, effective as of June 2, 1998, the Purchase Agreement was amended
so as to provide that Seller, rather than Temple - Inland Mortgage Corporation,
would act as the servicer with respect to certain specified Mortgage Loans as
well as with respect to Mortgage Loans which Seller may thereafter sell to
Purchaser and which are designated to be serviced by Seller;
WHEREAS, the Purchase Agreement is being amended as of the date hereof to
make certain changes intended to conform the terms of the Purchase Agreement
with the terms of this Agreement;
WHEREAS, it is the intention of the Seller and the Purchaser that this
Agreement shall, as of the date hereof govern the terms of the servicing by
Seller of certain of the Purchaser's Mortgage Loans in place of the amendment to
the Purchase Agreement dated June 2, 1998;
WHEREAS, the Purchaser desires to have the Seller act as a servicer of
Mortgage Loans, the Seller desires to service and administer Mortgage Loans on
behalf of the Purchaser, and the parties desire to provide the terms and
conditions of such servicing by the Seller; and
WHEREAS, for the purpose of this Agreement, the parties intend that the
term Mortgage Loans shall refer to all such Mortgage Loans which, pursuant to
the Purchase Agreement, as amended, have been and will be serviced by the
Seller.
NOW, THEREFORE, in consideration of the mutual promises and agreements set
forth herein and for other good and valuable consideration, the receipt and the
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein
have the respective meanings set forth in the Purchase Agreement. The following
terms are defined as follows:
<PAGE>
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Ancillary Income" means all late charges, reconveyance fees,
not-sufficient funds charges, optional insurance fees, assumption fees, escrow
account benefits, reinstatement fees, and similar types of fees arising from or
in connection with any Mortgage Loan to the extent not otherwise payable to the
Mortgagee under applicable law or pursuant to the terms of the related Mortgage
Note.
"Best's" means Best's Key Rating Guide.
"BIF" means The Bank Insurance Fund, or any successor thereto.
hereto.
"Closing Date" means any date as is mutually agreed upon by the parties
hereto as to which Seller shall begin to service and administer Mortgage Loans.
"Code" means the Internal Revenue Code of 1986, as amended.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Custodial Account" means the separate account or accounts created and
maintained pursuant to Section 2.04.
"Cut-off Date" means the last business day of each calendar month.
"Due Period" means with respect to each Remittance Date, the period
commencing on the second day of the month preceding the month of the Remittance
Date and ending on the first day of the month of the Remittance Date.
"Errors and Omissions Insurance Policy" means an errors and omissions
insurance policy to be maintained by the Seller pursuant to Section 2.12.
"Escrow Account" means the separate account or accounts created and
maintained pursuant to Section 2.06.
"Escrow Payment" means, with respect to any Mortgage Loan, any payments
required to be escrowed by the Mortgagor with the mortgagee pursuant to the
Mortgage or any other document
2
<PAGE>
(whether referred to as escrow, impound or otherwise), including, without
limitation, the amounts constituting ground rents, taxes, assessments, water
rates, sewer rents, municipal charges, mortgage insurance premiums, fire and
hazard insurance premiums.
"Event of Default" means any one of the conditions or circumstances
enumerated in Section 11.01.
"FDIC" means The Federal Deposit Insurance Corporation, or any successor
thereto.
"FHLMC Guide" means the FHLMC Sellers' and Servicers' Guide and all
amendments or additions thereto.
"Fidelity Bond" means a fidelity bond to be maintained by the Seller
pursuant to Section 2.12.
"FNMA Guides" means the FNMA Sellers' Guide and the FNMA Servicers' Guide
and all amendment or additions thereto.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds
of insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of the Mortgage Loan.
"Monthly Remittance Advice" means the monthly remittance advice, in the
form of Exhibit A annexed hereto, to be provided to the Purchaser pursuant to
Section 3.02.
"Mortgage Impairment Insurance Policy" means a mortgage impairment or
blanket hazard insurance policy as described in Section 2.11.
"Nonrecoverable Advance" means any advance of principal and interest
previously made or proposed to be made in respect of a Mortgage Loan which, in
the good faith judgment of the Seller, will not or, in the case of a proposed
advance of principal and interest, would not, be ultimately recoverable from
related Insurance Proceeds, Liquidation Proceeds or otherwise. The determination
by the Seller that it has made a Nonrecoverable Advance or that any proposed
advance of principal and interest, if made, would constitute a Nonrecoverable
Advance, shall be evidenced by an Officers' Certificate delivered to the
Purchaser.
"Officer's Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or the President or a Vice President and
by the Treasurer or the Secretary or
3
<PAGE>
one of the Assistant Treasurers or Assistant Secretaries of the Seller, and
delivered to the Purchaser as required by this Agreement.
"OTS" means Office of Thrift Supervision, or any successor thereto.
"PMI Policy" means a policy of primary mortgage guaranty insurance issued
by a Qualified Insurer, as required by this Agreement with respect to certain
Mortgage Loans.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Western
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled due date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Agreement" means the Residential Mortgage Loan Purchase and
Warranties Agreement between the Purchaser and the Seller dated as of October 3,
1997 and as subsequently amended.
"Qualified Depository" means a depository the accounts of which are
insured by the FDIC through the BIF or the SAIF, and shall include the Seller.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, approved as an insurer by FNMA and
FHLMC with respect to primary mortgage insurance, and, in addition, in the two
highest rating categories by Best's with respect to hazard and flood insurance.
"Record Date" means the close of business of the last Business Day of the
month preceding the month of the related Remittance Date.
"Remittance Date" means the 18th day (or if such 18th day is not a
Business Day, the first Business Day immediately following) of any month
following a Cut-off Date.
"REO Property" means a Mortgaged Property acquired by the Seller on behalf
of the Purchaser through foreclosure or by deed in lieu of foreclosure, as
described in Section 2.17.
"SAIF" means the Savings Association Insurance Fund, or any successor
thereto.
"Servicing Advances" means all customary, reasonable and necessary "out of
pocket" costs and expenses (including reasonable attorneys' fees and
disbursements) incurred in the performance by the Seller of its servicing
obligations, including, but not limited to, the cost of (a) the
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preservation, restoration and protection of the Mortgaged Property, (b) any
enforcement or judicial proceedings, including foreclosures, (c) the management
and liquidation of the Mortgaged Property if the Mortgaged Property is acquired
in satisfaction of the Mortgage and (d) compliance with the obligations under
Sections 2.08, 2.10 and 2.17.
"Servicing Agreement" means this agreement between the Purchaser and the
Seller for the servicing and administration of the Mortgage Loans.
"Servicing Fee" means, with respect to each Mortgage Loan, the amount of
the annual fee the Purchaser shall pay to the Seller, which shall, for a period
of one (1) full month, be equal to one-twelfth of the product of the Servicing
Fee Rate and (2) the Stated Principal Balance of such Mortgage Loan. Such fee
shall be payable monthly, computed on the basis of the same principal amount and
period in respect of which any related interest payment on a Mortgage Loan is
computed and shall be pro rated for any portion of a month during which the
Mortgage Loan is serviced by the Seller under this Agreement. The obligation of
the Purchaser to pay the Servicing Fee is limited to, and the Servicing Fee is
payable solely from, the interest portion (including recoveries with respect to
interest from Liquidation Proceeds, to the extent permitted by Section 4.03) of
such Monthly Payment collected by the Seller, or as otherwise provided under
Section 4.03.
"Servicing Fee Rate" means, with respect to each Mortgage Loan , the rate
specified in the Mortgage Loan Schedule with respect to such Mortgage Loan.
"Servicing File" means, with respect to each Mortgage Loan, the file
retained by the Seller consisting of originals of all documents in the Mortgage
File which are not delivered to the Purchaser or its designee and copies of the
Mortgage Loan Documents listed on Exhibit A to the Purchase Agreement.
"Servicing Officer" means any officer of the Seller involved in or
responsible for, the administration and servicing of the Mortgage Loans whose
name appears on a list of servicing officers furnished by the Seller to the
Purchaser upon request, as such list may from time to time be amended.
"Termination Fee" means the amount paid by the Purchaser to the Seller in
the event of the Seller's termination, without cause, as servicer. Such fee
shall equal the percentage amount set forth in Section 6.04 hereof of the then
current aggregate unpaid principal balance of the related Mortgage Loans.
ARTICLE II
SERVICING
SECTION 2.01 SELLER TO ACT AS SERVICER. From and after any Closing Date,
the Seller, as an independent contractor, shall service and administer the
Mortgage Loans and shall have full power
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and authority, acting alone, to do any and all things in connection with such
servicing and administration which the Seller may deem necessary or desirable,
consistent with the terms of this Agreement and with Accepted Servicing
Practices.
Consistent with the terms of this Agreement, the Seller may waive, modify
or vary any term of any Mortgage Loan or consent to the postponement of
compliance with any such term or in any manner grant indulgence to any Mortgagor
if in the Seller's reasonable and prudent determination such waiver,
modification, postponement or indulgence is not materially adverse to the
Purchaser, provided, however, that unless the Seller has obtained the prior
written consent of the Purchaser, the Seller shall not permit any modification
with respect to any Mortgage Loan that would change the Mortgage Interest Rate,
defer or forgive the payment of principal or interest, reduce or increase the
outstanding principal balance (except for actual payments of principal) or
change the final maturity date on such Mortgage Loan. Without limiting the
generality of the foregoing, the Seller shall continue, and is hereby authorized
and empowered, to execute and deliver on behalf of itself and the Purchaser, all
instruments of satisfaction or cancellation, or of partial or full release,
discharge and all other comparable instruments, with respect to the Mortgage
Loans and with respect to the Mortgaged Properties. If reasonably required by
the Seller, the Purchaser shall furnish the Seller with any powers of attorney
and other documents necessary or appropriate to enable the Seller to carry out
its servicing and administrative duties under this Agreement.
In servicing and administering the Mortgage Loans, the Seller shall employ
procedures (including collection procedures) and exercise the same care that it
customarily employs and exercises in servicing and administering mortgage loans
for its own account, giving due consideration to Accepted Servicing Practices
where such practices do not conflict with the requirements of this Agreement,
the FNMA Guides, the FHLMC Guides, and the Purchaser's reliance on the Seller.
The Seller shall keep at its servicing office books and records in which,
subject to such reasonable regulations as it may prescribe, the Seller shall
note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be made
unless such transfer is in compliance with the terms hereof. For the purposes of
this Agreement, Seller shall be under no obligation to deal with any Person with
respect to this Agreement or the Mortgage Loans unless the Seller has been
notified of such transfers as provided in this Section 2.01. The Purchaser may
sell and transfer, in whole or in part, the Mortgage Loans, provided that no
such sale and transfer shall be binding upon the Seller unless such transferee
shall agree in writing in the form of the Assignment and Assumption Agreement
attached to the Purchase Agreement as Exhibit G, to be bound by the terms of
this Agreement and the Purchase Agreement, and an executed copy of the same
shall have been delivered to the Seller. Upon receipt thereof, the Seller shall
mark its books and records to reflect the ownership of the Mortgage Loans by
such assignee, and the previous Purchaser shall be released from its obligations
hereunder, subject to receipt by Seller of all unpaid but due Servicing
Advances, Servicing Fees and other payments due to Seller on or before the date
of such transfer pursuant to this Agreement. The Seller shall be required to
remit all amounts required to be remitted to the Purchaser hereunder to said
transferee commencing with the first Remittance Date falling after receipt of
said copy of the related Assignment and Assumption Agreement provided that the
Seller
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receives said copy no later than three (3) Business Days immediately prior to
the first day of the month of the related Remittance Date. This Agreement shall
be binding upon and inure to the benefit of the Purchaser and the Seller and
their permitted successors, assignees and designees.
The Servicing File retained by the Seller pursuant to this Agreement shall
be appropriately marked and identified in the Seller's computer system to
clearly reflect the sale of the related Mortgage Loan to the Purchaser. The
Seller shall release from its custody the contents of any Servicing File
retained by it only in accordance with this Agreement, except when such release
is required in connection with a repurchase of any such Mortgage Loan pursuant
to Section 8.3 of the Purchase Agreement.
The Seller must have an internal quality control program that verifies, on
a regular basis, the existence and accuracy of the legal documents, credit
documents, property appraisals, and underwriting decisions. The program must be
capable of evaluating and monitoring the overall quality of its loan production
and servicing activities. The program is to ensure that the Mortgage Loans are
serviced in accordance with prudent mortgage banking practices and accounting
principles; guard against dishonest, fraudulent, or negligent acts; and guard
against errors and omissions by officers, employees, or other authorized
persons.
SECTION 2.02 LIQUIDATION OF MORTGAGE LOANS. In the event that any payment
due under any Mortgage Loan and not postponed pursuant to Section 2.01 is not
paid when the same becomes due and payable, or in the event the Mortgagor fails
to perform any other covenant or obligation under the Mortgage Loan and such
failure continues beyond any applicable grace period, the Seller shall take such
action as (1) the Seller would take under similar circumstances with respect to
a similar mortgage loan held for its own account for investment, (2) shall be
consistent with Accepted Servicing Practices, (3) the Seller shall determine
prudently to be in the best interest of Purchaser and (4) is consistent with any
related PMI Policy. In addition to the foregoing, in the event that any payment
due under any Mortgage Loan is not postponed pursuant to Section 2.01 and
remains delinquent for a period of ninety (90) days or any other default
continues for a period of ninety (90) days beyond the expiration of any grace or
cure period (or such other period as is required by law in the jurisdiction
where the related Mortgaged Property is located), the Seller shall commence and
be responsible for the processing of foreclosure proceedings, PROVIDED THAT,
prior to commencing foreclosure proceedings, the Seller shall notify the
Purchaser in writing of the Seller's intention to do so, and the Seller shall
not commence foreclosure proceedings if the Purchaser objects to such action
within ten (10) Business Days of receiving such notice or, if the provisions of
the next two paragraphs apply, in any event without the prior written consent of
Purchaser, and PROVIDED, FURTHER, that the Seller may, in its good faith
business judgement, determine to commence foreclosure proceedings earlier than
the expiration of the foregoing grace or cure period, subject to the
requirements of the preceding proviso. In such connection, the Seller shall from
its own funds make all necessary and proper Servicing Advances, provided,
however, that the Seller shall not be required to expend its own funds in
connection with any foreclosure or towards the restoration or preservation of
any Mortgaged Property, unless it shall determine (a) that such preservation,
restoration and/or foreclosure will increase the proceeds of liquidation of the
Mortgage Loan to Purchaser after
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reimbursement to itself for such expenses and (b) that such expenses will be
recoverable by it either through Liquidation Proceeds (in respect of which it
shall have priority for purposes of withdrawals from the Custodial Account
pursuant to Section 2.05) or through Insurance Proceeds (in respect of which it
shall have similar priority). The Purchaser shall execute any instruments or
documents reasonably necessary in furtherance of all actions to be taken by
Seller pursuant to this Section 2.02.
Notwithstanding anything to the contrary contained herein, in connection
with a foreclosure, in the event the Seller has reasonable cause to believe that
a Mortgaged Property is contaminated by hazardous or toxic substances or wastes,
or if the Purchaser otherwise requests an environmental inspection or review of
such Mortgaged Property to be conducted by a qualified inspector, the Seller
shall cause the Mortgaged Property to be so inspected at the expense of the
Purchaser. Upon completion of the inspection, the Seller shall promptly provide
the Purchaser with a written report of the environmental inspection.
After reviewing the environmental inspection report, the Purchaser shall
determine how the Seller shall proceed with respect to the Mortgaged Property.
In the event (a) the environmental inspection report indicates that the
Mortgaged Property is contaminated by hazardous or toxic substances or wastes
and (b) the Purchaser directs the Seller to proceed with foreclosure or
acceptance of a deed in lieu of foreclosure, the Seller shall be reimbursed for
all reasonable costs associated with such foreclosure or acceptance of a deed in
lieu of foreclosure and any related environmental clean up costs, as applicable,
from the related Liquidation Proceeds, or if the Liquidation Proceeds are
insufficient to fully reimburse the Seller, the Seller shall be entitled to be
reimbursed from amounts in the Custodial Account pursuant to Section 2.05 hereof
and to the extent amounts in the Custodial Account are insufficient to fully
reimburse the Seller,the Seller shall be entitled to be reimbursed by the
Purchaser for such deficiencies (upon presentation of evidence of such
deficiency). In the event the Purchaser directs the Seller not to proceed with
foreclosure or acceptance of a deed in lieu of foreclosure, the Seller shall be
reimbursed for all Servicing Advances made with respect to the related Mortgaged
Property from the Custodial Account pursuant to Section 2.05 hereof.
SECTION 2.03 COLLECTION OF MORTGAGE LOAN PAYMENTS. Continuously from any
Closing Date, the Seller shall proceed diligently to collect all payments due
under each of the Mortgage Loans when the same shall become due and payable and
shall take special care in ascertaining and estimating Escrow Payments and all
other charges that will become due and payable with respect to the Mortgage
Loans and each related Mortgaged Property, to the end that the installments
payable by the Mortgagors will be sufficient to pay such charges as and when
they become due and payable.
SECTION 2.04 ESTABLISHMENT OF AND DEPOSITS TO CUSTODIAL ACCOUNT. The
Seller shall segregate and hold all funds collected and received pursuant to the
Mortgage Loans separate and apart from any of its own funds and general assets
and shall establish and maintain one or more Custodial Accounts, in the form of
time deposit or demand accounts, titled "People's Bank of California in trust
for People's Preferred Capital Corporation". The Custodial Account shall be
established with a Qualified Depository acceptable to the Purchaser. Any funds
deposited in the
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Custodial Account shall at all times be fully insured to the full extent
permitted under applicable law; provided, however, that to the extent the
Custodial Account is established with the Seller, the Seller may maintain the
Custodial Account as a single account. Funds deposited in the Custodial Account
may be drawn on by the Seller in accordance with Section 2.05. The creation of
any Custodial Account shall be evidenced by a certification in the form of
Exhibit B hereto, in the case of the account established with the Seller, or by
a letter agreement in the form of Exhibit C hereto, in the case of an account
held by a depository other than the Seller. A copy of such certification or
letter agreement shall be furnished to the Purchaser and, upon request, to any
subsequent Purchaser.
The Seller shall deposit in the Custodial Account within one Business Day
of receipt, and retain therein, the following collections received by the Seller
and payments made by the Seller after any Closing Date(other than payments of
principal and interest due on or before any Closing Date) or received by the
Seller prior to any Closing Date but allocable to a period subsequent thereto:
(i) all payments on account of principal on the Mortgage Loans,
including all Principal Prepayments;
(ii) all payments on account of interest on the Mortgage;
(iii) all Liquidation Proceeds and any amount received with respect to REO
Property;
(iv) all Insurance Proceeds including amounts required to be deposited
pursuant to Section 2.10 (other than proceeds to be held in the
Escrow Account and applied to the restoration or repair of the
Mortgaged Property or released to the Mortgagor in accordance with
Section 2.14), and Section 2.11;
(v) all Condemnation Proceeds which are not applied to the restoration
or repair of the Mortgaged Property or released to the Mortgagor in
accordance with Section 2.14;
(vi) any amount required to be deposited in the Custodial Account
pursuant to Section 2.15, 2.17, 3.01, or 4.02;
(vii) any amounts payable in connection with the repurchase of any
Mortgage Loan pursuant to Section 8.3 of the Purchase Agreement; and
(viii) any amounts required to be deposited by the Seller pursuant to
Section 2.11 in connection with the deductible clause in any blanket
hazard insurance policy.
The foregoing requirements for deposit into the Custodial Account shall be
exclusive, it being understood and agreed that, without limiting the generality
of the foregoing, Ancillary Income need not be deposited by the Seller into the
Custodial Account. Any interest paid on funds deposited in the Custodial Account
by the depository institution shall accrue to the benefit of the Seller and
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the Seller shall be entitled to retain and withdraw such interest from the
Custodial Account pursuant to Section 2.05.
SECTION 2.05 PERMITTED WITHDRAWALS FROM CUSTODIAL ACCOUNT. Subject to
Section 2.17 hereof, the Seller shall, from time to time, withdraw funds from
the Custodial Account for the following purposes:
(i) to make payments to the Purchaser in the amounts and in the manner
provided for in Section 3.01;
(ii) to pay to itself the Servicing Fee;
(iii) to reimburse itself for unreimbursed Servicing Advances (except to
the extent reimbursed pursuant to Section 2.07), any accrued but
unpaid Servicing Fees and for unreimbursed advances of Seller funds
made pursuant to Sections 2.15 or 2.17, the Seller's right to
reimburse itself pursuant to this subclause (iii) with respect to
any Mortgage Loan being limited to related Liquidation Proceeds,
Condemnation Proceeds, Insurance Proceeds and such other amounts as
may be collected by the Seller from the Mortgagor or otherwise
relating to the Mortgage Loan, it being understood that, in the case
of any such reimbursement, the Seller's right thereto shall be prior
to the rights of the Purchaser except that, where the Seller is
required to repurchase a Mortgage Loan pursuant to Section 8.3 of
the Purchase Agreement or Section 4.02 of this Agreement,
respectively, the Seller's right to such reimbursement shall be
subsequent to the payment to the Purchaser of the Repurchase Price
pursuant to such sections and all other amounts required to be paid
to the Purchaser with respect to such Mortgage Loan;
(iv) to pay itself any interest earned on funds deposited in the
Custodial Account (all such interest to be withdrawn monthly not
later than each Remittance Date); and
(v) to clear and terminate the Custodial Account upon the termination of
this Agreement.
In the event that the Custodial Account is interest bearing, on each
Remittance Date, the Seller shall withdraw all funds from the Custodial Account
except for those amounts which, pursuant to Section 3.01, the Seller is not
obligated to remit on such Remittance Date. The Seller may use such withdrawn
funds only for the purposes described in this Section 2.05.
