<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
REGISTRATION NO. 333-48397
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
PBOC HOLDINGS, INC.
(Exact name of registrant as specified in its articles of incorporation)
<TABLE>
<S> <C> <C>
DELAWARE 6711 33-0220233
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
5900 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
(213) 938-6300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
J. MICHAEL HOLMES
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
PBOC HOLDINGS, INC.
5900 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
(213) 938-6300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
WITH A COPY TO:
<TABLE>
<S> <C> <C>
NORMAN B. ANTIN, ESQ. STANLEY F. FARRAR, ESQ.
JEFFREY D. HAAS, ESQ. SULLIVAN & CROMWELL
ELIAS, MATZ, TIERNAN & HERRICK L.L.P. AND 444 SOUTH FLOWER STREET
734 15TH STREET, N.W., 12TH FLOOR LOS ANGELES, CALIFORNIA 90071
WASHINGTON, D.C. 20005
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
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 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. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE AS MAY
BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 24, 1998
PROSPECTUS
12,666,667 SHARES
[LOGO]
PBOC HOLDINGS, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
---------------------
Of the 12,666,667 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby, 8,866,667 shares are being issued and sold by
PBOC Holdings, Inc. (the "Company") and 3,800,000 shares are being sold by the
current stockholders of the Company (the "Selling Stockholders") (collectively,
the "Offering"). The Company will not receive any part of the proceeds from the
sale of shares by the Selling Stockholders. See "Principal and Selling
Stockholders."
Prior to the Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $13.00 and $15.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price.
THE COMPANY HAS APPLIED TO HAVE THE COMMON STOCK QUOTED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "PBOC."
SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER DEBT
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS
ASSOCIATION INSURANCE FUND, ANY
GOVERNMENTAL AGENCY OR OTHERWISE.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE DISCOUNTS PROCEEDS TO
TO AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
<S> <C> <C> <C> <C>
Per Share.................................. $ $ $ $
Total(3)................................... $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company and the Selling
Stockholders estimated at $1.5 million. The Company has agreed to pay
substantially all of the Offering expenses of the Selling Stockholders,
other than the Underwriting Discounts and Commissions. A significant portion
of the net proceeds to the Company will be used to pay accumulated and
unpaid dividends to the Selling Stockholders, repurchase senior notes held
by a Selling Stockholder and to make other payments to insiders of the
Company. See "Use of Proceeds."
(3) The Company and the Selling Stockholders have granted the Underwriters an
option for 30 days to purchase up to an additional 1,900,000 shares of
Common Stock, on the same terms and conditions as set forth above, solely to
cover over-allotments, if any. If such option is exercised in full, the
Price to Public, Underwriting Discounts and Commissions, Proceeds to Company
and Proceeds to Selling Stockholders will be $ , $ ,
$ and $ , respectively.
------------------------
The shares of Common Stock are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that delivery of
the shares of Common Stock will be made on or about , 1998 against payment
therefor in immediately available funds.
--------------------------
SANDLER O'NEILL & PARTNERS, L.P.
---------------
The date of this Prospectus is , 1998
<PAGE>
PBOC HOLDINGS, INC.
CORPORATE OFFICES OF THE COMPANY AND THE BANK
5900 WILSHIRE BOULEVARD
LOS ANGELES, CA 90036
Map of California. Box showing a blow-up of the regions containing Ventura,
Los Angeles and Orange Counties with stars representing the locations of the
Bank's branches.
The Bank operates 19 offices in Los Angeles, Ventura and Orange Counties.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE ACCOMPANYING
NOTES, APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (I) ASSUMES THAT
THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED, (II) REFLECTS A
32 FOR 1 SPLIT OF THE COMPANY'S COMMON STOCK, WHICH WILL BE EFFECTED IN THE FORM
OF A COMMON STOCK DIVIDEND ISSUED TO ALL OF THE COMPANY'S STOCKHOLDERS
IMMEDIATELY PRIOR TO THE OFFERING, AND (III) REFLECTS THE CONVERSION OF THE
COMPANY'S OUTSTANDING SHARES OF PREFERRED STOCK INTO SHARES OF COMMON STOCK,
WHICH WILL BE EFFECTED IN CONNECTION WITH THE OFFERING. UNLESS THE CONTEXT
OTHERWISE REQUIRES, REFERENCES HEREIN TO THE COMPANY INCLUDE PEOPLE'S BANK OF
CALIFORNIA (THE "BANK") AND ITS OTHER SUBSIDIARIES.
THE COMPANY
GENERAL. The Company is a Delaware corporation which was organized in 1987
to acquire 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 Bank is a federally chartered savings bank which was originally
organized in 1887 under California law and conducts business from its executive
offices located in Los Angeles, California and 19 full-service branch offices
located primarily in Los Angeles County as well as Orange and Ventura Counties
in Southern California. In addition, the Company currently operates 40 automated
teller machines ("ATMs"), 18 of which are in stand-alone facilities, and nine
automated loan machines within Southern California. As of June 30, 1997, after
giving effect to the consolidation activity in California, the Bank ranked
seventh in terms of thrift deposit market share in Los Angeles, Orange and
Ventura Counties. At December 31, 1997, the Company had total assets of $2.2
billion, net loans receivable of $1.5 billion, total deposits of $1.3 billion
and total stockholders' equity of $79.6 million.