SECTION 2.06 ESTABLISHMENT OF AND DEPOSITS TO ESCROW ACCOUNT. The Seller
shall segregate and hold all funds collected and received pursuant to a Mortgage
Loan constituting Escrow Payments separate and apart from any of its own funds
and general assets and shall establish and maintain one or more Escrow Accounts,
in the form of time deposit or demand accounts. The Escrow Account or Accounts
shall be established with a Qualified Depositary, in a manner which shall
provide maximum available insurance thereunder. Funds deposited in the Escrow
Accounts
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may be drawn on by the Seller in accordance with Section 2.07. The creation of
any Escrow Account shall be evidenced by a certification in the form of Exhibit
D hereto, in the case of the account established with the Seller, or by a letter
agreement in the form of Exhibit E hereto, in the case of an account held by a
depository other than the Seller. A copy of such certification shall be
furnished to the Purchaser and, upon request, to any subsequent Purchaser.
The Seller shall deposit in the Escrow Account or Accounts within one
Business Day of receipt, and retain therein:
(i) all Escrow Payments collected on account of the Mortgage Loans, for
the purpose of effecting timely payment of any such items as
required under the terms of the Mortgage Loan Documents; and
(ii) all amounts representing Insurance Proceeds or Condemnation Proceeds
which are to be applied to the restoration or repair of any
Mortgaged Property in accordance with the Mortgage Loan Documents.
The Seller shall make withdrawals from the Escrow Account only to effect
such payments as are required under the Mortgage Loan Documents and this
Agreement as set forth in Section 2.07. The Seller shall be entitled to retain
any interest paid on funds deposited in the Escrow Account by the depository
institution, other than interest on escrowed funds required by law to be paid to
the Mortgagor. To the extent required by law, the Seller shall pay from its own
funds interest on escrowed funds to the Mortgagor notwithstanding that the
Escrow Account may be noninterest bearing or that interest paid thereon is
insufficient for such purposes.
SECTION 2.07 PERMITTED WITHDRAWALS FROM ESCROW ACCOUNT. Withdrawals from
each Escrow Account may be made by the Seller only:
(i) to effect timely payments of ground rents, taxes, assessments, water
rates, mortgage insurance premiums, condominium charges, fire and
hazard insurance premiums or other items constituting Escrow
Payments for the related Mortgage;
(ii) to reimburse the Seller for any Servicing Advance made by the Seller
pursuant to Section 2.08 (except with respect to any expenses
incurred in procuring or transferring Tax Service Contracts) with
respect to a related Mortgage Loan, but only from amounts received
on the related Mortgage Loan which represent late collections of
Escrow Payments thereunder;
(iii) to refund to the related Mortgagor any funds found to be in excess
of the amounts required under the terms of the related Mortgage Loan
or applicable federal or state law or judicial or administrative
ruling;
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(iv) for transfer to the Custodial Account and application to reduce the
principal balance of the Mortgage Loan in accordance with the terms
of the related Mortgage and Mortgage Note;
(v) for application to restoration or repair of the related Mortgaged
Property in accordance with the procedures outlined in Section 2.14;
(vi) to pay to the Seller, or any Mortgagor to the extent required by
law, any interest paid on the funds deposited in the Escrow Account;
and
(vii) to clear and terminate the Escrow Account on the termination of this
Agreement.
SECTION 2.08 PAYMENT OF TAXES, INSURANCE AND OTHER CHARGES, TAX CONTRACTS.
With respect to each Mortgage Loan, the Seller shall maintain accurate records
reflecting the status of ground rents, taxes, assessments, water rates, sewer
rents, and other charges, as applicable, which are or may become a lien upon the
Mortgaged Property and the status of PMI Policy premiums and fire and hazard
insurance coverage to the extent Escrow Payments are required under the Mortgage
Loan Documents, shall obtain, from time to time, all bills for the payment of
such charges (including renewal premiums) and shall effect payment thereof prior
to the applicable penalty or termination date, employing for such purpose
deposits of the Mortgagor in the Escrow Account which shall have been estimated
and accumulated by the Seller in amounts sufficient for such purposes, as
allowed under the terms of the Mortgage. To the extent that a Mortgage does not
provide for Escrow Payments, the Seller shall determine that any such payments
relating to taxes or maintaining insurance policies are made by the Mortgagor at
the time they first become due. The Seller assumes full responsibility for the
payment of all such bills to the extent it has notice of such bills and shall
effect payment of all such charges irrespective of each Mortgagor's faithful
performance in the payment of same or the making of the Escrow Payments, and the
Seller shall make advances from its own funds to effect such payments, such
advances to be reimbursable to the same extent as Servicing Advances.
SECTION 2.09 PROTECTION OF ACCOUNTS. The Seller may transfer the Custodial
Account or the Escrow Account to a different Qualified Depository from time to
time. Such transfer shall be made only upon obtaining the consent of the
Purchaser, which consent shall not be withheld unreasonably.
The Seller shall bear any expenses, losses or damages sustained by the
Purchaser because the Custodial Account and/or the Escrow Account are not demand
deposit accounts.
SECTION 2.10 MAINTENANCE OF HAZARD INSURANCE. The Seller shall cause to be
maintained for each Mortgage Loan, hazard insurance such that all buildings upon
the Mortgaged Property are insured by a generally acceptable insurer against
loss by fire, hazards of extended coverage and such other hazards as are
required to be insured pursuant to the FNMA Guides or the FHLMC Guide, in an
amount which is at least equal to the lesser of (i) the maximum insurable value
of the
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improvements securing such Mortgage Loan and (ii) the greater of (a) the
outstanding principal balance of the Mortgage Loan and (b) an amount such that
the proceeds thereof shall be sufficient to prevent the Mortgagor or the loss
payee from becoming a co-insurer.
If required by the Flood Disaster Protection Act of 1973, as amended,
each Mortgage Loan is covered by a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance
Administration in effect with a generally acceptable insurance carrier in an
amount representing coverage not less than the lesser of (i) the outstanding
principal balance of the related Mortgage Loan and (ii) the maximum amount of
insurance which is available under the Flood Disaster Protection Act of 1973,
as amended. If at any time during the term of the Mortgage Loan, the Seller
determines in accordance with applicable law and pursuant to the FNMA and
FHLMC Guides that a Mortgaged Property is located in a special flood hazard
area and is not covered by flood insurance or is covered in an amount less
than the amount required by the Flood Disaster Protection Act of 1973, as
amended, the Seller shall notify the related Mortgagor that the Mortgagor
must obtain such flood insurance coverage, and if said Mortgagor fails to
obtain the required flood insurance coverage within forty five (45) days
after such notification, the Seller shall immediately purchase the required
flood insurance on the Mortgagor's behalf.
If a Mortgage is secured by a unit in a condominium project, the Seller
shall verify that the coverage required of the owner's association, including
hazard, flood, liability, and fidelity coverage, is being maintained in
accordance with then current FNMA and FHLMC requirements.
The Seller shall cause to be maintained on each Mortgaged Property such
other or additional insurance as may be required pursuant to such applicable
laws and regulations as shall at any time be in force and as shall require such
additional insurance, or pursuant to the requirements of any applicable primary
mortgage guaranty insurer.
All policies required hereunder shall name the Seller and its successors
and assigns as mortgagee and shall be endorsed with non-contributory standard
mortgagee clauses which shall provide for at least thirty (30) days' prior
written notice of any cancellation, reduction in amount or material change in
coverage.
The Seller shall not interfere with the Mortgagor's freedom of choice in
selecting either his insurance carrier or agent, provided, however, that the
Seller shall not accept any such insurance policies from insurance companies
unless such companies are rated A:VI or better in Best's and are licensed to do
business in the jurisdiction in which the Mortgaged Property is located. The
Seller shall determine that such policies provide sufficient risk coverage and
amounts that they insure the property owner, and that they properly describe the
property address. To the extent reasonably possible, the Seller shall furnish to
the Mortgagor a formal notice of expiration of any such insurance in sufficient
time for the Mortgagor to arrange for renewal coverage by the expiration date;
provided,
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however, that in the event that no such notice is furnished by the Seller, the
Seller shall ensure that replacement insurance policies are in place in the
required coverages and the Seller shall be solely liable to the Purchaser only
for any losses in the event such coverage is not provided.
Pursuant to Section 2.04, any amounts collected by the Seller under any
such policies (other than amounts to be deposited in the Escrow Account and
applied to the restoration or repair of the related Mortgaged Property, or
property acquired in liquidation of the Mortgage Loan, or to be released to the
Mortgagor, in accordance with the Seller's normal servicing procedures as
specified in Section 2.14) shall be deposited in the Custodial Account subject
to withdrawal pursuant to Section 2.05.
SECTION 2.11 MAINTENANCE OF MORTGAGE IMPAIRMENT INSURANCE. In the event
that the Seller shall obtain and maintain a blanket policy insuring against
losses arising from fire and hazards covered under extended coverage on all of
the Mortgage Loans, then, to the extent such policy provides coverage in an
amount equal to the amount required pursuant to Section 2.10 and otherwise
complies with all other requirements of Section 2.10, it shall conclusively be
deemed to have satisfied its obligations as set forth in Section 2.10. Any
amounts collected by the Seller under any such policy relating to a Mortgage
Loan shall be deposited in the Custodial Account subject to withdrawal pursuant
to Section 2.05. Such policy may contain a deductible clause, in which case, in
the event that there shall not have been maintained on the related Mortgaged
Property a policy complying with Section 2.10, and there shall have been a loss
which would have been covered by such policy, the Seller shall deposit in the
Custodial Account at the time of such loss the amount not otherwise payable
under the blanket policy because of such deductible clause, such amount to be
deposited from the Seller's funds, without reimbursement therefor. Upon request
of the Purchaser, the Seller shall cause to be delivered to the Purchaser a
certified true copy of such policy and a statement from the insurer thereunder
that such policy shall in no event be terminated or materially modified without
thirty (30) days' prior written notice to the Purchaser.
SECTION 2.12 MAINTENANCE OF FIDELITY BOND AND ERRORS AND OMISSIONS
INSURANCE. The Seller shall maintain with responsible companies, at its own
expense, a blanket Fidelity Bond and an Errors and Omissions Insurance Policy,
with broad coverage on all officers, employees or other persons acting in any
capacity requiring such persons to handle funds, money, documents or papers
relating to the Mortgage Loans ("Seller Employees"). Any such Fidelity Bond and
Errors and Omissions Insurance Policy shall be in the form of the Mortgage
Banker's Blanket Bond and shall protect and insure the Seller against losses,
including forgery, theft, embezzlement, fraud, errors and omissions and
negligent acts of such Seller Employees. Such Fidelity Bond and Errors and
Omissions Insurance Policy also shall protect and insure the Seller against
losses in connection with the release or satisfaction of a Mortgage Loan without
having obtained payment in full of the indebtedness secured thereby. No
provision of this Section 2.12 requiring such Fidelity Bond and Errors and
Omissions Insurance Policy shall diminish or relieve the Seller from its duties
and obligations as set forth in this Agreement. The minimum coverage under any
such Fidelity Bond and Errors and Omissions Insurance Policy shall be at least
equal to the corresponding amounts required by FNMA in the FNMA Mortgage-Backed
Securities Selling and Servicing Guide or by
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FHLMC in the FHLMC Guide. Upon the request of the Purchaser, the Seller shall
cause to be delivered to the Purchaser a certified true copy of such Fidelity
Bond and Errors and Omissions Insurance Policy and a statement from the surety
and the insurer that such Fidelity Bond and Errors and Omissions Insurance
Policy shall in no event be terminated or materially modified without thirty
(30) days' prior written notice to the Purchaser. In the event that the surety
or insurer charges the Seller a fee for providing such evidence, the Purchaser
shall reimburse the Seller for the reasonable expense incurred by the Seller in
furnishing such evidence.
SECTION 2.13 INSPECTIONS. The Seller shall inspect the Mortgaged Property
as often as deemed necessary by the Seller to assure itself that the value of
the Mortgaged Property is being preserved. In addition, if any Mortgage Loan is
more than sixty (60) days delinquent, the Seller immediately shall inspect the
Mortgaged Property and shall conduct subsequent inspections in accordance with
Accepted Servicing Practices or as may be required by the primary mortgage
guaranty insurer. The Seller shall keep a written report of each such
inspection.
SECTION 2.14 RESTORATION OF MORTGAGED PROPERTY. The Seller need not obtain
the approval of the Purchaser prior to releasing any Insurance Proceeds or
Condemnation Proceeds to the Mortgagor to be applied to the restoration or
repair of the Mortgaged Property if such release is in accordance with the terms
of the Mortgage Loan Documents. At a minimum, the Seller shall comply with the
following conditions in connection with any such release of Insurance Proceeds
or Condemnation Proceeds:
(i) the Seller shall receive satisfactory independent verification of
completion of repairs and issuance of any required approvals with
respect thereto;
(ii) the Seller shall take all steps necessary to preserve the priority
of the lien of the Mortgage, including, but not limited to requiring
waivers with respect to mechanics' and materialmen's liens;
(iii) the Seller shall verify that the Mortgage Loan is not in default;
and
(iv) pending repairs or restoration, the Seller shall place the Insurance
Proceeds or Condemnation Proceeds in the Escrow Account.
If the Purchaser is named as an additional mortgagee, the Seller is hereby
empowered to endorse any loss draft issued in respect of such a claim in the
name of the Purchaser.
SECTION 2.15 MAINTENANCE OF PMI, CLAIMS. With respect to each Mortgage
Loan with an LTV in excess of 80.01%, the Seller shall, without any cost to the
Purchaser, maintain or cause the Mortgagor to maintain in full force and effect
a PMI Policy insuring that portion of the Mortgage Loan in excess of 75% of
value, and shall pay or shall cause the Mortgagor to pay the premium thereon on
a timely basis, until the LTV of such Mortgage Loan is reduced to 78%. In the
event that such PMI Policy shall be terminated, the Seller shall obtain from
another Qualified Insurer a
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comparable replacement policy, with a total coverage equal to the remaining
coverage of such terminated PMI Policy. If the insurer shall cease to be a
Qualified Insurer, the Seller shall determine whether recoveries under the PMI
Policy are jeopardized for reasons related to the financial condition of such
insurer, it being understood that the Seller shall in no event have any
responsibility or liability for any failure to recover under the PMI Policy for
such reason. If the Seller determines that recoveries are so jeopardized, it
shall notify the Purchaser and the Mortgagor, if required, and obtain from
another Qualified Insurer a replacement insurance policy. The Seller shall not
take any action which would result in noncoverage under any applicable PMI
Policy of any loss which, but for the actions of the Seller, would have been
covered thereunder. In connection with any assumption or substitution agreement
entered into or to be entered into pursaunt to Section 4.01, the Seller shall
promptly notify the insurer under the related PMI Policy, if any, of such
assumption or substitution of liability in accordance with the terms of such PMI
Policy and shall take all actions which may be required by such insurer as a
condition to the continuation of coverage under such PMI Policy. If such PMI
Policy is terminated as a result of such assumption or substitution of
liability, the Seller shall obtain a replacement PMI Policy as provided above.
In connection with its activities as servicer, the Seller agrees to
prepare and present, on behalf of itself and the Purchaser, claims to the
insurer under any PMI Policy in a timely fashion in accordance with the terms of
such PMI Policy and, in this regard, to take such action as shall be necessary
to permit recovery under any PMI Policy with respect to a defaulted Mortgage
Loan. Pursaunt to Section 2.04, any amounts collected by the Seller under any
PMI Policy shall be deposited in the Custodial Account, subject to withdrawal
pursuant to Section 2.05.
SECTION 2.16 DETERIORATING MORTGAGE LOANS. If, during the term of this
Agreement, a Mortgage Loan (or interest therein) becomes at any time in
Nonaccrual Status, the Seller shall notify the Purchaser as part of the Seller's
reporting obligations under this Agreement and shall follow the procedures set
forth in Section 2.02 of this Agreement for realizing upon defaulted Mortgage
Loans.
SECTION 2.17 TITLE, MANAGEMENT AND DISPOSITION OF REO PROPERTY. In the
event that title to any Mortgaged Property is acquired in foreclosure or by deed
in lieu of foreclosure, the deed or certificate of sale shall be taken in the
name of the Purchaser, or in the event the Purchaser is not authorized or
permitted to hold title to real property in the state where the REO Property is
located, or would be adversely affected under the "doing business" or tax laws
of such state by so holding title, the deed or certificate of sale shall be
taken in the name of such Person or Persons as shall be designated by the
Purchaser. The Person or Persons holding such title other than the Purchaser
shall acknowledge in writing that such title is being held as nominee for the
Purchaser.
The Seller shall manage, conserve, protect and operate each REO Property
for the Purchaser solely for the purpose of its prompt disposition and sale. The
Seller, either itself or through an agent selected by the Seller and reasonably
acceptable to the Purchaser, shall manage, conserve, protect and operate the REO
Property in the same manner that it manages, conserves, protects and operates
other foreclosed property for its own account, and in the same manner that
similar property in the same locality as the REO Property is managed. The Seller
shall attempt to sell the same (and may
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temporarily rent the same for a period not greater than one (1) year, except as
otherwise provided below) on such terms and conditions as the Seller deems to be
in the best interest of the Purchaser.
The Seller shall use its best efforts to dispose of the REO Property as
soon as possible and shall sell such REO Property in any event within one year
after title has been taken to such REO Property, unless the Seller determines,
and gives an appropriate notice to the Purchaser to such effect, that a longer
period is necessary for the orderly liquidation of such REO Property. If a
period longer than one (1) year is permitted under the foregoing sentence and is
necessary to sell any REO Property, the Seller shall report monthly to the
Purchaser as to the progress being made in selling such REO Property.
The Seller shall also maintain on each REO Property fire and hazard
insurance with extended coverage in an amount which is at least equal to the
maximum insurable value of the improvements which are a part of such property,
liability insurance and, to the extent required and available under the Flood
Disaster Protection Act of 1973, as amended, flood insurance in the amount
required above.
The disposition of REO Property shall be carried out by the Seller at such
price, and upon such terms and conditions, as the Seller deems to be in the best
interests of the Purchaser. The proceeds of sale of the REO Property shall be
promptly deposited in the Custodial Account. As soon as practical thereafter the
expenses of such sale shall be paid and the Seller shall reimburse itself
pursuant to Section 2.05(iii) hereof, as applicable, for any related
unreimbursed Servicing Advances, unpaid Servicing Fees and unreimbursed advances
made pursuant to this Section, and on the Remittance Date immediately following
the Due Period in which such sale proceeds are received the net cash proceeds of
such sale remaining in the Custodial Account shall be distributed to the
Purchaser; provided that such distribution shall, in any event, be made within
ninety (90) days from and after the closing of the sale of such REO Property.
In addition to the Seller's obligations set forth in this Section 2.17,
the Seller shall deliver written notice to the Purchaser whenever title to any
Mortgaged Property is acquired in foreclosure or by deed in lieu of foreclosure
together with a copy of the drive-by appraisal of the related Mortgaged Property
obtained by the Seller on or prior to the date of such acquisition.
Notwithstanding anything to the contrary contained herein, the Purchaser may, at
the Purchaser's sole option, terminate the Seller as servicer of any such REO
Property without payment of any Termination Fee with respect thereto, provided
that (i) the Purchaser gives the Seller notice of such termination within ten
(10) Business Days of receipt of said written notice from the Seller which
termination shall be effective no more than fifteen (15) Business Days from and
after the date of said notice from the Purchaser and (ii) the Seller shall on
the date said termination takes effect be reimbursed by Purchaser for any
unreimbursed Servicing Advances in each case relating to the Mortgage Loan
underlying such REO Property. In the event of any such termination, the
provisions of Section 8.06 hereof shall apply to said termination and the
transfer of servicing responsibilities with respect to such REO Property to the
Purchaser or its designee.
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With respect to each REO Property, the Seller shall deposit all funds
collected and received in connection with the operation of the REO Property in
the Custodial Account. The Seller shall cause to be deposited on a daily basis
upon the receipt thereof in the Custodial Account all revenues received with
respect to the conservation and disposition of the related REO Property.
SECTION 2.18 PERMITTED WITHDRAWALS WITH RESPECT TO REO PROPERTY. For so
long as the Seller is acting as servicer of any Mortgage Loan relating to any
REO Property, the Seller shall withdraw funds on deposit in the Custodial
Account with respect to each related REO Property necessary for the proper
operation, management and maintenance of the REO Property, including the cost of
maintaining any hazard insurance pursuant to Section 2.10 and the fees of any
managing agent acting on behalf of the Seller. The Seller shall make monthly
distributions on each Remittance Date to the Purchaser of the net cash flow from
the REO Property (which shall equal the revenues from such REO Property net of
the expenses described in Section 2.17 and of any reserves reasonably required
from time to time to be maintained to satisfy anticipated liabilities for such
expenses).
SECTION 2.19 REAL ESTATE OWNED REPORTS. For so long as the Seller is
acting as servicer of any Mortgage Loan relating to any REO Property, the Seller
shall furnish to the Purchaser on or before the 15th day of each month a
statement with respect to any REO Property covering the operation of such REO
Property for the previous month and the Seller's efforts in connection with the
sale of such REO Property and any rental of such REO Property incidental to the
sale thereof for the previous month. That statement shall be accompanied by such
other information as the Purchaser shall reasonably request.
SECTION 2.20 LIQUIDATION REPORTS. For so long as the Seller is acting as
servicer of any Mortgage Loan relating to any REO Property, upon the foreclosure
sale of any Mortgaged Property or the acquisition thereof by the Purchaser
pursuant to a deed in lieu of foreclosure, the Seller shall submit to the
Purchaser a liquidation report with respect to such Mortgaged Property.
SECTION 2.21 REPORTS OF FORECLOSURES AND ABANDONMENTS. For so long as the
Seller is acting as servicer of any Mortgage Loan relating to any REO Property,
following the foreclosure sale or abandonment of any Mortgaged Property, the
Seller shall report such foreclosure or abandonment as required pursuant to
Section 6050J of the Code.
SECTION 2.22 NOTIFICATION OF ADJUSTMENTS. With respect to each Variable
Rate Mortgage Loan, the Seller shall adjust the Mortgage Interest Rate on the
related Interest Rate Adjustment Date and shall adjust the Monthly Payment
accordingly in compliance with the requirements of applicable law and the
related Mortgage and Mortgage Note. If, pursuant to the terms of the Mortgage
Note, another index is selected for determining the Mortgage Interest Rate, the
same index will be used with respect to each Mortgage Note which requires a new
index to be selected, provided that such selection does not conflict with the
terms of the related Mortgage Note. The Seller shall execute and deliver any and
all necessary notices required under applicable law and the terms of the related
Mortgage Note and Mortgage regarding the Mortgage Interest Rate and the Monthly
Payment
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adjustments. The Seller shall promptly upon written request therefor, deliver to
the Purchaser such notifications and any additional applicable data regarding
such adjustments and the methods used to calculate and implement such
adjustments. Upon the discovery by the Seller or the Purchaser that the Seller
has failed to adjust a Mortgage Interest Rate or a Monthly Payment pursuant to
the terms of the related Mortgage Note and Mortgage, the Seller shall
immediately deposit in the Custodial Account from its own funds the amount of
any interest loss actually caused the Purchaser thereby.
SECTION 2.23 NOTIFICATION OF MATURITY DATE. With respect to each Fixed
Rate Mortgage Loan, the Purchaser shall execute and deliver to the Mortgagor any
and all necessary notices required under applicable law and the terms of the
related Mortgage Note and Mortgage regarding the maturity date if required under
applicable law.
ARTICLE III
PAYMENTS TO PURCHASER
SECTION 3.01 REMITTANCES. On each Remittance Date the Seller shall remit
by wire transfer of immediately available funds to the Purchaser all amounts
deposited in the Custodial Account as of the close of business on the Cut-off
Date immediately preceding such Remittance Date, except that less than full
Principal Prepayments received on or after the first day of the month in which
the Remittance Date occurs shall be remitted to the Purchaser on the next
following Remittance Date; and minus any amounts attributable to Monthly
Payments collected but due on a Due Date or Dates subsequent to the first day of
the month of the Remittance Date, which amounts shall be remitted on the next
Remittance Date, in each case, net of charges against or withdrawals from the
Custodial Account pursuant to Section 2.05.
With respect to any Principal Prepayment in full, the Seller shall remit
such Principal Prepayment to the Purchaser within five (5) Business Days of
receipt of such Principal Prepayment by the Seller.
With respect to any Seller's remittance received by the Purchaser after
the fifth Business Day following the Business Day on which such payment was due,
the Seller shall pay to the Purchaser interest on any such late payment at an
annual rate equal to the Prime Rate, adjusted as of the date of each change,
plus one (1) percentage point, but in no event greater than the maximum amount
permitted by applicable law. Such interest shall be deposited in the Custodial
Account by the Seller on the date such late payment is made and shall cover the
period commencing with and including the day following such fifth Business Day
and ending with the Business Day on which such payment is made, exclusive of
such Business Day; provided, however, that in the event that the Seller remits
such amounts after 11:00 A.M. (California time) on any day, such period shall
include such day. Such interest shall be remitted along with the distribution
payable on the next succeeding Remittance Date. The payment by the Seller of any
such interest shall not be deemed an extension of time for payment or a waiver
of any Event of Default by the Seller.
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SECTION 3.02 STATEMENTS TO PURCHASER. Not later than the twentieth day of
the month following the end of each calendar quarter, the Seller shall furnish
by modem and/or diskette to the Purchaser or its designee a listing of the
outstanding Mortgage Loans, including with respect to each Mortgage Loan: the
Mortgage Loan number, the actual balance, the actual paid-through dates, the
Mortgage Interest Rate and principal and interest payment, and with respect to
Variable Rate Mortgage Loans, the next Interest Rate Adjustment Date, the
Mortgage Interest Rate and the principal and interest payment effective as of
the next Interest Rate Adjustment Date (if available), and shall furnish to the
Purchaser manually a Monthly Remittance Advice, with a trial balance report
attached thereto, in the form of Exhibit A annexed hereto as to the preceding
remittance and the period ending on the preceding Cut-off Date.
In addition, not more than sixty (60) days after the end of each calendar
year, the Seller shall furnish to each Person who was a Purchaser at any time
during such calendar year an annual statement in accordance with the
requirements of applicable federal income tax law as to the aggregate of
remittances for the applicable portion of such year.
Such obligation of the Seller shall be deemed to have been satisfied to
the extent that substantially comparable information shall be provided by the
Seller pursuant to any requirements of the Code as from time to time are in
force.
The Seller shall prepare and file, with respect to each Mortgage Loan, any
and all tax returns, information statements or other filings required to be
delivered to any governmental taxing authority or to the Purchaser pursuant to
any applicable law with respect to the Mortgage Loans and the transactions
contemplated hereby. In addition, the Seller shall provide the Purchaser with
such information concerning the Mortgage Loans as is necessary for the Purchaser
to prepare its federal income tax return as the Purchaser may reasonably request
from time to time.
ARTICLE IV
GENERAL SERVICING PROCEDURES
SECTION 4.01 TRANSFERS OF MORTGAGED PROPERTY. The Seller shall be required
to enforce any "due-on-sale" provision contained in any Mortgage or Mortgage
Note and to deny assumption by the person to whom the Mortgaged Property has
been or is about to be sold whether by absolute conveyance or by contract of
sale, whether or not the Mortgagor remains liable on the Mortgage and the
Mortgage Note, unless assumptions are permitted by the Mortgage Loan Documents.
When the Mortgaged Property has been conveyed by the Mortgagor, the Seller
shall, to the extent it has knowledge of such conveyance, exercise its rights to
accelerate the maturity of such Mortgage Loan under the "due-on-sale" clause
applicable thereto, unless assumptions are permitted by the Mortgage Loan
Documents, provided, however, that the Seller shall not exercise such rights if
prohibited by law from doing so or if the exercise of such rights would impair
or threaten to impair any recovery under the related PMI Policy, if any.
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If the Seller reasonably believes it is unable under applicable law to
enforce such "due-on-sale" clause, or if the Mortgage Loan Documents permit an
assumption of the Mortgage Loan, the Seller, in the Purchaser's name, shall, to
the extent permitted by applicable law, enter into (i) an assumption and
modification agreement with the person to whom such property has been conveyed,
pursuant to which such person becomes liable under the Mortgage Note and the
original Mortgagor remains liable thereon, unless the Mortgage Loan Documents
provide otherwise or (ii) in the event the Seller is unable under applicable law
or the Mortgage Loan Documents to require that the original Mortgagor remain
liable under the Mortgage Note and the Seller has the prior consent of any
applicable insurer, a substitution of liability agreement with the purchaser of
the Mortgaged Property pursuant to which the original Mortgagor is released from
liability and the purchaser of the Mortgaged Property is substituted as
Mortgagor and becomes liable under the Mortgage Note. In connection with any
such assumption, neither the Mortgage Interest Rate borne by the related
Mortgage Note, the term of the Mortgage Loan nor the outstanding principal
amount of the Mortgage Loan shall be changed unless approved by the Purchaser.
To the extent that any Mortgage Loan is assumable, the Seller shall
inquire diligently into the creditworthiness of the proposed transferee, and
shall use the underwriting criteria for approving the credit of the proposed
transferee which are used by the Seller with respect to underwriting mortgage
loans of the same type as the Mortgage Loans. If the credit of the proposed
transferee does not meet such underwriting criteria, the Seller diligently
shall, to the extent permitted by the Mortgage or the Mortgage Note and by
applicable law, accelerate the maturity of the Mortgage Loan.
SECTION 4.02 SATISFACTION OF MORTGAGES AND RELEASE OF MORTGAGE FILES. Upon
the payment in full of any Mortgage Loan, or the receipt by the Seller of a
notification that payment in full will be escrowed in a manner customary for
such purposes, the Seller shall notify the Purchaser in the Monthly Remittance
Advice as provided in Section 3.02, and may request the release of any Mortgage
Loan Documents from the Purchaser in accordance with this Section 4.02 hereof.
Upon full satisfaction of the Mortgage Note, the Seller shall obtain discharge
of the related Mortgage Loan as of record within any related time limit required
by applicable law.
If the Seller satisfies or releases a Mortgage without first having
obtained payment in full of the indebtedness secured by the Mortgage, upon
written demand of the Purchaser, the Seller shall repurchase the related
Mortgage Loan at the Repurchase Price by deposit thereof in the Custodial
Account within two (2) Business Days of receipt of such demand by the Purchaser.
Upon such repurchase, all funds maintained in the Escrow Account with respect to
such repurchased Mortgage Loan shall be transferred to the Seller. The Seller
shall maintain the Fidelity Bond and Errors and Omissions Insurance Policy as
provided for in Section 2.12 insuring the Seller against any loss it may sustain
with respect to any Mortgage Loan not satisfied in accordance with the
procedures set forth herein.
SECTION 4.03 SERVICING COMPENSATION. As consideration for servicing the
Mortgage Loans hereunder, the Seller shall withdraw the Servicing Fee with
respect to each Mortgage Loan from the
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Custodial Account pursuant to Section 2.05 hereof. Such Servicing Fee shall be
payable monthly, computed on the basis of the same principal amount and period
in respect of which any related interest payment on a Mortgage Loan is computed.
The Servicing Fee shall be pro-rated when servicing is for less than one month.
The obligation of the Purchaser to pay, and the Seller's right to withdraw, the
Servicing Fee is limited to, and the Servicing Fee is payable solely from, the
interest portion (including recoveries with respect to interest from Liquidation
Proceeds, to the extent permitted by Section 2.05), of such Monthly Payment
collected by the Seller, or as otherwise provided under Section 2.05.
Additional servicing compensation in the form of Ancillary Income shall be
retained by the Seller and shall not be required to be deposited in the
Custodial Account. The Seller shall be required to pay all expenses incurred by
it in connection with its servicing activities hereunder and shall not be
entitled to reimbursement thereof except as specifically provided for herein.
SECTION 4.04 ANNUAL STATEMENT AS TO COMPLIANCE. The Seller shall deliver
to the Purchaser, on or before March 31 each year, an Officer's Certificate,
stating that (i) a review of the activities of the Seller during the preceding
calendar year and of performance under this Agreement has been made under such
officer's supervision, and (ii) the Seller has complied in all material respects
with the provisions of Article II and Article IV, and (iii) to the best of such
officer's knowledge, based on such review, the Seller has fulfilled all its
obligations under this Agreement throughout such year or part thereof, or, if
there has been a default in the fulfillment of any such obligation, specifying
each such default known to such officer and the nature and status thereof and
the action being taken by the Seller to cure such default.
SECTION 4.05 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SERVICING REPORT. On
or before March 31 of each year, the Seller at its expense shall cause a firm of
independent public accountants (who may also render other services to the
Seller, or any affiliate thereof) which is a member of the American Institute of
Certified Public Accountants to furnish a statement to the Purchaser to the
effect that such firm has, as part of their examination of the financial
statements of the Seller performed tests embracing the records and documents
relating to mortgage loans serviced by the Seller in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers and that
their examination disclosed no exceptions that, in their opinion were material,
relating to mortgage loans serviced by the Seller.
SECTION 4.06 RIGHT TO EXAMINE SELLER RECORDS. The Purchaser, upon
reasonable notice, shall have the right to examine and audit any and all of the
books, records, or other information of the Seller, whether held by the Seller
or by another on its behalf, with respect to or concerning this Agreement or the
Mortgage Loans, during business hours or at such other times as may be
reasonable under applicable circumstances, upon reasonable advance notice.
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ARTICLE V
SELLER TO COOPERATE
SECTION 5.01 PROVISION OF INFORMATION. During the term of this Agreement,
the Seller shall furnish to the Purchaser such periodic, special, or other
reports or information, whether or not provided for herein, as shall be
necessary, reasonable, or appropriate with respect to the Purchaser or the
purposes of this Agreement. All such reports or information shall be provided by
and in accordance with all reasonable instructions and directions which the
Purchaser may give.
The Seller shall execute and deliver all such instruments and take all
such action as the Purchaser may reasonably request from time to time, in order
to effectuate the purposes and to carry out the terms of this Agreement.
SECTION 5.02 FINANCIAL STATEMENTS; SERVICING FACILITIES. In connection
with disposition of Mortgage Loans, the Purchaser may make available to a
prospective purchaser audited financial statements of the Seller for the most
recently completed two (2) fiscal years for which such statements are available,
as well as a Consolidated Statement of Condition at the end of the last two (2)
fiscal years covered by any Consolidated Statement of Operations. If it has not
already done so, the Seller shall furnish promptly to the Purchaser or a
prospective purchaser copies of the statements specified above; provided,
however, that prior to furnishing such statements or information to any
prospective purchaser, the Seller may require such prospective purchaser to
execute a confidentiality agreement in form reasonably satisfactory to it.
The Seller shall make available to the Purchaser or any prospective
purchaser a knowledgeable financial or accounting officer for the purpose of
answering questions with respect to recent developments affecting the Seller or
the financial statements of the Seller, and to permit any prospective purchaser
to inspect the Seller's servicing facilities for the purpose of satisfying such
prospective purchaser that the Seller has the ability to service the Mortgage
Loans as provided in this Agreement.
ARTICLE VI
TERMINATION
SECTION 6.01 AGENCY SUSPENSION. Should the Seller at any time during the
term of this Agreement have its right to service temporarily or permanently
suspended by FNMA or FHLMC or otherwise cease to be an approved seller/servicer
of conventional residential mortgage loans for FNMA or FHLMC, then the Purchaser
may immediately terminate this Agreement and accelerate performance of the
provisions of the Purchase Agreement to require immediate transfer of the
servicing rights.
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SECTION 6.02 DAMAGES. The Purchaser shall have the right at any time to
seek and recover from the Seller any damages or losses suffered by it solely as
a result of any failure by the Seller to observe or perform any duties,
obligations, covenants or agreements herein contained.
SECTION 6.03 TERMINATION. The respective obligations and responsibilities
of the Seller shall terminate upon: (i) the later of the final payment or other
liquidation (or any advance with respect thereto) of the last Mortgage Loan
serviced by the Seller or the disposition of all REO Property serviced by the
Seller and the remittance of all funds due hereunder; or (ii) by mutual consent
of the Seller and the Purchaser in writing, unless earlier terminated pursuant
to this Agreement.
SECTION 6.04 TERMINATION WITHOUT CAUSE. The Purchaser may, at its sole
option, upon not less than thirty (30) days' prior written notice to the Seller,
terminate any rights the Seller may have hereunder with respect to any or all of
the Mortgage Loans, without cause, upon written notice, provided that the Seller
shall have an additional period of not more than sixty (60) days from and after
the date of said notice from the Purchaser within which to effect the related
transfer of servicing. Any such notice of termination shall be in writing and
delivered to the Seller as provided in Section 12.01 of this Agreement. In the
event of such termination, the Seller shall be entitled to a Termination Fee,
equal to 1.50% of the then current aggregate unpaid principal balance of the
related Mortgage Loans; provided, however, that no Termination Fee shall be
payable if the successor servicer is an Affiliate of the Seller.
ARTICLE VII
BOOKS AND RECORDS
SECTION 7.01 POSSESSION OF SERVICING FILES. The contents of each Servicing
File are and shall be held in trust by the Seller for the benefit of the
Purchaser as the owner thereof. The Seller shall maintain in the Servicing File
a copy of the contents of each Mortgage File and the originals of the documents
in each Mortgage File not delivered to the Purchaser. The possession of the
Servicing File by the Seller is at the will of the Purchaser for the sole
purpose of servicing the related Mortgage Loan, pursuant to this Agreement, and
such retention and possession by the Seller is in its capacity as servicer only
and at the election of the Purchaser. The Seller shall release its custody of
the contents of any Servicing File only in accordance with written instructions
from the Purchaser or other termination of the Seller with respect to the
related Mortgage Loans, unless such release is required as incidental to the
Seller's servicing of the Mortgage Loans pursuant to this Agreement, or is in
connection with a repurchase of any Mortgage Loan pursuant to Section 8.3 of the
Purchase Agreement or Section 4.02 of this Agreement.
The Seller shall be responsible for maintaining, and shall maintain, a
complete set of books and records for each Mortgage Loan which shall be marked
clearly to reflect the ownership of each Mortgage Loan by the Purchaser. In
particular, the Seller shall maintain in its possession, available for
inspection by the Purchaser or its designee during normal business hours, and
shall deliver to the
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Purchaser or its designee upon reasonable notice, evidence of compliance with
all federal, state and local laws, rules and regulations and requirements of
FNMA or FHLMC, including but not limited to documentation as to the method
used in determining the applicability of the provisions of the Flood Disaster
Protection Act of 1973, as amended, to the Mortgaged Property, documentation
evidencing insurance coverage and eligibility of any condominium project for
approval by FNMA and FHLMC and periodic inspection reports as required by
Section 2.13 and the FNMA and FHLMC Guides. To the extent that original
documents are not required for purposes of realization of Liquidation
Proceeds or Insurance Proceeds, documents maintained by the Seller may be in
the form of microfilm or microfiche, so long as the Seller complies with the
requirements of the FNMA and FHLMC Guides.
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
SECTION 8.01 INDEMNIFICATION. The Seller agrees to indemnify and hold the
Purchaser harmless from any liability, claim, loss or damage (including, without
limitation, any reasonable legal fees, judgments or expenses relating to such
liability, claim, loss or damage, but excluding consequential, special,
exemplary, punitive and indirect damages ("Special Damages"), except for such
Special Damages which Purchaser is required by law to pay to a third party), to
the Purchaser directly or indirectly resulting from the Seller's failure to
observe and perform any or all of Seller's duties, obligations, covenants,
agreements, warranties or representations contained in this Agreement or the
Seller's failure to comply with all applicable requirements with respect to the
transfer of Servicing Rights as set forth herein.
The Seller shall notify the Purchaser as soon as reasonably possible if a
claim is made by a third party with respect to this Agreement.
SECTION 8.02 LIMITATION ON LIABILITY OF SELLER AND OTHERS. Neither the
Seller nor any of the directors, officers, employees or agents of the Seller
shall be under any liability to the Purchaser for any action taken or for
refraining from the taking of any action in good faith pursuant to this
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Agreement, or for errors in judgment, provided, however, that this provision
shall not protect the Seller or any such person against any breach of warranties
or representations made herein, or failure to perform its obligations in
material compliance with any standard of care set forth in this Agreement, or
any liability which would otherwise be imposed by reason of any breach of the
terms and conditions of this Agreement. The Seller and any director, officer,
employee or agent of the Seller may rely in good faith on any document of any
kind prima facie properly executed and submitted by any Person with respect to
any matter arising hereunder. The Seller shall not be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
duties to service the Mortgage Loans in accordance with this Agreement and which
in its opinion may involve it in any expense or liability, provided, however,
that the Seller may, with the prior written consent of the Purchaser, undertake
any such action which it may deem necessary or desirable in respect to this
Agreement and the rights and duties of the parties hereto. In such event, the
Seller shall be entitled to prompt reimbursement from the Purchaser of the
reasonable legal expenses and costs of such action.
SECTION 8.03 LIMITATION ON REGISTRATION AND ASSIGNMENT BY SELLER. The
Purchaser has entered into this Agreement with the Seller in reliance upon the
independent status of the Seller, and the representations as to the adequacy of
its servicing facilities, plant, personnel, records and procedures, its
integrity, reputation and financial standing, and the continuance thereof.
Therefore, the Seller shall not (i) assign this Agreement or the servicing
hereunder (other than to an affiliate of Seller) or (ii) delegate any
substantial part of its rights or duties hereunder without the prior written
consent of the Purchaser, which consent shall not be unreasonably withheld or
conditioned provided that (a) any delegation of such rights or duties shall not
release the Seller from its obligations hereunder and the Seller shall remain
responsible hereunder for all acts and omissions of any delegee as if such acts
or omissions were those of the Seller and (b) any such assignee or designee
shall satisfy the requirements for a successor or surviving Person set forth in
Section 8.05 and Section 8.06 hereof. The Seller shall notify the Purchaser in
writing at least 30 days prior to selling or otherwise disposing of all or
substantially all of its assets and receipt of such notice shall entitle the
Purchaser to terminate this Agreement except as set forth in Section 8.06
hereof.
The Seller shall not resign from the obligations and duties hereby imposed
on it except by mutual consent of the Seller and the Purchaser or upon the
determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Seller. Any such
determination permitting the resignation of the Seller shall be evidenced by an
Opinion of Counsel to such effect delivered to the Purchaser which Opinion of
Counsel shall be in form and substance acceptable to the Purchaser. No such
resignation shall become effective until a successor shall have assumed the
Seller's responsibilities and obligations hereunder in the manner provided in
Section 8.06.
Without in any way limiting the generality of this Section 8.03, in the
event that the Seller either shall assign this Agreement or the servicing
responsibilities hereunder or delegate its duties hereunder or any portion
thereof without (i) satisfying the requirements set forth herein or (ii) the
prior written consent of the Purchaser, then the Purchaser shall have the right
to terminate this
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Agreement as set forth in Section 6.04, without any additional payment of any
penalty or damages and without any liability whatsoever to the Seller (other
than with respect to accrued but unpaid Servicing Fees and Servicing Advances
remaining unpaid) or any third party.
SECTION 8.04 ASSIGNMENT BY PURCHASER. The Purchaser shall have the right,
without the consent of the Seller, to assign, in whole or in part, its interest
under this Agreement with respect to some or all of the Mortgage Loans, and
designate any person to exercise any rights of the Purchaser hereunder, by
executing an Assignment and Assumption Agreement substantially in the form of
Exhibit G to the Purchase Agreement and the assignee or designee shall accede to
the rights and obligations hereunder of the Purchaser with respect to such
Mortgage Loans. All references to the Purchaser in this Agreement shall be
deemed to include its assignee or designee. Notwithstanding the foregoing, at
any one time there shall not be more than fifteen (15) separate Purchasers under
this Agreement.
SECTION 8.05 MERGER OR CONSOLIDATION OF THE SELLER. The Seller will keep
in full effect its existence, rights and franchises as a corporation under the
laws of the state of its incorporation except as permitted herein, and will
obtain and preserve its qualification to do business as a foreign corporation in
each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Agreement, or any of the
Mortgage Loans and to perform its duties under this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the Seller,
shall be the successor of the Seller hereunder, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding; provided, however, that the
successor or surviving Person shall be an institution whose deposits are insured
by FDIC or a company whose business includes the origination and servicing of
mortgage loans, shall be qualified to service mortgage loans on behalf of FNMA
or FHLMC and shall satisfy the requirements of Section 8.06 with respect to the
qualifications of a successor to the Seller.
SECTION 8.06 SUCCESSOR TO THE SELLER. Prior to termination of Seller's
responsibilities and duties under this Agreement pursuant to Sections 2.17,
6.04, 8.03 or 11.01, the Purchaser shall (i) succeed to and assume all of the
Seller's responsibilities, rights, duties and obligations under this Agreement,
or (ii) appoint a successor having a tangible net worth of not less than
$30,000,000 and which shall succeed to all rights and assume all of the
responsibilities, duties and liabilities of the Seller under this Agreement
prior to the termination of Seller's responsibilities, duties and liabilities
under this Agreement. Any successor to the Seller shall be a FNMA - or FHLMC -
approved servicer in good standing. In connection with such appointment and
assumption, the Purchaser may make such arrangements for the compensation of
such successor out of payments on Mortgage Loans as it and such successor shall
agree. In the event that the Seller's duties, responsibilities and liabilities
under this Agreement should be terminated pursuant to the aforementioned
sections, the Seller shall discharge such duties and responsibilities during the
period from the date it acquires
27
<PAGE>
knowledge of such termination until the effective date thereof with the same
degree of diligence and prudence which it is obligated to exercise under this
Agreement, and shall take no action whatsoever that might impair or prejudice
the rights or financial condition of its successor. The resignation or removal
of Seller pursuant to the aforementioned Sections shall not become effective
until a successor shall be appointed pursuant to this Section and shall in no
event relieve the Seller of the representations, warranties and covenants made
pursuant to and the remedies available to the Purchaser with respect thereto.
Any successor appointed as provided herein shall execute, acknowledge and
deliver to the Seller and to the Purchaser, an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Seller, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Section 2.17, 6.04, 8.03 or 11.01
shall not affect any claims that the Purchaser may have against the Seller
arising prior to any such termination or resignation.
The Seller shall timely deliver to the successor the funds in the
Custodial Account and the Escrow Account and the Mortgage Files and related
documents and statements held by it hereunder and the Seller shall account for
all funds. The Seller shall execute and deliver such instruments and do such
other things all as may reasonably be required to more fully and definitely vest
and confirm in the successor all such rights, powers, duties, responsibilities,
obligations and liabilities of the Seller. The successor shall make arrangements
as it may deem appropriate to reimburse the Seller for amounts the Seller
actually expended pursuant to this Agreement which the successor is entitled to
retain hereunder and which would otherwise have been recovered by the Seller
pursuant to this Agreement but for the appointment of the successor servicer.
Upon a successor's acceptance of appointment as such, the Seller shall
notify by mail the Purchaser of such appointment.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
As of each Closing Date, the Purchaser warrants and represents to, and
covenants and agrees with, the Seller as follows:
SECTION 9.01 DUE ORGANIZATION AND AUTHORITY. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Maryland. The Purchaser has the full corporate power and
authority to execute and deliver this Agreement and to perform in accordance
herewith; the execution, delivery and performance of this Agreement by the
Purchaser and the consummation of the transactions contemplated hereby have been
duly and validly authorized; this Agreement evidences the valid, binding and
enforceable obligation of the Purchaser;
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and all requisite corporate action has been taken by the Purchaser to make this
Agreement valid and binding upon the Purchaser in accordance with its terms;
SECTION 9.02 NO CONFLICTS. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Purchaser's charter or bylaws or any legal
restriction or any agreement or instrument to which the Purchaser is now a party
or by which it is bound, or constitute a default or result in an acceleration
under any of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Purchaser or its property is
subject;
SECTION 9.03 ABILITY TO PERFORM. The Purchaser does not believe, nor does
it have any reason or cause to believe, that it cannot perform each and every
covenant made by it in this Agreement.
SECTION 9.04 NO LITIGATION PENDING. There is no action, suit, proceeding
or investigation pending or threatened against the Purchaser, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Purchaser, or in
any material impairment of the right or ability of the Purchaser to carry on its
business substantially as now conducted, or in any material liability on the
part of the Purchaser, or which would draw into question the validity of this
Agreement or of any action taken or to be taken in connection with the
obligations of the Purchaser contemplated herein.
SECTION 9.05 NO CONSENT REQUIRED. No consent, approval, authorization or
order of any court or governmental agency or body is required for the execution,
delivery and performance by the Purchaser of, or compliance by the Purchaser
with, this Agreement as evidenced by the consummation of the transactions
contemplated by this Agreement, or if required, such approval has been obtained
prior to the Closing Date.
SECTION 9.06 ASSISTANCE. To the extent reasonably possible, the Purchaser
shall cooperate with and assist the Seller as requested by the Seller, in
carrying out Seller's covenants, agreements, duties and responsibilities under
this Agreement and in connection therewith shall execute and deliver all such
papers, documents and instruments as nay be necessary and appropriate in
furtherance thereof.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER
As of each Closing Date, the Seller warrants and represents to, and
covenants and agrees with, the Purchaser as follows:
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SECTION 10.01 DUE ORGANIZATION AND AUTHORITY. The Seller is a federal
savings bank duly organized, validly existing and in good standing under the
laws of the United States and is licensed, qualified and in good standing in
each state where a Mortgaged Property is located if the laws of such state
require licensing or qualification in order to conduct business of the type
conducted by the Seller, and in any event the Seller is in compliance with the
laws of any such state to the extent necessary to ensure the enforceability of
the related Mortgage Loan in accordance with the terms of this Agreement; the
Seller has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery and
performance of this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Seller and the consummation of the
transactions contemplated hereby have been duly and validly authorized; this
Agreement evidences the valid, legal, binding and enforceable obligation of the
Seller subject to bankruptcy laws and other similar laws of general application
affecting rights of creditors and subject to the application of the rules of
equity, including those respecting the availability of specific performance,
none of which will materially interfere with the realization of the benefits
provided thereunder, regardless of whether such enforcement is sought in a
proceeding in equity or at law; and all requisite corporate action has been
taken by the Seller to make this Agreement valid and binding upon the Seller in
accordance with its terms.
SECTION 10.02 ORDINARY COURSE OF BUSINESS. The consummation of the
transactions contemplated by this Agreement are in the ordinary course of
business of the Seller;
SECTION 10.03 NO CONFLICTS. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Seller's charter or bylaws or any legal
restriction or any agreement or instrument to which the Seller is now a party or
by which it is bound, or constitute a default or result in an acceleration under
any of the foregoing, or result in the violation of any law, rule, regulation,
order, judgment or decree to which the Seller or its property is subject, or
impair the ability of the Purchaser to realize on the Mortgage Loans, or impair
the value of the Mortgage Loans, or impair the ability of the Purchaser to
realize the full amount of any mortgage insurance benefits accruing pursuant to
this Agreement.
SECTION 10.04 ABILITY TO SERVICE. The Seller is an approved
seller/servicer of conventional residential mortgage loans for FNMA and FHLMC,
with the facilities, procedures, and experienced personnel necessary for the
sound servicing of mortgage loans of the same type as the Mortgage Loans. The
Seller is duly qualified, licensed, registered and otherwise authorized under
all applicable federal, state and local laws and regulations, meets the minimum
capital requirements set forth by OTS, and is in good standing to enforce,
originate, sell mortgage loans, and service mortgage loans in the jurisdiction
wherein the Mortgaged Properties are located for, either FNMA or FHLMC, and no
event has occurred, including but not limited to a change in insurance coverage,
which would make the Seller unable to comply with either FMNA or FHLMC
eligibility requirements or which would require notification to FNMA or FHLMC.
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SECTION 10.05 ABILITY TO PERFORM. The Seller does not believe, nor does it
have any reason to believe, that it cannot perform each and every covenant
contained in this Agreement.
SECTION 10.06 NO LITIGATION PENDING. There is no action, suit, proceeding
or investigation pending or threatened against the Seller, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Seller, or in any
material impairment of the right or ability of the Seller to carry on its
business substantially as now conducted, or in any material liability on the
part of the Seller, or which would draw into question the validity of this
Agreement or the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Seller contemplated herein, or which
would be likely to impair materially the ability of the Seller to perform under
the terms of this Agreement.
SECTION 10.07 NO CONSENT REQUIRED. No consent, approval, authorization or
order of any court or governmental agency or body is required for the execution,
delivery and performance by the Seller of or compliance by the Seller with this
Agreement or the servicing of the Mortgage Loans as evidenced by the
consummation of the transactions contemplated by this Agreement, or if required,
such approval has been obtained.
SECTION 10.08 NO UNTRUE INFORMATION. Neither this Agreement nor any
statement, tape, diskette, form, report or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of fact or omits to state a
fact necessary to make the statements contained therein not misleading.
SECTION 10.09 REASONABLE SERVICING FEE. The Seller acknowledges and agrees
that the Servicing Fee represents reasonable compensation for performing such
services and that the entire Servicing Fee shall be treated by the Seller, for
accounting and tax purposes, as compensation for the servicing and
administration of the Mortgage Loans pursuant to this Agreement.
SECTION 10.10 FINANCIAL STATEMENTS. The Seller has delivered to the
Purchaser financial statements as to its last two complete fiscal years. All
such financial statements fairly present the pertinent results of operations and
changes in financial position for each of such periods and the financial
position at the end of each such period of the Seller and its subsidiaries and
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as set forth in the
notes thereto. There has been no change in the business, operations, financial
condition, properties or assets of the Seller since the date of the Seller's
financial statements that would have a material adverse effect on its ability to
perform its obligations under this Agreement.
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SECTION 10.11 CONFLICT OF INTEREST. The Seller agrees that it shall
service the Mortgage Loans hereunder solely with a view toward the interests of
the Purchaser, and without regard to the interests of the Seller or its other
affiliates.
ARTICLE XI
DEFAULT
SECTION 11.01 EVENTS OF DEFAULT. The following shall constitute an Event
of Default under this Agreement on the part of the Seller:
(a) any failure by the Seller to remit to the Purchaser any payment
required to be made under the terms of this Agreement which continues unremedied
for a period of five (5) Business Days after the date upon which written notice
of such failure, requiring the same to be remedied, shall have been given to the
Seller by the Purchaser; or
(b) the failure by the Seller duly to observe or perform in any material
respect any other of the covenants or agreements on the part of the Seller set
forth in this Agreement which continues unremedied for a period of thirty (30)
days (except that such number of days shall be fifteen (15) in the case of a
failure to pay any premium for any insurance policy required to be maintained
under this Agreement) after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the Seller by the
Purchaser; or
(c) a decree or order of a court or agency or supervisory authority having
jurisdiction for the appointment of a conservator or receiver or liquidator in
any insolvency, bankruptcy, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the Seller and such decree or order
shall have remained in force undischarged or unstayed for a period of sixty (60)
days; or
(d) the Seller shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, bankruptcy, readjustment of debt,
marshaling of assets and liabilities or similar proceedings of or relating to
the Seller or of or relating to all or substantially all of its property; or
(e) the Seller shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its obligations; or
(f) the Seller ceases to meet the qualifications of a FNMA or FHLMC
seller/servicer which continues unremedied for a period of thirty (30) days
after the date of such cessation; or
(g) the Seller, without the consent of the Purchaser, attempts to assign
this Agreement or the servicing responsibilities hereunder or to delegate any
substantial part of its duties hereunder or any portion thereof; or
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(h) the Seller fails to maintain its license to do business or service
residential mortgage loans in any jurisdiction where the Mortgaged Properties
are located and such failure results in a material adverse effect on the
Mortgage Loans, the servicing of the Mortgage Loans, or the Purchaser's rights
with respect to the Mortgage Loans.
In each and every such case, so long as an Event of Default shall not have
been remedied, in addition to whatsoever rights the Purchaser may have at law or
equity to damages, including injunctive relief and specific performance, the
Purchaser, by notice in writing to the Seller, may terminate without
compensation or reimbursement (other than Servicing Fees previously earned but
remaining unpaid and Servicing Advances remaining unreimbursed) all the rights
and obligations of the Seller under this Agreement and in and to the Mortgage
Loans and the proceeds thereof.
Upon receipt by the Seller of such written notice, all authority and power
of the Seller under this Agreement, whether with respect to the Mortgage Loans
or otherwise, shall pass to and be vested in the successor appointed pursuant to
Section 8.06. Upon written request from the Purchaser, the Seller shall prepare,
execute and deliver any and all documents and other instruments reasonably
requested by the Purchaser, place in such successor's possession all Mortgage
Files (to the extent not properly delivered to the Purchaser by the Seller
previously), and do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at the Seller's sole expense. The Seller agrees
to reasonably cooperate with the Purchaser and such successor in effecting the
termination of the Seller's responsibilities and rights hereunder, including,
without limitation, the transfer to such successor for administration by it of
all cash amounts which shall at the time be credited by the Seller to the
Custodial Account or Escrow Account or thereafter received with respect to the
Mortgage Loans, subject to the Seller's right to be paid for unreimbursed
Servicing Advances and earned and unpaid Servicing Fees.
SECTION 11.02 WAIVER OF DEFAULTS. The Purchaser may waive any default by
the Seller in the performance of its obligations hereunder and its consequences.
Upon any such waiver of a past default, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been remedied for
every purpose of this Agreement. No such waiver shall extend to any subsequent
or other default or impair any right consequent thereon except to the extent
expressly so waived.
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01 NOTICES. All notices, requests, demands and other
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given upon the
delivery or mailing thereof, as the case may be, sent by registered or certified
mail, return receipt requested:
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(a) If to Purchaser to:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
(b) If to Seller to:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
SECTION 12.02 WAIVERS. Either the Seller or the Purchaser may upon consent
of all parties, by written notice to the others:
(a) Waive compliance with any of the terms, conditions or covenants
required to be complied with by the others hereunder; and
(b) Waive or modify performance of any of the obligations of the others
hereunder.
The waiver by any party hereto of a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any other subsequent breach.
SECTION 12.03 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Purchase
Agreement constitute the entire agreement between the parties with respect to
servicing of the Mortgage Loans. This Agreement may be amended and any provision
hereof waived, but, only in writing signed by the party against whom such
enforcement is sought.
SECTION 12.04 EXECUTION; BINDING EFFECT. This Agreement may be executed in
one or more counterparts and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed to be an
original; such counterparts, together, shall constitute one and the same
agreement. Subject to Sections 8.03 and 8.04, this Agreement shall inure to the
benefit of and be binding upon the Seller and the Purchaser and their respective
successors and assigns.
SECTION 12.05 HEADINGS. Headings of the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
SECTION 12.06 APPLICABLE LAW. This Agreement shall be construed in
accordance with the laws of the State of California and the obligations, rights
and remedies hereunder shall be determined in accordance with the substantive
laws of the State of California (without regard to conflicts of laws
principles), except to the extent preempted by Federal law.
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SECTION 12.07 RELATIONSHIP OF PARTIES. Nothing herein contained shall be
deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Seller shall be rendered by it
as an independent contractor and not as an agent of the Purchaser. The Seller
shall have full control of all of its acts, doings, proceedings, relating to or
requisite in connection with the discharge of its duties and responsibilities
under this Agreement.
SECTION 12.08 SEVERABILITY OF PROVISIONS. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
SECTION 12.09 EXHIBITS. The exhibits to this Agreement are hereby
incorporated and made a part hereof and are integral parts of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
PEOPLE'S PREFERRED CAPITAL CORPORATION
(the Purchaser)
By:_____________________________________________
Name:__________________________________________
Title:___________________________________________
PEOPLE'S BANK OF CALIFORNIA
(the Seller)
By:_____________________________________________
Name:__________________________________________
Title:___________________________________________
By:_____________________________________________
Name:__________________________________________
Title:___________________________________________
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EXHIBIT A
MONTHLY REMITTANCE ADVICE
<PAGE>
EXHIBIT B
CUSTODIAL ACCOUNT CERTIFICATION
______ __, 1999
In accordance with Section 2.04 of the Residential Servicing Agreement,
dated as of ______ __, 1999, this is to certify that the account described below
has been established as a Custodial Account.
Title of Account: "People's Bank of California, in trust for People's Preferred
Capital Corporation."
Account Number: ___________________________________
Address of office or branch of the Seller at which Account is maintained:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
PEOPLE'S BANK OF CALIFORNIA
By:________________________________
Name:______________________________
Title:_____________________________
<PAGE>
EXHIBIT C
CUSTODIAL ACCOUNT LETTER AGREEMENT
______________, 1999
To:
--------------------
--------------------
--------------------
(the "Depository")
As Seller under the Residential Servicing Agreement, dated as of ______
__, 1999, (the "Agreement"), we hereby authorize and request you to establish an
account, as a Custodial Account pursuant to Section 2.04 of the Agreement, to be
designated as "People's Bank of California, in trust for People's Preferred
Capital Corporation." All deposits in the account shall be subject to withdrawal
therefrom by order signed by the Seller. You may refuse any deposit which would
result in violation of the requirement that the account be fully insured as
described below. This letter is submitted to you in duplicate. Please execute
and return one original to us.
PEOPLE'S BANK OF CALIFORNIA
By:______________________________
Name:____________________________
Title:___________________________
The undersigned, as Depository, hereby certifies that the above described
account has been established under Account Number ___________, at the office of
the Depository indicated above, and agrees to honor withdrawals on such account
as provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
---------------------------------
Depository
By:______________________________
Name:____________________________
Title:___________________________
Date:____________________________
<PAGE>
EXHIBIT D
ESCROW ACCOUNT CERTIFICATION
____________, 1999
In accordance with Section 2.06 of the Residential Servicing Agreement,
dated as of ______ __, 1999, this is to certify that the account described
below has been established as an Escrow Account.
Title of Account: "People's Bank of California in trust for People's Preferred
Capital Corporation."
Account Number: _____________________________
Address of office or branch of the Seller at which Account is maintained:
------------------------------
------------------------------
------------------------------
------------------------------
PEOPLE'S BANK OF CALIFORNIA
By: ___________________________________
Name: _________________________________
Title: ________________________________
<PAGE>
EXHIBIT E
ESCROW ACCOUNT LETTER AGREEMENT
______________, 1999
To:
--------------------------
--------------------------
--------------------------
(the "Depository")
As Seller under the Residential Servicing Agreement, dated as of ______
__, 1999 (the "Agreement"), we hereby authorize and request you to establish
an account, as an Escrow Account pursuant to Section 2.06 of the Agreement,
to be designated as "People's Bank of California in trust for the People's
Preferred Capital Corporation." All deposits in the account shall be subject
to withdrawal therefrom by order signed by the Seller. You may refuse any
deposit which would result in violation of the requirement that the account
be fully insured as described below. This letter is submitted to you in
duplicate. Please execute and return one original to us.
PEOPLE'S BANK OF CALIFORNIA
By: _____________________________
Name: ___________________________
Title: __________________________
Date:____________________________
The undersigned, as Depository, hereby certifies that the above described
account has been established under Account Number _______, at the office of the
Depository indicated above, and agrees to honor withdrawals on such account as
provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
---------------------------------
Depository
By: _____________________________
Name: ___________________________
Title: __________________________
Date:____________________________
<PAGE>
Exhibit 10.(f)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICING AGREEMENT
BETWEEN
PEOPLE'S PREFERRED CAPITAL CORPORATION
PURCHASER
PEOPLE'S BANK OF CALIFORNIA
SELLER
DATED AS OF OCTOBER 3, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS
Section 1. Definitions............................................... 1
ARTICLE II
SERVICING
Section 2.01 Seller to Act as Servicer................................. 5
Section 2.02 Liquidation of Mortgage Loans............................. 6
Section 2.03 Collection of Mortgage Loan Payments...................... 7
Section 2.04 Establishment of and Deposits to Custodial Account........ 8
Section 2.05 Permitted Withdrawals From Custodial Account.............. 9
Section 2.06 Establishment of and Deposits to Escrow Account........... 10
Section 2.07 Permitted Withdrawals From Escrow Account................. 10
Section 2.08 Payment of Taxes, Insurance and Other Charges,............
Tax Contracts........................................ 11
Section 2.09 Protection of Accounts.................................... 12
Section 2.10 Maintenance of Hazard Insurance........................... 12
Section 2.11 Maintenance of Mortgage Impairment Insurance.............. 13
Section 2.12 Maintenance of Fidelity Bond and Errors and Omissions.....
Insurance............................................ 14
Section 2.13 Inspections............................................... 14
Section 2.14 Restoration of Mortgaged Property......................... 14
Section 2.15 Deteriorating Mortgage Loans.............................. 15
Section 2.16 Title, Management and Disposition of REO Property......... 15
Section 2.17 Permitted Withdrawals with respect to REO Property........ 16
Section 2.18 Real Estate Owned Reports................................. 17
Section 2.19 [Reserved]................................................ 17
Section 2.20 Reports Of Foreclosures and Abandonments.................. 17
Section 2.21 Notification of Adjustments............................... 17
Section 2.22 Notification of Maturity Date............................. 17
ARTICLE III
PAYMENTS TO PURCHASER
Section 3.01 Remittances............................................... 18
Section 3.02 Statements to Purchaser................................... 18
<PAGE>
ARTICLE IV
GENERAL SERVICING PROCEDURES
Section 4.01 Transfers of Mortgaged Property........................... 19
Section 4.02 Satisfaction of Mortgages and Release of Mortgage Files... 20
Section 4.03 Servicing Compensation.................................... 20
Section 4.04 Annual Statement as to Compliance......................... 20
Section 4.05 Annual Independent Public Accountants' Servicing Report... 21
Section 4.06 Right to Examine Seller Records........................... 21
ARTICLE V
SELLER TO COOPERATE
Section 5.01 Provision of Information.................................. 21
Section 5.02 Financial Statements; Servicing Facilities................ 21
ARTICLE VI
TERMINATION
Section 6.01 Damages................................................... 22
Section 6.02 Termination............................................... 22
Section 6.03 Termination Without Cause................................. 22
ARTICLE VII
BOOKS AND RECORDS
Section 7.01 Possession of Servicing Files............................. 23
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
Section 8.01 Indemnification........................................... 23
Section 8.02 Limitation on Liability of Seller and Others.............. 24
Section 8.03 Limitation on Registration and Assignment by Seller....... 24
Section 8.04 Assignment by Purchaser................................... 25
Section 8.05 Merger or Consolidation of the Seller..................... 25
Section 8.06 Successor to the Seller................................... 25
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
Section 9.01 Due Organization and Authority............................ 26
Section 9.02 No Conflicts.............................................. 27
Section 9.03 Ability to Perform........................................ 27
Section 9.04 No Litigation Pending..................................... 27
<PAGE>
Section 9.05 No Consent Required....................................... 27
Section 9.06 Assistance................................................ 27
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER
Section 10.01 Due Organization and Authority............................ 28
Section 10.02 Ordinary Course of Business............................... 28
Section 10.03 No Conflicts.............................................. 28
Section 10.04 Ability to Service........................................ 28
Section 10.05 Ability to Perform........................................ 28
Section 10.06 No Litigation Pending..................................... 28
Section 10.07 No Consent Required....................................... 29
Section 10.08 No Untrue Information..................................... 29
Section 10.09 Reasonable Servicing Fee.................................. 29
Section 10.10 Financial Statements...................................... 29
Section 10.11 Conflict of Interest...................................... 29
ARTICLE XI
DEFAULT
Section 11.01 Events of Default......................................... 30
Section 11.02 Waiver of Defaults........................................ 31
ARTICLE XII
MISCELLANEOUS PROVISIONS
Section 12.01 Notices................................................... 31
Section 12.02 Waivers................................................... 32
Section 12.03 Entire Agreement; Amendment............................... 32
Section 12.04 Execution; Binding Effect................................. 32
Section 12.05 Headings.................................................. 32
Section 12.06 Applicable Law............................................ 32
Section 12.07 Relationship of Parties................................... 33
Section 12.08 Severability of Provisions................................ 33
Section 12.09 Exhibits.................................................. 33
<PAGE>
EXHIBITS
EXHIBIT A Form of Monthly Remittance Advice
EXHIBIT B Form of Custodial Account Certification
EXHIBIT C Form of Custodial Account Letter Agreement
EXHIBIT D Form of Escrow Account Certification
EXHIBIT E Form of Escrow Account Letter Agreement
<PAGE>
COMMERCIAL SERVICING AGREEMENT
This Commercial Servicing Agreement (the "Servicing Agreement" or the
"Agreement") is entered into as of October 3, 1997, by and between PEOPLE'S BANK
OF CALIFORNIA (the "Seller"), a federal stock savings bank incorporated under
the laws of the United States, and PEOPLE'S PREFERRED CAPITAL CORPORATION, a
Maryland corporation (the "Purchaser").
WHEREAS, the Purchaser and the Seller entered into a Commercial Mortgage
Loan Purchase and Warranties Agreement dated as of October 3, 1997 (the
"Purchase Agreement") pursuant to which the Purchaser agreed to purchase from
the Seller certain commercial, first mortgage loans (the "Mortgage Loans") to be
delivered as whole loans, with the Seller retaining servicing rights in
connection with the purchase of such Mortgage Loans; and
WHEREAS, the Purchaser desires to have the Seller service the Mortgage
Loans, the Seller desires to service and administer the Mortgage Loans on behalf
of the Purchaser, and the parties desire to provide the terms and conditions of
such servicing by the Seller.
NOW, THEREFORE, in consideration of the mutual promises and agreements set
forth herein and for other good and valuable consideration, the receipt and the
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein
have the respective meanings set forth in the Purchase Agreement. The following
terms are defined as follows:
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Ancillary Income" means all late charges, reconveyance fees,
not-sufficient funds charges, optional insurance fees, assumption fees, escrow
account benefits, reinstatement fees, and similar types of fees arising from or
in connection with any Mortgage Loan to the extent not otherwise payable to the
Mortgagee under applicable law or pursuant to the terms of the related Mortgage
Note.
"Best's" means Best's Key Rating Guide.
"BIF" means The Bank Insurance Fund, or any successor thereto.
<PAGE>
"Closing Date" means the Initial Closing Date and any other date as is
mutually agreed upon by the parties hereto.
"Code" means the Internal Revenue Code of 1986, as amended.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Custodial Account" means the separate account or accounts created and
maintained pursuant to Section 2.04.
"Cut-off Date" means September 22, 1997 and the last business day of each
calendar month.
"Errors and Omissions Insurance Policy" means an errors and omissions
insurance policy to be maintained by the Seller pursuant to Section 2.12.
"Escrow Account" means the separate account or accounts created and
maintained pursuant to Section 2.06.
"Escrow Payment" means, with respect to any Mortgage Loan, any payments
required to be escrowed by the Mortgagor with the mortgagee pursuant to the
Mortgage or any other document (whether referred to as escrow, impound or
otherwise), including, without limitation, the amounts constituting ground
rents, taxes, assessments, water rates, sewer rents, municipal charges, mortgage
insurance premiums, fire and hazard insurance premiums.
"Event of Default" means any one of the conditions or circumstances
enumerated in Section 11.01.
"FDIC" means The Federal Deposit Insurance Corporation, or any successor
thereto.
"Fidelity Bond" means a fidelity bond to be maintained by the Seller
pursuant to Section 2.12.
"Initial Closing Date" means October 3, 1997, or such other date as the
parties hereto may mutually agree.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds
of insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale,
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<PAGE>
foreclosure sale or otherwise, or the sale of the related Mortgaged Property if
the Mortgaged Property is acquired in satisfaction of the Mortgage Loan.
"Monthly Remittance Advice" means the monthly remittance advice, in the
form of Exhibit A annexed hereto, to be provided to the Purchaser pursuant to
Section 3.02.
"Mortgage Impairment Insurance Policy" means a mortgage impairment or
blanket hazard insurance policy as described in Section 2.11.
"Nonrecoverable Advance" means any advance of principal and interest
previously made or proposed to be made in respect of a Mortgage Loan which, in
the good faith judgment of the Seller, will not or, in the case of a proposed
advance of principal and interest, would not, be ultimately recoverable from
related Insurance Proceeds, Liquidation Proceeds or otherwise. The determination
by the Seller that it has made a Nonrecoverable Advance or that any proposed
advance of principal and interest, if made, would constitute a Nonrecoverable
Advance, shall be evidenced by an Officers' Certificate delivered to the
Purchaser.
"OTS" means Office of Thrift Supervision, or any successor thereto.
"Officer's Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President and
by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, and delivered to the Purchaser as required
by this Agreement.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Western
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled due date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Agreement" means the Commercial Mortgage Loan Purchase and
Warranties Agreement between the Purchaser and the Seller related to the
purchase of the Mortgage Loans dated as of October 3, 1997.
"Qualified Depository" means a depository the accounts of which are
insured by the FDIC through the BIF or the SAIF, and shall include the Seller.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located,
duly authorized and licensed in such states to transact the applicable
insurance business and to write the insurance provided, and in the two
highest rating categories by Best's with respect to hazard and flood
insurance.
3
<PAGE>
"Record Date" means the close of business of the last Business Day of the
month preceding the month of the related Remittance Date.
"Remittance Date" means the 18th day (or if such 18th day is not a
Business Day, the first Business Day immediately following) of any month
following a Cut-off Date, beginning with the first Remittance Date on October
18, 1997.
"REO Property" means a Mortgaged Property acquired by the Seller on behalf
of the Purchaser through foreclosure or by deed in lieu of foreclosure, as
described in Section 2.16.
"SAIF" means the Savings Association Insurance Fund, or any successor
thereto.
"Servicing Advances" means all customary, reasonable and necessary "out
of pocket" costs and expenses (including reasonable attorneys' fees and
disbursements) incurred in the performance by the Seller of its servicing
obligations, including, but not limited to, the cost of (a) the preservation,
restoration and protection of the Mortgaged Property, (b) any enforcement or
judicial proceedings, including foreclosures, (c) the management and
liquidation of the Mortgaged Property if the Mortgaged Property is acquired
in satisfaction of the Mortgage and (d) compliance with the obligations under
Sections 2.08, 2.10 and 2.16.
"Servicing Agreement" means this agreement between the Purchaser and the
Seller for the servicing and administration of the Mortgage Loans.
"Servicing Fee" means, with respect to each Mortgage Loan, the amount of
the annual fee the Purchaser shall pay to the Seller, which shall, for a period
of one (1) full month, be equal to one-twelfth of the product of the Servicing
Fee Rate and (2) the Stated Principal Balance of such Mortgage Loan. Such fee
shall be payable monthly, computed on the basis of the same principal amount and
period in respect of which any related interest payment on a Mortgage Loan is
computed and shall be pro rated for any portion of a month during which the
Mortgage Loan is serviced by the Seller under this Agreement. The obligation of
the Purchaser to pay the Servicing Fee is limited to, and the Servicing Fee is
payable solely from, the interest portion (including recoveries with respect to
interest from Liquidation Proceeds, to the extent permitted by Section 4.03) of
such Monthly Payment collected by the Seller, or as otherwise provided under
Section 4.03.
"Servicing Fee Rate" means, with respect to each Mortgage Loan serviced
pursuant to this Agreement 0.25%. per annum.
"Servicing File" means, with respect to each Mortgage Loan, the file
retained by the Seller consisting of originals of all documents in the Mortgage
File which are not delivered to the Purchaser or its designee and copies of the
Mortgage Loan Documents listed on Exhibit A to the Purchase Agreement.
4
<PAGE>
"Servicing Officer" means any officer of the Seller involved in or
responsible for, the administration and servicing of the Mortgage Loans whose
name appears on a list of servicing officers furnished by the Seller to the
Purchaser upon request, as such list may from time to time be amended.
"Termination Fee" means the amount paid by the Purchaser to the Seller in
the event of the Seller's termination, without cause, as servicer. Such fee
shall equal the percentage amount set forth in Section 6.03 hereof of the then
current aggregate unpaid principal balance of the related Mortgage Loans.
ARTICLE II
SERVICING
SECTION 2.01 SELLER TO ACT AS SERVICER. From and after the Closing Date,
the Seller, as an independent contractor, shall service and administer the
Mortgage Loans and shall have full power and authority, acting alone, to do any
and all things in connection with such servicing and administration which the
Seller may deem necessary or desirable, consistent with the terms of this
Agreement and with Accepted Servicing Practices.
Consistent with the terms of this Agreement, the Seller may waive,
modify or vary any term of any Mortgage Loan or consent to the postponement
of compliance with any such term or in any manner grant indulgence to any
Mortgagor if in the Seller's reasonable and prudent determination such
waiver, modification, postponement or indulgence is not materially adverse to
the Purchaser, provided, however, that unless the Seller has obtained the
prior written consent of the Purchaser, the Seller shall not permit any
modification with respect to any Mortgage Loan that would change the Mortgage
Interest Rate, defer or forgive the payment of principal or interest, reduce
or increase the outstanding principal balance (except for actual payments of
principal) or change the final maturity date on such Mortgage Loan. Without
limiting the generality of the foregoing, the Seller shall continue, and is
hereby authorized and empowered, to execute and deliver on behalf of itself
and the Purchaser, all instruments of satisfaction or cancellation, or of
partial or full release, discharge and all other comparable instruments, with
respect to the Mortgage Loans and with respect to the Mortgaged Properties.
If reasonably required by the Seller, the Purchaser shall furnish the Seller
with any powers of attorney and other documents necessary or appropriate to
enable the Seller to carry out its servicing and administrative duties under
this Agreement.
In servicing and administering the Mortgage Loans, the Seller shall
employ procedures (including collection procedures) and exercise the same
care that it customarily employs and exercises in servicing and administering
mortgage loans for its own account, giving due consideration to Accepted
Servicing Practices where such practices do not conflict with the
requirements of this Agreement, and the Purchaser's reliance on the Seller.
5
<PAGE>
The Seller shall keep at its servicing office books and records in
which, subject to such reasonable regulations as it may prescribe, the Seller
shall note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be
made unless such transfer is in compliance with the terms hereof. For the
purposes of this Agreement, Seller shall be under no obligation to deal with
any Person with respect to this Agreement or the Mortgage Loans unless the
Seller has been notified of such transfers as provided in this Section 2.01.
The Purchaser may sell and transfer, in whole or in part, the Mortgage Loans,
provided that no such sale and transfer shall be binding upon the Seller
unless such transferee shall agree in writing in the form of the Assignment
and Assumption Agreement attached to the Purchase Agreement as Exhibit G, to
be bound by the terms of this Agreement and the Purchase Agreement, and an
executed copy of the same shall have been delivered to the Seller. Upon
receipt thereof, the Seller shall mark its books and records to reflect the
ownership of the Mortgage Loans by such assignee, and the previous Purchaser
shall be released from its obligations hereunder, subject to receipt by
Seller of all unpaid but due Servicing Advances, Servicing Fees and other
payments due to Seller on or before the date of such transfer pursuant to
this Agreement. The Seller shall be required to remit all amounts required to
be remitted to the Purchaser hereunder to said transferee commencing with the
first Remittance Date falling after receipt of said copy of the related
Assignment and Assumption Agreement provided that the Seller receives said
copy no later than three (3) Business Days immediately prior to the first day
of the month of the related Remittance Date. This Agreement shall be binding
upon and inure to the benefit of the Purchaser and the Seller and their
permitted successors, assignees and designees.
The Servicing File retained by the Seller pursuant to this Agreement shall
be appropriately marked and identified in the Seller's computer system to
clearly reflect the sale of the related Mortgage Loan to the Purchaser. The
Seller shall release from its custody the contents of any Servicing File
retained by it only in accordance with this Agreement, except when such release
is required in connection with a repurchase of any such Mortgage Loan pursuant
to Section 8.03 of the Purchase Agreement.
The Seller must have an internal quality control program that verifies, on
a regular basis, the existence and accuracy of the legal documents, credit
documents, property appraisals, and underwriting decisions. The program must be
capable of evaluating and monitoring the overall quality of its loan production
and servicing activities. The program is to ensure that the Mortgage Loans are
serviced in accordance with prudent mortgage banking practices and accounting
principles; guard against dishonest, fraudulent, or negligent acts; and guard
against errors and omissions by officers, employees, or other authorized
persons.
SECTION 2.02 LIQUIDATION OF MORTGAGE LOANS. In the event that any payment
due under any Mortgage Loan and not postponed pursuant to Section 2.01 is not
paid when the same becomes due and payable, or in the event the Mortgagor fails
to perform any other covenant or obligation under the Mortgage Loan and such
failure continues beyond any applicable grace period, the Seller shall take such
action as (1) the Seller would take under similar circumstances with respect to
a similar mortgage loan held for its own account for investment, (2) shall be
consistent with Accepted Servicing Practices and (3) the Seller shall determine
prudently to be in the best interest of
6
<PAGE>
Purchaser. In addition to the foregoing, in the event that any payment due under
any Mortgage Loan is not postponed pursuant to Section 2.01 and remains
delinquent for a period of ninety (90) days or any other default continues for a
period of ninety (90) days beyond the expiration of any grace or cure period (or
such other period as is required by law in the jurisdiction where the related
Mortgaged Property is located), the Seller shall commence and be responsible for
the processing of foreclosure proceedings, PROVIDED THAT, prior to commencing
foreclosure proceedings, the Seller shall notify the Purchaser in writing of the
Seller's intention to do so, and the Seller shall not commence foreclosure
proceedings if the Purchaser objects to such action within ten (10) Business
Days of receiving such notice or, if the provisions of the next two paragraphs
apply, in any event without the prior written consent of Purchaser, and
PROVIDED, FURTHER, that the Seller may, in its good faith business judgement,
determine to commence foreclosure proceedings earlier than the expiration of the
foregoing grace or cure period, subject to the requirements of the preceding
proviso. In such connection, the Seller shall from its own funds make all
necessary and proper Servicing Advances, provided, however, that the Seller
shall not be required to expend its own funds in connection with any foreclosure
or towards the restoration or preservation of any Mortgaged Property, unless it
shall determine (a) that such preservation, restoration and/or foreclosure will
increase the proceeds of liquidation of the Mortgage Loan to Purchaser after
reimbursement to itself for such expenses and (b) that such expenses will be
recoverable by it either through Liquidation Proceeds (in respect of which it
shall have priority for purposes of withdrawals from the Custodial Account
pursuant to Section 2.05) or through Insurance Proceeds (in respect of which it
shall have similar priority). The Purchaser shall execute any instruments or
documents reasonably necessary in furtherance of all actions to be taken by
Seller pursuant to this Section 2.02.
Notwithstanding anything to the contrary contained herein, in connection
with a foreclosure, in the event the Seller has reasonable cause to believe that
a Mortgaged Property is contaminated by hazardous or toxic substances or wastes,
or if the Purchaser otherwise requests an environmental inspection or review of
such Mortgaged Property to be conducted by a qualified inspector, the Seller
shall cause the Mortgaged Property to be so inspected at the expense of the
Purchaser. Upon completion of the inspection, the Seller shall promptly provide
the Purchaser with a written report of the environmental inspection.
After reviewing the environmental inspection report, the Purchaser shall
determine how the Seller shall proceed with respect to the Mortgaged Property.
In the event (a) the environmental inspection report indicates that the
Mortgaged Property is contaminated by hazardous or toxic substances or wastes
and (b) the Purchaser directs the Seller to proceed with foreclosure or
acceptance of a deed in lieu of foreclosure, the Seller shall be reimbursed for
all reasonable costs associated with such foreclosure or acceptance of a deed in
lieu of foreclosure and any related environmental clean up costs, as applicable,
from the related Liquidation Proceeds, or if the Liquidation Proceeds are
insufficient to fully reimburse the Seller, the Seller shall be entitled to be
reimbursed from amounts in the Custodial Account pursuant to Section 2.05 hereof
and to the extent amounts in the Custodial Account are insufficient to fully
reimburse the Seller,the Seller shall be entitled to be reimbursed by the
Purchaser for such deficiencies (upon presentation of evidence of such
deficiency). In the event the Purchaser directs the Seller not to proceed with
foreclosure or
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<PAGE>
acceptance of a deed in lieu of foreclosure, the Seller shall be reimbursed for
all Servicing Advances made with respect to the related Mortgaged Property from
the Custodial Account pursuant to Section 2.05 hereof.
SECTION 2.03 COLLECTION OF MORTGAGE LOAN PAYMENTS. Continuously from the
Closing Date the Seller shall proceed diligently to collect all payments due
under each of the Mortgage Loans when the same shall become due and payable and
shall take special care in ascertaining and estimating Escrow Payments and all
other charges that will become due and payable with respect to the Mortgage
Loans and each related Mortgaged Property, to the end that the installments
payable by the Mortgagors will be sufficient to pay such charges as and when
they become due and payable.
SECTION 2.04 ESTABLISHMENT OF AND DEPOSITS TO CUSTODIAL ACCOUNT. The
Seller shall segregate and hold all funds collected and received pursuant to the
Mortgage Loans separate and apart from any of its own funds and general assets
and shall establish and maintain one or more Custodial Accounts, in the form of
time deposit or demand accounts, titled "People's Bank of California in trust
for People's Preferred Capital Corporation". The Custodial Account shall be
established with a Qualified Depository acceptable to the Purchaser. Any funds
deposited in the Custodial Account shall at all times be fully insured to the
full extent permitted under applicable law; provided, however, that to the
extent the Custodial Account is established with the Seller, the Seller may
maintain the Custodial Account as a single account. Funds deposited in the
Custodial Account may be drawn on by the Seller in accordance with Section 2.05.
The creation of any Custodial Account shall be evidenced by a certification in
the form of Exhibit B hereto, in the case of an account established with the
Seller, or by a letter agreement in the form of Exhibit C hereto, in the case of
an account held by a depository other than the Seller. A copy of such
certification or letter agreement shall be furnished to the Purchaser and, upon
request, to any subsequent Purchaser.
The Seller shall deposit in the Custodial Account within one Business Day
of receipt, and retain therein, the following collections received by the Seller
and payments made by the Seller after the Closing Date (other than payments of
principal and interest due on or before the Closing Date) or received by the
Seller prior to the Closing Date but allocable to a period subsequent thereto:
(i) all payments on account of principal on the Mortgage Loans,
including all Principal Prepayments;
(ii) all payments on account of interest on the Mortgage;
(iii) all Liquidation Proceeds and any amount received with respect to REO
Property;
(iv) all Insurance Proceeds including amounts required to be deposited
pursuant to Section 2.10 (other than proceeds to be held in the
Escrow Account and applied to the restoration or repair of the
Mortgaged Property or released to the Mortgagor in accordance with
Section 2.14), and Section 2.11;
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<PAGE>
(v) all Condemnation Proceeds which are not applied to the restoration
or repair of the Mortgaged Property or released to the Mortgagor in
accordance with Section 2.14;
(vi) any amount required to be deposited in the Custodial Account
pursuant to Section 2.16, 3.01, or 4.02;
(vii) any amounts payable in connection with the repurchase of any
Mortgage Loan pursuant to Section 8.03 of the Purchase Agreement;
and
(viii) any amounts required to be deposited by the Seller pursuant to
Section 2.11 in connection with the deductible clause in any blanket
hazard insurance policy.
The foregoing requirements for deposit into the Custodial Account shall be
exclusive, it being understood and agreed that, without limiting the generality
of the foregoing, Ancillary Income need not be deposited by the Seller into the
Custodial Account. Any interest paid on funds deposited in the Custodial Account
by the depository institution shall accrue to the benefit of the Seller and the
Seller shall be entitled to retain and withdraw such interest from the Custodial
Account pursuant to Section 2.05.
SECTION 2.05 PERMITTED WITHDRAWALS FROM CUSTODIAL ACCOUNT. Subject to
Section 2.16 hereof, the Seller shall, from time to time, withdraw funds from
the Custodial Account for the following purposes:
(i) to make payments to the Purchaser in the amounts and in the manner
provided for in Section 3.01;
(ii) to pay to itself the Servicing Fee;
(iii) to reimburse itself for unreimbursed Servicing Advances (except to
the extent reimbursed pursuant to Section 2.07), any accrued but
unpaid Servicing Fees and for unreimbursed advances of Seller funds
made pursuant to Section 2.16, the Seller's right to reimburse
itself pursuant to this subclause (iii) with respect to any Mortgage
Loan being limited to related Liquidation Proceeds, Condemnation
Proceeds, Insurance Proceeds and such other amounts as may be
collected by the Seller from the Mortgagor or otherwise relating to
the Mortgage Loan, it being understood that, in the case of any such
reimbursement, the Seller's right thereto shall be prior to the
rights of the Purchaser except that, where the Seller is required to
repurchase a Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement or Section 4.02 of this Agreement, respectively, the
Seller's right to such reimbursement shall be subsequent to the
payment to the Purchaser of the Repurchase Price pursuant to such
sections and all other amounts required to be paid to the Purchaser
with respect to such Mortgage Loan;
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(iv) to pay itself any interest earned on funds deposited in the
Custodial Account (all such interest to be withdrawn monthly not
later than each Remittance Date); and
(v) to clear and terminate the Custodial Account upon the termination of
this Agreement.
In the event that the Custodial Account is interest bearing, on each
Remittance Date, the Seller shall withdraw all funds from the Custodial Account
except for those amounts which, pursuant to Section 3.01, the Seller is not
obligated to remit on such Remittance Date. The Seller may use such withdrawn
funds only for the purposes described in this Section 2.05.
SECTION 2.06 ESTABLISHMENT OF AND DEPOSITS TO ESCROW ACCOUNT. The Seller
shall segregate and hold all funds collected and received pursuant to a Mortgage
Loan constituting Escrow Payments separate and apart from any of its own funds
and general assets and shall establish and maintain one or more Escrow Accounts,
in the form of time deposit or demand accounts. The Escrow Account or Accounts
shall be established with a Qualified Depositary, in a manner which shall
provide maximum available insurance thereunder. Funds deposited in the Escrow
Accounts may be drawn on by the Seller in accordance with Section 2.07. The
creation of any Escrow Account shall be evidenced by a certification in the form
of Exhibit D hereto, in the case of an account established with the Seller, or
by a letter agreement in the form of Exhibit E hereto, in the case of an account
held by a depository other than the Seller. A copy of such certification shall
be furnished to the Purchaser and, upon request, to any subsequent Purchaser.
The Seller shall deposit in the Escrow Account or Accounts within one
Business Day of receipt, and retain therein:
(i) all Escrow Payments collected on account of the Mortgage Loans, for
the purpose of effecting timely payment of any such items as
required under the terms of the Mortgage Loan Documents; and
(ii) all amounts representing Insurance Proceeds or Condemnation Proceeds
which are to be applied to the restoration or repair of any
Mortgaged Property in accordance with the Mortgage Loan Documents.
The Seller shall make withdrawals from the Escrow Account only to effect
such payments as are required under the Mortgage Loan Documents and this
Agreement as set forth in Section 2.07. The Seller shall be entitled to retain
any interest paid on funds deposited in the Escrow Account by the depository
institution, other than interest on escrowed funds required by law to be paid to
the Mortgagor. To the extent required by law, the Seller shall pay from its own
funds interest on escrowed funds to the Mortgagor notwithstanding that the
Escrow Account may be noninterest bearing or that interest paid thereon is
insufficient for such purposes.
SECTION 2.07 PERMITTED WITHDRAWALS FROM ESCROW ACCOUNT. Withdrawals from
each Escrow Account may be made by the Seller only:
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(i) to effect timely payments of ground rents, taxes, assessments, water
rates, mortgage insurance premiums, condominium charges, fire and
hazard insurance premiums or other items constituting Escrow
Payments for the related Mortgage;
(ii) to reimburse the Seller for any Servicing Advance made by the Seller
pursuant to Section 2.08 (except with respect to any expenses
incurred in procuring or transferring Tax Service Contracts) with
respect to a related Mortgage Loan, but only from amounts received
on the related Mortgage Loan which represent late collections of
Escrow Payments thereunder;
(iii) to refund to the related Mortgagor any funds found to be in excess
of the amounts required under the terms of the related Mortgage Loan
or applicable federal or state law or judicial or administrative
ruling;
(iv) for transfer to the Custodial Account and application to reduce the
principal balance of the Mortgage Loan in accordance with the terms
of the related Mortgage and Mortgage Note;
(v) for application to restoration or repair of the related Mortgaged
Property in accordance with the procedures outlined in Section 2.14;
(vi) to pay to the Seller, or any Mortgagor to the extent required by
law, any interest paid on the funds deposited in the Escrow Account;
and
(vii) to clear and terminate the Escrow Account on the termination of this
Agreement.
SECTION 2.08 PAYMENT OF TAXES, INSURANCE AND OTHER CHARGES, TAX CONTRACTS.
With respect to each Mortgage Loan, the Seller shall maintain accurate records
reflecting the status of ground rents, taxes, assessments, water rates, sewer
rents, and other charges, as applicable, which are or may become a lien upon the
Mortgaged Property and the status of fire and hazard insurance coverage to the
extent Escrow Payments are required under the Mortgage Loan Documents, shall
obtain, from time to time, all bills for the payment of such charges (including
renewal premiums) and shall effect payment thereof prior to the applicable
penalty or termination date, employing for such purpose deposits of the
Mortgagor in the Escrow Account which shall have been estimated and accumulated
by the Seller in amounts sufficient for such purposes, as allowed under the
terms of the Mortgage. To the extent that a Mortgage does not provide for Escrow
Payments, the Seller shall determine that any such payments relating to taxes or
maintaining insurance policies are made by the Mortgagor at the time they first
become due. The Seller assumes full responsibility for the payment of all such
bills to the extent it has notice of such bills and shall effect payment of all
such charges irrespective of each Mortgagor's faithful performance in the
payment of same or the making of the Escrow Payments, and the Seller shall make
advances from its own funds to effect such payments, such advances to be
reimbursable to the same extent as Servicing Advances.
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The Seller shall ensure that each of the Mortgage Loans shall be covered
by a Tax Service Contract which shall be assigned to the Purchaser or the
Purchaser's designee at the Seller's expense in the event that the Seller is
terminated as servicer of the related Mortgage Loan(s) hereunder. To the extent
that a Mortgage Loan does not have a Tax Service Contract, the Purchaser shall
procure a Tax Service Contract for such Mortgage Loan and the Seller shall
reimburse the Purchaser upon request for reasonable expenses incurred in
connection therewith.
SECTION 2.09 PROTECTION OF ACCOUNTS. The Seller may transfer the Custodial
Account or the Escrow Account to a different Qualified Depository from time to
time. Such transfer shall be made only upon obtaining the consent of the
Purchaser, which consent shall not be withheld unreasonably.
The Seller shall bear any expenses, losses or damages sustained by the
Purchaser because the Custodial Account and/or the Escrow Account are not demand
deposit accounts.
SECTION 2.10 MAINTENANCE OF HAZARD INSURANCE. The Seller shall cause to be
maintained for each Mortgage Loan, hazard insurance such that all buildings upon
the Mortgaged Property are insured by a generally acceptable insurer against
loss by fire and hazards of extended coverage, in an amount which is at least
equal to the lesser of (i) the maximum insurable value of the improvements
securing such Mortgage Loan and (ii) the greater of (a) the outstanding
principal balance of the Mortgage Loan and (b) an amount such that the proceeds
thereof shall be sufficient to prevent the Mortgagor or the loss payee from
becoming a co-insurer.
If required by the Flood Disaster Protection Act of 1973, as amended, each
Mortgage Loan is covered by a flood insurance policy meeting the requirements of
the current guidelines of the Federal Insurance Administration in effect with a
generally acceptable insurance carrier in an amount representing coverage not
less than the lesser of (i) the outstanding principal balance of the related
Mortgage Loan and (ii) the maximum amount of insurance which is available under
the Flood Disaster Protection Act of 1973, as amended. If at any time during the
term of the Mortgage Loan, the Seller determines in accordance with applicable
law that a Mortgaged Property is located in a special flood hazard area and is
not covered by flood insurance or is covered in an amount less than the amount
required by the Flood Disaster Protection Act of 1973, as amended, the Seller
shall notify the related Mortgagor that the Mortgagor must obtain such flood
insurance coverage, and if said Mortgagor fails to obtain the required flood
insurance coverage within forty five (45) days after such notification, the
Seller shall immediately purchase the required flood insurance on the
Mortgagor's behalf.
The Seller shall cause to be maintained on each Mortgaged Property such
other or additional insurance as may be required pursuant to such applicable
laws and regulations as shall at any time be in force and as shall require such
additional insurance, or pursuant to the requirements of any applicable primary
mortgage guaranty insurer.
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All policies required hereunder shall name the Seller and its successors
and assigns as mortgagee and shall be endorsed with non-contributory standard
mortgagee clauses which shall provide for at least thirty (30) days' prior
written notice of any cancellation, reduction in amount or material change in
coverage.
The Seller shall not interfere with the Mortgagor's freedom of choice in
selecting either his insurance carrier or agent, provided, however, that the
Seller shall not accept any such insurance policies from insurance companies
unless such companies are rated A:VI or better in Best's and are licensed to do
business in the jurisdiction in which the Mortgaged Property is located. The
Seller shall determine that such policies provide sufficient risk coverage and
amounts, that they insure the property owner, and that they properly describe
the property address. To the extent reasonably possible, the Seller shall
furnish to the Mortgagor a formal notice of expiration of any such insurance in
sufficient time for the Mortgagor to arrange for renewal coverage by the
expiration date; provided, however, that in the event that no such notice is
furnished by the Seller, the Seller shall ensure that replacement insurance
policies are in place in the required coverages and the Seller shall be solely
liable to the Purchaser only for any losses in the event such coverage is not
provided.
Pursuant to Section 2.04, any amounts collected by the Seller under any
such policies (other than amounts to be deposited in the Escrow Account and
applied to the restoration or repair of the related Mortgaged Property, or
property acquired in liquidation of the Mortgage Loan, or to be released to the
Mortgagor, in accordance with the Seller's normal servicing procedures as
specified in Section 2.14) shall be deposited in the Custodial Account subject
to withdrawal pursuant to Section 2.05.
SECTION 2.11 MAINTENANCE OF MORTGAGE IMPAIRMENT INSURANCE. In the event
that the Seller shall obtain and maintain a blanket policy insuring against
losses arising from fire and hazards covered under extended coverage on all of
the Mortgage Loans, then, to the extent such policy provides coverage in an
amount equal to the amount required pursuant to Section 2.10 and otherwise
complies with all other requirements of Section 2.10, it shall conclusively be
deemed to have satisfied its obligations as set forth in Section 2.10. Any
amounts collected by the Seller under any such policy relating to a Mortgage
Loan shall be deposited in the Custodial Account subject to withdrawal pursuant
to Section 2.05. Such policy may contain a deductible clause, in which case, in
the event that there shall not have been maintained on the related Mortgaged
Property a policy complying with Section 2.10, and there shall have been a loss
which would have been covered by such policy, the Seller shall deposit in the
Custodial Account at the time of such loss the amount not otherwise payable
under the blanket policy because of such deductible clause, such amount to be
deposited from the Seller's funds, without reimbursement therefor. Upon request
of the Purchaser, the Seller shall cause to be delivered to the Purchaser a
certified true copy of such policy and a statement from the insurer thereunder
that such policy shall in no event be terminated or materially modified without
thirty (30) days' prior written notice to the Purchaser.
SECTION 2.12 MAINTENANCE OF FIDELITY BOND AND ERRORS AND OMISSIONS
INSURANCE. The Seller shall maintain with responsible companies, at its own
expense, a blanket Fidelity Bond and
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an Errors and Omissions Insurance Policy, with broad coverage on all officers,
employees or other persons acting in any capacity requiring such persons to
handle funds, money, documents or papers relating to the Mortgage Loans ("Seller
Employees"). Any such Fidelity Bond and Errors and Omissions Insurance Policy
shall be in the form of the Mortgage Banker's Blanket Bond and shall protect and
insure the Seller against losses, including forgery, theft, embezzlement, fraud,
errors and omissions and negligent acts of such Seller Employees. Such Fidelity
Bond and Errors and Omissions Insurance Policy also shall protect and insure the
Seller against losses in connection with the release or satisfaction of a
Mortgage Loan without having obtained payment in full of the indebtedness
secured thereby. No provision of this Section 2.12 requiring such Fidelity Bond
and Errors and Omissions Insurance Policy shall diminish or relieve the Seller
from its duties and obligations as set forth in this Agreement. Upon the request
of the Purchaser, the Seller shall cause to be delivered to the Purchaser a
certified true copy of such Fidelity Bond and Errors and Omissions Insurance
Policy and a statement from the surety and the insurer that such Fidelity Bond
and Errors and Omissions Insurance Policy shall in no event be terminated or
materially modified without thirty (30) days' prior written notice to the
Purchaser. In the event that the surety or insurer charges the Seller a fee for
providing such evidence, the Purchaser shall reimburse the Seller for the
reasonable expense incurred by the Seller in furnishing such evidence.
SECTION 2.13 INSPECTIONS. The Seller shall inspect the Mortgaged Property
as often as deemed necessary by the Seller to assure itself that the value of
the Mortgaged Property is being preserved. In addition, if any Mortgage Loan is
more than sixty (60) days delinquent, the Seller immediately shall inspect the
Mortgaged Property and shall conduct subsequent inspections in accordance with
Accepted Servicing Practices. The Seller shall keep a written report of each
such inspection.
SECTION 2.14 RESTORATION OF MORTGAGED PROPERTY. The Seller need not obtain
the approval of the Purchaser prior to releasing any Insurance Proceeds or
Condemnation Proceeds to the Mortgagor to be applied to the restoration or
repair of the Mortgaged Property if such release is in accordance with the terms
of the Mortgage Loan Documents. At a minimum, the Seller shall comply with the
following conditions in connection with any such release of Insurance Proceeds
or Condemnation Proceeds:
(i) the Seller shall receive satisfactory independent verification of
completion of repairs and issuance of any required approvals with
respect thereto;
(ii) the Seller shall take all steps necessary to preserve the priority
of the lien of the Mortgage, including, but not limited to requiring
waivers with respect to mechanics' and materialmen's liens;
(iii) the Seller shall verify that the Mortgage Loan is not in default;
and
(iv) pending repairs or restoration, the Seller shall place the Insurance
Proceeds or Condemnation Proceeds in the Escrow Account.
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If the Purchaser is named as an additional mortgagee, the Seller is hereby
empowered to endorse any loss draft issued in respect of such a claim in the
name of the Purchaser.
SECTION 2.15 DETERIORATING MORTGAGE LOANS. If, during the term of this
Agreement, a Mortgage Loan (or interest therein) becomes at any time in
Nonaccrual Status, the Seller shall notify the Purchaser as part of the Seller's
reporting obligations under this Agreement and shall follow the procedures set
forth in Section 2.02 of this Agreement for realizing upon defaulted Mortgage
Loans.
SECTION 2.16 TITLE, MANAGEMENT AND DISPOSITION OF REO PROPERTY. In the
event that title to any Mortgaged Property is acquired in foreclosure or by deed
in lieu of foreclosure, the deed or certificate of sale shall be taken in the
name of the Purchaser, or in the event the Purchaser is not authorized or
permitted to hold title to real property in the state where the REO Property is
located, or would be adversely affected under the "doing business" or tax laws
of such state by so holding title, the deed or certificate of sale shall be
taken in the name of such Person or Persons as shall be designated by the
Purchaser. The Person or Persons holding such title other than the Purchaser
shall acknowledge in writing that such title is being held as nominee for the
Purchaser.
The Seller shall manage, conserve, protect and operate each REO Property
for the Purchaser solely for the purpose of its prompt disposition and sale. The
Seller, either itself or through an agent selected by the Seller and reasonably
acceptable to the Purchaser, shall manage, conserve, protect and operate the REO
Property in the same manner that it manages, conserves, protects and operates
other foreclosed property for its own account, and in the same manner that
similar property in the same locality as the REO Property is managed. The Seller
shall attempt to sell the same (and may temporarily rent the same for a period
not greater than one (1) year, except as otherwise provided below) on such terms
and conditions as the Seller deems to be in the best interest of the Purchaser.
The Seller shall use its best efforts to dispose of the REO Property as
soon as possible and shall sell such REO Property in any event within one year
after title has been taken to such REO Property, unless the Seller determines,
and gives an appropriate notice to the Purchaser to such effect, that a longer
period is necessary for the orderly liquidation of such REO Property. If a
period longer than one (1) year is permitted under the foregoing sentence and is
necessary to sell any REO Property, the Seller shall report monthly to the
Purchaser as to the progress being made in selling such REO Property.
The Seller shall also maintain on each REO Property fire and hazard
insurance with extended coverage in an amount which is at least equal to the
maximum insurable value of the improvements which are a part of such property,
liability insurance and, to the extent required and available under the Flood
Disaster Protection Act of 1973, as amended, flood insurance in the amount
required above.
The disposition of REO Property shall be carried out by the Seller at such
price, and upon such terms and conditions, as the Seller deems to be in the best
interests of the Purchaser. The proceeds of sale of the REO Property shall be
promptly deposited in the Custodial Account. As soon
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as practical thereafter the expenses of such sale shall be paid and the Seller
shall reimburse itself pursuant to Section 2.05(iii) hereof, as applicable, for
any related unreimbursed Servicing Advances, unpaid Servicing Fees and
unreimbursed advances made pursuant to this Section, and on the Remittance Date
immediately following the Due Period in which such sale proceeds are received
the net cash proceeds of such sale remaining in the Custodial Account shall be
distributed to the Purchaser; provided that such distribution shall, in any
event, be made within ninety (90) days from and after the closing of the sale of
such REO Property.
In addition to the Seller's obligations set forth in this Section 2.16,
the Seller shall deliver written notice to the Purchaser whenever title to any
Mortgaged Property is acquired in foreclosure or by deed in lieu of foreclosure
together with a copy of the drive-by appraisal of the related Mortgaged Property
obtained by the Seller on or prior to the date of such acquisition.
Notwithstanding anything to the contrary contained herein, the Purchaser may, at
the Purchaser's sole option, terminate the Seller as servicer of any such REO
Property without payment of any Termination Fee with respect thereto, provided
that (i) the Purchaser gives the Seller notice of such termination within ten
(10) Business Days of receipt of said written notice from the Seller which
termination shall be effective no more than fifteen (15) Business Days from and
after the date of said notice from the Purchaser and (ii) the Seller shall on
the date said termination takes effect be reimbursed by Purchaser for any
unreimbursed Servicing Advances in each case relating to the Mortgage Loan
underlying such REO Property. In the event of any such termination, the
provisions of Section 8.06 hereof shall apply to said termination and the
transfer of servicing responsibilities with respect to such REO Property to the
Purchaser or its designee.
With respect to each REO Property, the Seller shall deposit all funds
collected and received in connection with the operation of the REO Property in
the Custodial Account. The Seller shall cause to be deposited on a daily basis
upon the receipt thereof in the Custodial Account all revenues received with
respect to the conservation and disposition of the related REO Property.
SECTION 2.17 PERMITTED WITHDRAWALS WITH RESPECT TO REO PROPERTY. For so
long as the Seller is acting as servicer of any Mortgage Loan relating to any
REO Property, the Seller shall withdraw funds on deposit in the Custodial
Account with respect to each related REO Property necessary for the proper
operation, management and maintenance of the REO Property, including the cost of
maintaining any hazard insurance pursuant to Section 2.10 and the fees of any
managing agent acting on behalf of the Seller. The Seller shall make monthly
distributions on each Remittance Date to the Purchaser of the net cash flow from
the REO Property (which shall equal the revenues from such REO Property net of
the expenses described in Section 2.16 and of any reserves reasonably required
from time to time to be maintained to satisfy anticipated liabilities for such
expenses).
SECTION 2.18 REAL ESTATE OWNED REPORTS. For so long as the Seller is
acting as servicer of any Mortgage Loan relating to any REO Property, the Seller
shall furnish to the Purchaser on or before the 15th day of each month a
statement with respect to any REO Property covering the operation of such REO
Property for the previous month and the Seller's efforts in connection with
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the sale of such REO Property and any rental of such REO Property incidental to
the sale thereof for the previous month. That statement shall be accompanied by
such other information as the Purchaser shall reasonably request.
SECTION 2.19 [RESERVED]
SECTION 2.20 REPORTS OF FORECLOSURES AND ABANDONMENTS. For so long as the
Seller is acting as servicer of any Mortgage Loan relating to any REO Property,
following the foreclosure sale or abandonment of any Mortgaged Property, the
Seller shall report such foreclosure or abandonment as required pursuant to
Section 6050J of the Code.
SECTION 2.21 NOTIFICATION OF ADJUSTMENTS. With respect to each Variable
Rate Mortgage Loan, the Seller shall adjust the Mortgage Interest Rate on the
related Interest Rate Adjustment Date and shall adjust the Monthly Payment
accordingly in compliance with the requirements of applicable law and the
related Mortgage and Mortgage Note. If, pursuant to the terms of the Mortgage
Note, another index is selected for determining the Mortgage Interest Rate, the
same index will be used with respect to each Mortgage Note which requires a new
index to be selected, provided that such selection does not conflict with the
terms of the related Mortgage Note. The Seller shall execute and deliver any and
all necessary notices required under applicable law and the terms of the related
Mortgage Note and Mortgage regarding the Mortgage Interest Rate and the Monthly
Payment adjustments. The Seller shall promptly upon written request therefor,
deliver to the Purchaser such notifications and any additional applicable data
regarding such adjustments and the methods used to calculate and implement such
adjustments. Upon the discovery by the Seller or the Purchaser that the Seller
has failed to adjust a Mortgage Interest Rate or a Monthly Payment pursuant to
the terms of the related Mortgage Note and Mortgage, the Seller shall
immediately deposit in the Custodial Account from its own funds the amount of
any interest loss actually caused the Purchaser thereby.
SECTION 2.22 NOTIFICATION OF MATURITY DATE. With respect to each Fixed
Rate Mortgage Loan, the Purchaser shall execute and deliver to the Mortgagor any
and all necessary notices required under applicable law and the terms of the
related Mortgage Note and Mortgage regarding the maturity date if required under
applicable law.
ARTICLE III
PAYMENTS TO PURCHASER
SECTION 3.01 REMITTANCES. On each Remittance Date the Seller shall remit
by wire transfer of immediately available funds to the Purchaser all amounts
deposited in the Custodial Account as of the close of business on the Cut-off
Date immediately preceding such Remittance Date, except that less than full
Principal Prepayments received on or after the first day of the month in which
the Remittance Date occurs shall be remitted to the Purchaser on the next
following Remittance Date; and minus any amounts attributable to Monthly
Payments collected but due on a Due Date or Dates subsequent to the first day of
the month of the Remittance Date, which amounts shall be remitted
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on the next Remittance Date, in each case, net of charges against or withdrawals
from the Custodial Account pursuant to Section 2.05.
With respect to any Principal Prepayment in full, the Seller shall remit
such Principal Prepayment to the Purchaser within five (5) Business Days of
receipt of such Principal Prepayment by the Seller.
With respect to any Seller's remittance received by the Purchaser after
the fifth Business Day following the Business Day on which such payment was due,
the Seller shall pay to the Purchaser interest on any such late payment at an
annual rate equal to the Prime Rate, adjusted as of the date of each change,
plus one (1) percentage point, but in no event greater than the maximum amount
permitted by applicable law. Such interest shall be deposited in the Custodial
Account by the Seller on the date such late payment is made and shall cover the
period commencing with and including the day following such fifth Business Day
and ending with the Business Day on which such payment is made, exclusive of
such Business Day; provided, however, that in the event that the Seller remits
such amounts after 11:00 A.M. (California time) on any day, such period shall
include such day. Such interest shall be remitted along with the distribution
payable on the next succeeding Remittance Date. The payment by the Seller of any
such interest shall not be deemed an extension of time for payment or a waiver
of any Event of Default by the Seller.
SECTION 3.02 STATEMENTS TO PURCHASER. Not later than the twentieth day of
the month following the end of each calendar quarter, the Seller shall furnish
by modem and/or diskette to the Purchaser or its designee a listing of the
outstanding Mortgage Loans, including with respect to each Mortgage Loan: the
Mortgage Loan number, the actual balance, the actual paid-through dates, the
Mortgage Interest Rate and principal and interest payment, and with respect to
Variable Rate Mortgage Loans, the next Interest Rate Adjustment Date, the
Mortgage Interest Rate and the principal and interest payment effective as of
the next Interest Rate Adjustment Date (if available), and shall furnish to the
Purchaser manually a Monthly Remittance Advice, with a trial balance report
attached thereto, in the form of Exhibit A annexed hereto as to the preceding
remittance and the period ending on the preceding Cut-off Date.
In addition, not more than sixty (60) days after the end of each calendar
year, the Seller shall furnish to each Person who was a Purchaser at any time
during such calendar year an annual statement in accordance with the
requirements of applicable federal income tax law as to the aggregate of
remittances for the applicable portion of such year.
Such obligation of the Seller shall be deemed to have been satisfied to
the extent that substantially comparable information shall be provided by the
Seller pursuant to any requirements of the Code as from time to time are in
force.
The Seller shall prepare and file, with respect to each Mortgage Loan, any
and all tax returns, information statements or other filings required to be
delivered to any governmental taxing authority or to the Purchaser pursuant to
any applicable law with respect to the Mortgage Loans and the
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transactions contemplated hereby. In addition, the Seller shall provide the
Purchaser with such information concerning the Mortgage Loans as is necessary
for the Purchaser to prepare its federal income tax return as the Purchaser may
reasonably request from time to time.
ARTICLE IV
GENERAL SERVICING PROCEDURES
SECTION 4.01 TRANSFERS OF MORTGAGED PROPERTY. The Seller shall be required
to enforce any "due-on-sale" provision contained in any Mortgage or Mortgage
Note and to deny assumption by the person to whom the Mortgaged Property has
been or is about to be sold whether by absolute conveyance or by contract of
sale, whether or not the Mortgagor remains liable on the Mortgage and the
Mortgage Note, unless assumptions are permitted by the Mortgage Loan Documents.
When the Mortgaged Property has been conveyed by the Mortgagor, the Seller
shall, to the extent it has knowledge of such conveyance, exercise its rights to
accelerate the maturity of such Mortgage Loan under the "due-on-sale" clause
applicable thereto, unless assumptions are permitted by the Mortgage Loan
Documents.
If the Seller reasonably believes it is unable under applicable law to
enforce such "due-on-sale" clause, or if the Mortgage Loan Documents permit an
assumption of the Mortgage Loan, the Seller, in the Purchaser's name, shall, to
the extent permitted by applicable law, enter into (i) an assumption and
modification agreement with the person to whom such property has been conveyed,
pursuant to which such person becomes liable under the Mortgage Note and the
original Mortgagor remains liable thereon, unless the Mortgage Loan Documents
provide otherwise or (ii) in the event the Seller is unable under applicable law
or the Mortgage Loan Documents to require that the original Mortgagor remain
liable under the Mortgage Note and the Seller has the prior consent of any
applicable insurer, a substitution of liability agreement with the purchaser of
the Mortgaged Property pursuant to which the original Mortgagor is released from
liability and the purchaser of the Mortgaged Property is substituted as
Mortgagor and becomes liable under the Mortgage Note. In connection with any
such assumption, neither the Mortgage Interest Rate borne by the related
Mortgage Note, the term of the Mortgage Loan nor the outstanding principal
amount of the Mortgage Loan shall be changed unless approved by the Purchaser.
To the extent that any Mortgage Loan is assumable, the Seller shall
inquire diligently into the creditworthiness of the proposed transferee, and
shall use the underwriting criteria for approving the credit of the proposed
transferee which are used by the Seller with respect to underwriting mortgage
loans of the same type as the Mortgage Loans. If the credit of the proposed
transferee does not meet such underwriting criteria, the Seller diligently
shall, to the extent permitted by the Mortgage or the Mortgage Note and by
applicable law, accelerate the maturity of the Mortgage Loan.
SECTION 4.02 SATISFACTION OF MORTGAGES AND RELEASE OF MORTGAGE FILES. Upon
the payment in full of any Mortgage Loan, or the receipt by the Seller of a
notification that payment in
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full will be escrowed in a manner customary for such purposes, the Seller shall
notify the Purchaser in the Monthly Remittance Advice as provided in Section
3.02, and may request the release of any Mortgage Loan Documents from the
Purchaser in accordance with this Section 4.02 hereof. Upon full satisfaction of
the Mortgage Note, the Seller shall obtain discharge of the related Mortgage
Loan as of record within any related time limit required by applicable law.
If the Seller satisfies or releases a Mortgage without first having
obtained payment in full of the indebtedness secured by the Mortgage, upon
written demand of the Purchaser, the Seller shall repurchase the related
Mortgage Loan at the Repurchase Price by deposit thereof in the Custodial
Account within two (2) Business Days of receipt of such demand by the Purchaser.
Upon such repurchase, all funds maintained in the Escrow Account with respect to
such repurchased Mortgage Loan shall be transferred to the Seller. The Seller
shall maintain the Fidelity Bond and Errors and Omissions Insurance Policy as
provided for in Section 2.12 insuring the Seller against any loss it may sustain
with respect to any Mortgage Loan not satisfied in accordance with the
procedures set forth herein.
SECTION 4.03 SERVICING COMPENSATION. As consideration for servicing the
Mortgage Loans hereunder, the Seller shall withdraw the Servicing Fee with
respect to each Mortgage Loan from the Custodial Account pursuant to Section
2.05 hereof. Such Servicing Fee shall be payable monthly, computed on the basis
of the same principal amount and period in respect of which any related interest
payment on a Mortgage Loan is computed. The Servicing Fee shall be pro-rated
when servicing is for less than one month. The obligation of the Purchaser to
pay, and the Seller's right to withdraw, the Servicing Fee is limited to, and
the Servicing Fee is payable solely from, the interest portion (including
recoveries with respect to interest from Liquidation Proceeds, to the extent
permitted by Section 2.05), of such Monthly Payment collected by the Seller, or
as otherwise provided under Section 2.05.
Additional servicing compensation in the form of Ancillary Income shall be
retained by the Seller and shall not be required to be deposited in the
Custodial Account. The Seller shall be required to pay all expenses incurred by
it in connection with its servicing activities hereunder and shall not be
entitled to reimbursement thereof except as specifically provided for herein.
SECTION 4.04 ANNUAL STATEMENT AS TO COMPLIANCE. The Seller shall deliver
to the Purchaser, on or before March 31 each year beginning with March 31, 1998,
an Officer's Certificate, stating that (i) a review of the activities of the
Seller during the preceding calendar year and of performance under this
Agreement has been made under such officer's supervision, and (ii) the Seller
has complied in all material respects with the provisions of Article II and
Article IV, and (iii) to the best of such officer's knowledge, based on such
review, the Seller has fulfilled all its obligations under this Agreement
throughout such year or part thereof, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof and the action being taken by the
Seller to cure such default.
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SECTION 4.05 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SERVICING REPORT. On
or before March 31 of each year, beginning March 31, 1998, the Seller at its
expense shall cause a firm of independent public accountants (who may also
render other services to the Seller, or any affiliate thereof) which is a member
of the American Institute of Certified Public Accountants to furnish a statement
to the Purchaser to the effect that such firm has, as part of their examination
of the financial statements of the Seller performed tests embracing the records
and documents relating to mortgage loans serviced by the Seller in accordance
with the requirements of the Uniform Single Audit Program for Mortgage Bankers
and that their examination disclosed no exceptions that, in their opinion were
material, relating to mortgage loans serviced by the Seller.
SECTION 4.06 RIGHT TO EXAMINE SELLER RECORDS. The Purchaser, upon
reasonable notice, shall have the right to examine and audit any and all of the
books, records, or other information of the Seller, whether held by the Seller
or by another on its behalf, with respect to or concerning this Agreement or the
Mortgage Loans, during business hours or at such other times as may be
reasonable under applicable circumstances, upon reasonable advance notice.
ARTICLE V
SELLER TO COOPERATE
SECTION 5.01 PROVISION OF INFORMATION. During the term of this Agreement,
the Seller shall furnish to the Purchaser such periodic, special, or other
reports or information, whether or not provided for herein, as shall be
necessary, reasonable, or appropriate with respect to the Purchaser or the
purposes of this Agreement. All such reports or information shall be provided by
and in accordance with all reasonable instructions and directions which the
Purchaser may give.
The Seller shall execute and deliver all such instruments and take all
such action as the Purchaser may reasonably request from time to time, in order
to effectuate the purposes and to carry out the terms of this Agreement.
SECTION 5.02 FINANCIAL STATEMENTS; SERVICING FACILITIES. In connection
with disposition of Mortgage Loans, the Purchaser may make available to a
prospective purchaser audited financial statements of the Seller for the most
recently completed two (2) fiscal years for which such statements are available,
as well as a Consolidated Statement of Condition at the end of the last two (2)
fiscal years covered by any Consolidated Statement of Operations. If it has not
already done so, the Seller shall furnish promptly to the Purchaser or a
prospective purchaser copies of the statements specified above; provided,
however, that prior to furnishing such statements or information to any
prospective purchaser, the Seller may require such prospective purchaser to
execute a confidentiality agreement in form reasonably satisfactory to it.
The Seller shall make available to the Purchaser or any prospective
Purchaser a knowledgeable financial or accounting officer for the purpose of
answering questions with respect to recent developments affecting the Seller or
the financial statements of the Seller, and to permit
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any prospective purchaser to inspect the Seller's servicing facilities for the
purpose of satisfying such prospective purchaser that the Seller has the ability
to service the Mortgage Loans as provided in this Agreement.
ARTICLE VI
TERMINATION
SECTION 6.01 DAMAGES. The Purchaser shall have the right at any time to
seek and recover from the Seller any damages or losses suffered by it solely as
a result of any failure by the Seller to observe or perform any duties,
obligations, covenants or agreements herein contained.
SECTION 6.02 TERMINATION. The respective obligations and responsibilities
of the Seller shall terminate upon: (i) the later of the final payment or other
liquidation (or any advance with respect thereto) of the last Mortgage Loan
serviced by the Seller or the disposition of all REO Property serviced by the
Seller and the remittance of all funds due hereunder; or (ii) by mutual consent
of the Seller and the Purchaser in writing, unless earlier terminated pursuant
to this Agreement.
SECTION 6.03 TERMINATION WITHOUT CAUSE. The Purchaser may, at its sole
option, upon not less than thirty (30) days' prior written notice to the Seller,
terminate any rights the Seller may have hereunder with respect to any or all of
the Mortgage Loans, without cause, upon written notice, provided that the Seller
shall have an additional period of not more than sixty (60) days from and after
the date of said notice from the Purchaser within which to effect the related
transfer of servicing. Any such notice of termination shall be in writing and
delivered to the Seller as provided in Section 12.01 of this Agreement. In the
event of such termination, the Seller shall be entitled to a Termination Fee,
equal to 1.50% of the then current aggregate unpaid principal balance of the
related Mortgage Loans; provided, however, that no Termination Fee shall be
payable if the successor servicer is an Affiliate of the Seller.
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ARTICLE VII
BOOKS AND RECORDS
SECTION 7.01 POSSESSION OF SERVICING FILES. The contents of each Servicing
File are and shall be held in trust by the Seller for the benefit of the
Purchaser as the owner thereof. The Seller shall maintain in the Servicing File
a copy of the contents of each Mortgage File and the originals of the documents
in each Mortgage File not delivered to the Purchaser. The possession of the
Servicing File by the Seller is at the will of the Purchaser for the sole
purpose of servicing the related Mortgage Loan, pursuant to this Agreement, and
such retention and possession by the Seller is in its capacity as Seller only
and at the election of the Purchaser. The Seller shall release its custody of
the contents of any Servicing File only in accordance with written instructions
from the Purchaser or other termination of the Seller with respect to the
related Mortgage Loans, unless such release is required as incidental to the
Seller's servicing of the Mortgage Loans pursuant to this Agreement, or is in
connection with a repurchase of any Mortgage Loan pursuant to Section 8.03 of
the Purchase Agreement or Section 4.02 of this Agreement.
The Seller shall be responsible for maintaining, and shall maintain, a
complete set of books and records for each Mortgage Loan which shall be marked
clearly to reflect the ownership of each Mortgage Loan by the Purchaser. In
particular, the Seller shall maintain in its possession, available for
inspection by the Purchaser or its designee during normal business hours, and
shall deliver to the Purchaser or its designee upon reasonable notice, evidence
of compliance with all federal, state and local laws, rules and regulations,
including but not limited to documentation as to the method used in determining
the applicability of the provisions of the Flood Disaster Protection Act of
1973, as amended, to the Mortgaged Property, documentation evidencing insurance
coverage and periodic inspection reports as required by Section 2.13. To the
extent that original documents are not required for purposes of realization of
Liquidation Proceeds or Insurance Proceeds, documents maintained by the Seller
may be in the form of microfilm or microfiche.
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
SECTION 8.01 INDEMNIFICATION. The Seller agrees to indemnify and hold the
Purchaser harmless from any liability, claim, loss or damage (including, without
limitation, any reasonable legal fees, judgments or expenses relating to such
liability, claim, loss or damage, but excluding consequential, special,
exemplary, punitive and indirect damages ("Special Damages"), except for such
Special Damages which Purchaser is required by law to pay to a third party), to
the Purchaser directly or indirectly resulting from the Seller's failure to
observe and perform any or all of Seller's duties, obligations, covenants,
agreements, warranties or representations contained in this Agreement or the
Seller's failure to comply with all applicable requirements with respect to the
transfer of servicing rights as set forth herein.
The Seller shall notify the Purchaser as soon as reasonably possible if a
claim is made by a third party with respect to this Agreement.
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SECTION 8.02 LIMITATION ON LIABILITY OF SELLER AND OTHERS. Neither the
Seller nor any of the directors, officers, employees or agents of the Seller
shall be under any liability to the Purchaser for any action taken or for
refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgment, provided, however, that this provision
shall not protect the Seller or any such person against any breach of warranties
or representations made herein, or failure to perform its obligations in
material compliance with any standard of care set forth in this Agreement, or
any liability which would otherwise be imposed by reason of any breach of the
terms and conditions of this Agreement. The Seller and any director, officer,
employee or agent of the Seller may rely in good faith on any document of any
kind prima facie properly executed and submitted by any Person with respect to
any matter arising hereunder. The Seller shall not be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
duties to service the Mortgage Loans in accordance with this Agreement and which
in its opinion may involve it in any expense or liability, provided, however,
that the Seller may, with the prior written consent of the Purchaser, undertake
any such action which it may deem necessary or desirable in respect to this
Agreement and the rights and duties of the parties hereto. In such event, the
Seller shall be entitled to prompt reimbursement from the Purchaser of the
reasonable legal expenses and costs of such action.
SECTION 8.03 LIMITATION ON REGISTRATION AND ASSIGNMENT BY SELLER. The
Purchaser has entered into this Agreement with the Seller in reliance upon the
independent status of the Seller, and the representations as to the adequacy of
its servicing facilities, plant, personnel, records and procedures, its
integrity, reputation and financial standing, and the continuance thereof.
Therefore, the Seller shall not (i) assign this Agreement or the servicing
hereunder (other than to an affiliate of Seller) or (ii) delegate any
substantial part of its rights or duties hereunder without the prior written
consent of the Purchaser, which consent shall not be unreasonably withheld or
conditioned provided that (a) any delegation of such rights or duties shall not
release the Seller from its obligations hereunder and the Seller shall remain
responsible hereunder for all acts and omissions of any delegee as if such acts
or omissions were those of the Seller and (b) any such assignee or designee
shall satisfy the requirements for a successor or surviving Person set forth in
Section 8.05 and Section 8.06 hereof. The Seller shall notify the Purchaser in
writing at least 30 days prior to selling or otherwise disposing of all or
substantially all of its assets and receipt of such notice shall entitle the
Purchaser to terminate this Agreement except as set forth in Section 8.06
hereof.
The Seller shall not resign from the obligations and duties hereby imposed
on it except by mutual consent of the Seller and the Purchaser or upon the
determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Seller. Any such
determination permitting the resignation of the Seller shall be evidenced by an
Opinion of Counsel to such effect delivered to the Purchaser which Opinion of
Counsel shall be in form and substance acceptable to the Purchaser. No such
resignation shall become effective until a successor shall have assumed the
Seller's responsibilities and obligations hereunder in the manner provided in
Section 8.06.
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Without in any way limiting the generality of this Section 8.03, in the
event that the Seller either shall assign this Agreement or the servicing
responsibilities hereunder or delegate its duties hereunder or any portion
thereof without (i) satisfying the requirements set forth herein or (ii) the
prior written consent of the Purchaser, then the Purchaser shall have the right
to terminate this Agreement as set forth in Section 6.03, without any additional
payment of any penalty or damages and without any liability whatsoever to the
Seller (other than with respect to accrued but unpaid Servicing Fees and
Servicing Advances remaining unpaid) or any third party.
SECTION 8.04 ASSIGNMENT BY PURCHASER. The Purchaser shall have the right,
without the consent of the Seller, to assign, in whole or in part, its interest
under this Agreement with respect to some or all of the Mortgage Loans, and
designate any person to exercise any rights of the Purchaser hereunder, by
executing an Assignment and Assumption Agreement substantially in the form of
Exhibit G to the Purchase Agreement and the assignee or designee shall accede to
the rights and obligations hereunder of the Purchaser with respect to such
Mortgage Loans. All references to the Purchaser in this Agreement shall be
deemed to include its assignee or designee. Notwithstanding the foregoing, at
any one time there shall not be more than fifteen (15) separate Purchasers under
this Agreement.
SECTION 8.05 MERGER OR CONSOLIDATION OF THE SELLER. The Seller will keep
in full effect its existence, rights and franchises as a corporation under the
laws of the state of its incorporation except as permitted herein, and will
obtain and preserve its qualification to do business as a foreign corporation in
each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Agreement, or any of the
Mortgage Loans and to perform its duties under this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the Seller,
shall be the successor of the Seller hereunder, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding; provided, however, that the
successor or surviving Person shall be an institution whose deposits are insured
by FDIC or a company whose business includes the origination and servicing of
mortgage loans and shall satisfy the requirements of Section 8.06 with respect
to the qualifications of a successor to the Seller.
SECTION 8.06 SUCCESSOR TO THE SELLER. Prior to termination of Seller's
responsibilities and duties under this Agreement pursuant to Sections 2.16,
6.03, 8.03 or 11.01, the Purchaser shall (i) succeed to and assume all of the
Seller's responsibilities, rights, duties and obligations under this Agreement,
or (ii) appoint a successor having a tangible net worth of not less than
$30,000,000 and which shall succeed to all rights and assume all of the
responsibilities, duties and liabilities of the Seller under this Agreement
prior to the termination of Seller's responsibilities, duties and liabilities
under this Agreement. In connection with such appointment and assumption, the
Purchaser may make such arrangements for the compensation of such successor out
of payments on Mortgage Loans as it and such successor shall agree. In the event
that the Seller's duties, responsibilities and
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liabilities under this Agreement should be terminated pursuant to the
aforementioned sections, the Seller shall discharge such duties and
responsibilities during the period from the date it acquires knowledge of such
termination until the effective date thereof with the same degree of diligence
and prudence which it is obligated to exercise under this Agreement, and shall
take no action whatsoever that might impair or prejudice the rights or financial
condition of its successor. The resignation or removal of Seller pursuant to the
aforementioned Sections shall not become effective until a successor shall be
appointed pursuant to this Section and shall in no event relieve the Seller of
the representations, warranties and covenants made pursuant to and the remedies
available to the Purchaser with respect thereto.
Any successor appointed as provided herein shall execute, acknowledge and
deliver to the Seller and to the Purchaser, an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Seller, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Section 2.16, 6.03, 8.03 or 11.01
shall not affect any claims that the Purchaser may have against the Seller
arising prior to any such termination or resignation.
The Seller shall timely deliver to the successor the funds in the
Custodial Account and the Escrow Account and the Mortgage Files and related
documents and statements held by it hereunder and the Seller shall account for
all funds. The Seller shall execute and deliver such instruments and do such
other things all as may reasonably be required to more fully and definitely vest
and confirm in the successor all such rights, powers, duties, responsibilities,
obligations and liabilities of the Seller. The successor shall make arrangements
as it may deem appropriate to reimburse the Seller for amounts the Seller
actually expended pursuant to this Agreement which the successor is entitled to
retain hereunder and which would otherwise have been recovered by the Seller
pursuant to this Agreement but for the appointment of the successor servicer.
Upon a successor's acceptance of appointment as such, the Seller shall
notify by mail the Purchaser of such appointment.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
As of each Closing Date, the Purchaser warrants and represents to, and
covenants and agrees with, the Seller as follows:
SECTION 9.01 DUE ORGANIZATION AND AUTHORITY. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Maryland. The Purchaser has the full corporate power and
authority to execute and deliver this Agreement and to perform in accordance
herewith; the execution, delivery and performance of this Agreement by the
Purchaser and the consummation of the transactions contemplated hereby have been
duly and validly
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authorized; this Agreement evidences the valid, binding and enforceable
obligation of the Purchaser; and all requisite corporate action has been taken
by the Purchaser to make this Agreement valid and binding upon the Purchaser in
accordance with its terms;
SECTION 9.02 NO CONFLICTS. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Purchaser's charter or bylaws or any legal
restriction or any agreement or instrument to which the Purchaser is now a party
or by which it is bound, or constitute a default or result in an acceleration
under any of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Purchaser or its property is
subject;
SECTION 9.03 ABILITY TO PERFORM. The Purchaser does not believe, nor does
it have any reason or cause to believe, that it cannot perform each and every
covenant made by it in this Agreement.
SECTION 9.04 NO LITIGATION PENDING. There is no action, suit, proceeding
or investigation pending or threatened against the Purchaser, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Purchaser, or in
any material impairment of the right or ability of the Purchaser to carry on its
business substantially as now conducted, or in any material liability on the
part of the Purchaser, or which would draw into question the validity of this
Agreement or of any action taken or to be taken in connection with the
obligations of the Purchaser contemplated herein.
SECTION 9.05 NO CONSENT REQUIRED. No consent, approval, authorization or
order of any court or governmental agency or body is required for the execution,
delivery and performance by the Purchaser of, or compliance by the Purchaser
with, this Agreement as evidenced by the consummation of the transactions
contemplated by this Agreement, or if required, such approval has been obtained
prior to the Closing Date.
SECTION 9.06 ASSISTANCE. To the extent reasonably possible, the Purchaser
shall cooperate with and assist the Seller as requested by the Seller, in
carrying out Seller's covenants, agreements, duties and responsibilities under
this Agreement and in connection therewith shall execute and deliver all such
papers, documents and instruments as nay be necessary and appropriate in
furtherance thereof.
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ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER
As of each Closing Date, the Seller warrants and represents to, and
covenants and agrees with, the Purchaser as follows:
SECTION 10.01 DUE ORGANIZATION AND AUTHORITY. The Seller is a federal
savings bank duly organized, validly existing and in good standing under the
laws of the United States and is licensed, qualified and in good standing in
each state where a Mortgaged Property is located if the laws of such state
require licensing or qualification in order to conduct business of the type
conducted by the Seller, and in any event the Seller is in compliance with the
laws of any such state to the extent necessary to ensure the enforceability of
the related Mortgage Loan in accordance with the terms of this Agreement; the
Seller has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery and
performance of this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Seller and the consummation of the
transactions contemplated hereby have been duly and validly authorized; this
Agreement evidences the valid, legal, binding and enforceable obligation of the
Seller subject to bankruptcy laws and other similar laws of general application
affecting rights of creditors and subject to the application of the rules of
equity, including those respecting the availability of specific performance,
none of which will materially interfere with the realization of the benefits
provided thereunder, regardless of whether such enforcement is sought in a
proceeding in equity or at law; and all requisite corporate action has been
taken by the Seller to make this Agreement valid and binding upon the Seller in
accordance with its terms.
SECTION 10.02 ORDINARY COURSE OF BUSINESS. The consummation of the
transactions contemplated by this Agreement are in the ordinary course of
business of the Seller;
SECTION 10.03 NO CONFLICTS. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Seller's charter or bylaws or any legal
restriction or any agreement or instrument to which the Seller is now a party or
by which it is bound, or constitute a default or result in an acceleration under
any of the foregoing, or result in the violation of any law, rule, regulation,
order, judgment or decree to which the Seller or its property is subject, or
impair the ability of the Purchaser to realize on the Mortgage Loans, or impair
the value of the Mortgage Loans, or impair the ability of the Purchaser to
realize the full amount of any mortgage insurance benefits accruing pursuant to
this Agreement.
SECTION 10.04 ABILITY TO SERVICE. The Seller is duly qualified, licensed,
registered and otherwise authorized under all applicable federal, state and
local laws and regulations, meets the minimum capital requirements set forth by
OTS or the FDIC, and is in good standing to enforce, originate, sell mortgage
loans, and service mortgage loans in the jurisdiction wherein the Mortgaged
Properties are located.
SECTION 10.05 ABILITY TO PERFORM. The Seller does not believe, nor does it
have any reason to believe, that it cannot perform each and every covenant
contained in this Agreement.
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SECTION 10.06 NO LITIGATION PENDING. There is no action, suit, proceeding
or investigation pending or threatened against the Seller, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Seller, or in any
material impairment of the right or ability of the Seller to carry on its
business substantially as now conducted, or in any material liability on the
part of the Seller, or which would draw into question the validity of this
Agreement or the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Seller contemplated herein, or which
would be likely to impair materially the ability of the Seller to perform under
the terms of this Agreement.
SECTION 10.07 NO CONSENT REQUIRED. No consent, approval, authorization or
order of any court or governmental agency or body is required for the execution,
delivery and performance by the Seller of or compliance by the Seller with this
Agreement or the servicing of the Mortgage Loans as evidenced by the
consummation of the transactions contemplated by this Agreement, or if required,
such approval has been obtained.
SECTION 10.08 NO UNTRUE INFORMATION. Neither this Agreement nor any
statement, tape, diskette, form, report or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of fact or omits to state a
fact necessary to make the statements contained therein not misleading.
SECTION 10.09 REASONABLE SERVICING FEE. The Seller acknowledges and agrees
that the Servicing Fee represents reasonable compensation for performing such
services and that the entire Servicing Fee shall be treated by the Seller, for
accounting and tax purposes, as compensation for the servicing and
administration of the Mortgage Loans pursuant to this Agreement.
SECTION 10.10 FINANCIAL STATEMENTS. The Servicer has delivered to the
Purchaser financial statements as to its last two complete fiscal years. All
such financial statements fairly present the pertinent results of operations and
changes in financial position for each of such periods and the financial
position at the end of each such period of the Servicer and its subsidiaries and
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as set forth in the
notes thereto. There has been no change in the business, operations, financial
condition, properties or assets of the Servicer since the date of the Servicer's
financial statements that would have a material adverse effect on its ability to
perform its obligations under this Agreement.
SECTION 10.11 CONFLICT OF INTEREST. The Seller agrees that it shall
service the Mortgage Loans hereunder solely with a view toward the interests of
the Purchaser, and without regard to the interests of the Seller or its other
affiliates.
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ARTICLE XI
DEFAULT
SECTION 11.01 EVENTS OF DEFAULT. The following shall constitute an Event
of Default under this Agreement on the part of the Seller:
(a) any failure by the Seller to remit to the Purchaser any payment
required to be made under the terms of this Agreement which continues unremedied
for a period of five (5) Business Days after the date upon which written notice
of such failure, requiring the same to be remedied, shall have been given to the
Seller by the Purchaser; or
(b) the failure by the Seller duly to observe or perform in any material
respect any other of the covenants or agreements on the part of the Seller set
forth in this Agreement which continues unremedied for a period of thirty (30)
days (except that such number of days shall be fifteen (15) in the case of a
failure to pay any premium for any insurance policy required to be maintained
under this Agreement) after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the Seller by the
Purchaser; or
(c) a decree or order of a court or agency or supervisory authority having
jurisdiction for the appointment of a conservator or receiver or liquidator in
any insolvency, bankruptcy, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the Seller and such decree or order
shall have remained in force undischarged or unstayed for a period of sixty (60)
days; or
(d) the Seller shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, bankruptcy, readjustment of debt,
marshaling of assets and liabilities or similar proceedings of or relating to
the Seller or of or relating to all or substantially all of its property; or
(e) the Seller shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its obligations; or
(f) the Seller, without the consent of the Purchaser, attempts to assign
this Agreement or the servicing responsibilities hereunder or to delegate any
substantial part of its duties hereunder or any portion thereof; or
(g) the Seller fails to maintain its license to do business or service
commercial mortgage loans in any jurisdiction where the Mortgaged Properties are
located and such failure results in a material adverse effect on the Mortgage
Loans, the servicing of the Mortgage Loans, or the Purchaser's rights with
respect to the Mortgage Loans.
In each and every such case, so long as an Event of Default shall not have
been remedied, in addition to whatsoever rights the Purchaser may have at law or
equity to damages, including
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injunctive relief and specific performance, the Purchaser, by notice in writing
to the Seller, may terminate without compensation or reimbursement (other than
Servicing Fees previously earned but remaining unpaid and Servicing Advances
remaining unreimbursed) all the rights and obligations of the Seller under this
Agreement and in and to the Mortgage Loans and the proceeds thereof.
Upon receipt by the Seller of such written notice, all authority and power
of the Seller under this Agreement, whether with respect to the Mortgage Loans
or otherwise, shall pass to and be vested in the successor appointed pursuant to
Section 8.06. Upon written request from the Purchaser, the Seller shall prepare,
execute and deliver any and all documents and other instruments reasonably
requested by the Purchaser, place in such successor's possession all Mortgage
Files (to the extent not properly delivered to the Purchaser by the Seller
previously), and do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at the Seller's sole expense. The Seller agrees
to reasonably cooperate with the Purchaser and such successor in effecting the
termination of the Seller's responsibilities and rights hereunder, including,
without limitation, the transfer to such successor for administration by it of
all cash amounts which shall at the time be credited by the Seller to the
Custodial Account or Escrow Account or thereafter received with respect to the
Mortgage Loans, subject to the Seller's right to be paid for unreimbursed
Servicing Advances and earned and unpaid Servicing Fees.
SECTION 11.02 WAIVER OF DEFAULTS. The Purchaser may waive any default by
the Seller in the performance of its obligations hereunder and its consequences.
Upon any such waiver of a past default, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been remedied for
every purpose of this Agreement. No such waiver shall extend to any subsequent
or other default or impair any right consequent thereon except to the extent
expressly so waived.
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01 NOTICES. All notices, requests, demands and other
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given upon the
delivery or mailing thereof, as the case may be, sent by registered or certified
mail, return receipt requested:
(a) If to Purchaser to:
People's Preferred Capital Corporation
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
31
<PAGE>
(b) If to Seller to:
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
Attention: Secretary
SECTION 12.02 WAIVERS. Either the Seller or the Purchaser may upon consent
of all parties, by written notice to the others:
(a) Waive compliance with any of the terms, conditions or covenants
required to be complied with by the others hereunder; and
(b) Waive or modify performance of any of the obligations of the others
hereunder.
The waiver by any party hereto of a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any other subsequent breach.
SECTION 12.03 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Purchase
Agreement constitute the entire agreement between the parties with respect to
servicing of the Mortgage Loans. This Agreement may be amended and any provision
hereof waived, but, only in writing signed by the party against whom such
enforcement is sought.
SECTION 12.04 EXECUTION; BINDING EFFECT. This Agreement may be executed in
one or more counterparts and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed to be an
original; such counterparts, together, shall constitute one and the same
agreement. Subject to Sections 8.03 and 8.04, this Agreement shall inure to the
benefit of and be binding upon the Seller and the Purchaser and their respective
successors and assigns.
SECTION 12.05 HEADINGS. Headings of the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
SECTION 12.06 APPLICABLE LAW. This Agreement shall be construed in
accordance with the laws of the State of California and the obligations, rights
and remedies hereunder shall be determined in accordance with the substantive
laws of the State of California (without regard to conflicts of laws
principles), except to the extent preempted by Federal law.
SECTION 12.07 RELATIONSHIP OF PARTIES. Nothing herein contained shall be
deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Seller shall be rendered by it
as an independent contractor and not as an agent of the Purchaser. The Seller
shall have full control of all of its acts, doings, proceedings, relating to or
requisite in connection with the discharge of its duties and responsibilities
under this Agreement.
32
<PAGE>
SECTION 12.08 SEVERABILITY OF PROVISIONS. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
SECTION 12.09 EXHIBITS. The exhibits to this Agreement are hereby
incorporated and made a part hereof and are integral parts of this Agreement.
33
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
PEOPLE'S PREFERRED CAPITAL CORPORATION
(the Purchaser)
/s/ J. Michael Holmes
By:----------------------------
J. Michael Holmes
Name:--------------------------
Title: Executive Vice President/
--------------------------
Chief Financial Officer
--------------------------
PEOPLE'S BANK OF CALIFORNIA
(the Seller)
/s/ J. Michael Holmes
By:----------------------------
J. Michael Holmes
Name:--------------------------
Title: Executive Vice President/
-------------------------
Chief Financial Officer
-------------------------
/s/ William W. Flader
By:----------------------------
William W. Flader
Name:--------------------------
Title: Executive Vice President
-------------------------
34
<PAGE>
EXHIBIT A
MONTHLY REMITTANCE ADVICE
<PAGE>
EXHIBIT B
CUSTODIAL ACCOUNT CERTIFICATION
____________, 1997
_________________ hereby certifies that it has established the account
described below as a Custodial Account pursuant to Section 2.04 of the
Commercial Servicing Agreement, dated as of ______, 1997.
Title of Account: "People's Bank of California, in trust for People's Preferred
Capital Corporation."
Account Number: ___________________________________
Address of office or branch of the Seller at which Account is maintained:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
PEOPLE'S BANK OF CALIFORNIA
By:________________________________
Name:______________________________
Title:_____________________________
<PAGE>
EXHIBIT C
CUSTODIAL ACCOUNT LETTER AGREEMENT
______________, 1997
To:
--------------------
--------------------
--------------------
(the "Depository")
As Seller under the Commercial Servicing Agreement, dated as of ______,
1997, (the "Agreement"), we hereby authorize and request you to establish an
account, as a Custodial Account pursuant to Section 2.04 of the Agreement, to be
designated as "People's Bank of California, in trust for People's Preferred
Capital Corporation." All deposits in the account shall be subject to withdrawal
therefrom by order signed by the Seller. You may refuse any deposit which would
result in violation of the requirement that the account be fully insured as
described below. This letter is submitted to you in duplicate. Please execute
and return one original to us.
PEOPLE'S BANK OF CALIFORNIA
By:______________________________
Name:____________________________
Title:___________________________
The undersigned, as Depository, hereby certifies that the above described
account has been established under Account Number ___________, at the office of
the Depository indicated above, and agrees to honor withdrawals on such account
as provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
---------------------------------
Depository
By:______________________________
Name:____________________________
Title:___________________________
Date:____________________________
<PAGE>
EXHIBIT D
ESCROW ACCOUNT CERTIFICATION
____________, 1997
______________________________hereby certifies that it has established
the account described below as an Escrow Account pursuant to Section 2.06 of
the Commercial Servicing Agreement, dated as of ________, 1997.
Title of Account: "People's Bank of California in trust for People's Preferred
Capital Corporation."
Account Number: _____________________________
Address of office or branch
of the Seller at which
Account is maintained:
------------------------------
------------------------------
------------------------------
------------------------------
PEOPLE'S BANK OF CALIFORNIA
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
EXHIBIT E
ESCROW ACCOUNT LETTER AGREEMENT
______________, 1997
To:
--------------------------
--------------------------
--------------------------
(the "Depository")
As Seller under the Commercial Servicing Agreement, dated as of
____________, 1997 (the "Agreement"), we hereby authorize and request you to
establish an account, as an Escrow Account pursuant to Section 2.06 of the
Agreement, to be designated as "People's Bank of California in trust for the
People's Preferred Capital Corporation." All deposits in the account shall be
subject to withdrawal therefrom by order signed by the Seller. You may refuse
any deposit which would result in violation of the requirement that the
account be fully insured as described below. This letter is submitted to you
in duplicate. Please execute and return one original to us.
PEOPLE'S BANK OF CALIFORNIA
By: _____________________________
Name: ___________________________
Title: __________________________
Date:____________________________
The undersigned, as Depository, hereby certifies that the above described
account has been established under Account Number _______, at the office of the
Depository indicated above, and agrees to honor withdrawals on such account as
provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
---------------------------------
Depository
By: _____________________________
Name: ___________________________
Title: __________________________
Date:____________________________
<PAGE>
Exhibit 12
Statement of Computation of Earnings to
Fixed Charges and Preferred Stock Dividends
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------- 6/19/97
1999 1998 12/31/98 12/31/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 2,555 $ 2,679 $ 5,250 $ 1,367
Fixed Charges
-------- -------- -------- --------
Advisory Fees 100 100 200 50
-------- -------- -------- --------
Earnings before fixed charges $ 2,655 $ 2,779 $ 5,450 $ 1,417
======== ======== ======== ========
Fixed charges as above 100 100 200 50
Preferred stock dividends 1,738 1,738 3,476 859
-------- -------- -------- --------
Fixed charges including preferred
stock dividends $ 1,838 $ 1,838 $ 3,676 $ 909
======== ======== ======== ========
Ratio of earnings to fixed charges
and preferred stock dividend
requirements 1.44 1.51 1.48 1.56
======== ======== ======== ========
</TABLE>
<PAGE>
Exhibit 23.(a)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
People's Preferred Capital Corporation:
We consent to the use of our report and to the reference to our firm under the
heading "Experts" in the registration statement.
KPMG LLP
Los Angeles, California
August 9, 1999
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
People's Bank of California:
We consent to the inclusion of our report dated January 25, 1999, with
respect to the consolidated statements of financial condition of People's
Bank of California as of December 31, 1998 and 1997, and the related
consolidated statements of operations, other comprehensive earnings (loss),
changes in stockholder's equity, and cash flows for the years in the
three-year period ended December 31, 1998, which report appears in the
Preliminary Offering Circular of People's Bank of California dated August 9,
1999, and to the reference to our firm under the heading "Experts" in the
Preliminary Offering Circular.
KPMG LLP
Los Angeles, California
August 6, 1999
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
People's Bank of California:
We consent to the inclusion of our report dated January 25, 1999, with
respect to the consolidated statements of financial condition of People's
Bank of California as of December 31, 1998 and 1997, and the related
consolidated statements of operations, other comprehensive earnings (loss),
changes in stockholder's equity, and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in Annex I of
the Preliminary Offering Circular to Form S-11 of People's Preferred Capital
Corporation dated August 9, 1999, and to the reference to our firm under the
heading "Experts" in Annex I of the Preliminary Offering Circular.
KPMG LLP
Los Angeles, California
August 6, 1999