OWNERSHIP STRUCTURE. All of the capital stock of the Company is currently
owned by (i) the Trustees of the Estate of Bernice Pauahi Bishop, also known as
Kamehameha Schools Bernice Pauahi Bishop Estate (the "Bishop Estate"), a
charitable educational trust established under Hawaii law, (ii) 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 "Selling Stockholders"). In connection
with the Offering, all of the outstanding shares of preferred stock of the
Company which are owned by the Selling Stockholders will be converted into
8,527,473 shares of Common Stock, which takes into consideration the Company's
32:1 stock split. In addition, the Selling Stockholders are selling an aggregate
of 3,800,000 shares of Common Stock in the Offering. Consequently, upon
consummation of the Offering and giving effect to the foregoing actions, the
Bishop Estate, BIL Securities and Arbur will own 24.97%, 10.03% and 3.34%,
respectively, of the Common Stock outstanding. Such continuing ownership of the
Common Stock, coupled with provisions which are contained in the 1998
Stockholders' Agreement (as defined herein) which permit the Selling
Stockholders to nominate up to three of the seven directors of the Company so
long as they are "Material Stockholders" (as defined herein), will permit the
Selling Stockholders to continue to influence the election of directors, and
thereby the policies of the Company and its subsidiaries. See "Risk
Factors--Control of the Company by the Selling Stockholders," "The Stockholders'
Agreement" and "Principal and Selling Stockholders."
The Bishop Estate is one of the largest private landowners in the state of
Hawaii. Brierley Investments Limited is a publicly held investment corporation
which is traded on the New Zealand and Australian stock exchanges. At December
31, 1997, BIL Securities had approximately $5.2 billion in total assets, $2.6
billion in total liabilities and $2.6 billion in total equity (all of which
amounts have been converted into U.S. dollars). Arbur is a Delaware corporation
which is wholly owned by William E. Simon, the former U.S. Secretary of the
Treasury, and his children.
THE GOODWILL LITIGATION. In connection with the Company'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
1
<PAGE>
goodwill which was recorded by the Bank under generally accepted accounting
principles ("GAAP"). In August 1989, Congress enacted the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") which provided, among
other things, that savings institutions such as the Bank were no longer
permitted to include goodwill in their regulatory capital (subject to a gradual
phaseout which expired on December 31, 1994). Consequently, the Bank was
required to write-off its goodwill (subject to the phaseout), 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 Company, the Bank and certain current and former
stockholders of the Company have sued the U.S. Government with respect to the
required write-off of its Capital Credit and supervisory goodwill in a lawsuit
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. Although the Company and the Bank have conducted preliminary reviews of the
damages allegedly suffered by the Company and the Bank, no conclusive
determination has been made regarding the amount or type of such damages. In
connection with the Offering, the Company, the Bank and each of the Selling
Stockholders will enter into a Shareholder Rights Agreement whereby each Selling
Stockholder will be entitled to receive one Contingent Goodwill Participation
Right ("Right") for each share of Common Stock held by the Selling Stockholder.
Each Right entitles such Selling Stockholder to receive 0.0009645% of the
Litigation Recovery (as defined herein), or 95% of the Litigation Recovery by
all Selling Stockholders on an aggregate basis. As defined herein, the
Litigation Recovery is the amount, if any, recovered by the Company 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 the Company and/or the
Bank. For additional information, see "Agreement With Respect to Potential
Goodwill Lawsuit Recovery."
1992 AND 1995 RECAPITALIZATIONS. In July and August 1992, the Company
issued $48.0 million of senior notes and, after payment of the transaction fees
and expenses, contributed $43.5 million of the net proceeds from such sale to
the Bank (the "1992 recapitalization"). As a result of the 1992
recapitalization, the Bank was able to satisfy its minimum regulatory capital
requirements. Notwithstanding the 1992 recapitalization, due to the required
write-off of the Bank's Capital Credit and supervisory goodwill the Bank's
capital was not sufficient to absorb the significant credit losses which the
Bank continued to recognize. Such credit losses were due in large part to the
continued deterioration in the Southern California economy which had begun with
the national recession at the start of the decade and the decline in market
values of real estate resulting in part from the Northridge earthquake of 1994.
As a result, the Bank experienced dramatically increased levels of
non-performing assets and troubled debt restructurings and, therefore, a loss of
interest income, increased operating expenses and substantially higher
provisions for losses. As a result of the foregoing, during 1994, the Bank again
fell out of compliance with its regulatory capital requirements. In June 1995,
the senior notes issued in the 1992 recapitalization were contributed to the
capital of the Bank and the Selling Stockholders invested $10.0 million in new
senior notes and $48.5 million in preferred stock of the Company, substantially
all of the proceeds of which were also contributed to the Bank in order to
satisfy the Bank's minimum regulatory capital requirements (the "1995
recapitalization"). In connection with the consummation of the Offering, the
senior notes of the Company will be prepaid, and the various outstanding series
of preferred stock of the Company will be exchanged for Common Stock. See "Use
of Proceeds," "Capitalization" and "The Stockholders' Agreement."
NEW MANAGEMENT AND BUSINESS STRATEGY. 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 new management team includes Rudolf P. Guenzel, President
and Chief Executive Officer, J. Michael Holmes, Executive Vice President and
Chief Financial Officer, and William W. Flader, Executive Vice President, all of
whom worked together at BancFlorida Financial Corp. ("BancFlorida"), and each of
whom has more than 20 years experience in the banking
2
<PAGE>
industry. For a more complete description of the experience and background of
the new management team, see "Management."
The Company under its new management has changed the name of the Company
from SoCal Holdings, Inc. to PBOC Holdings, Inc. and the name of the Bank from
Southern California Federal Savings and Loan Association to People's Bank of
California, in each case to reflect the new emphasis placed on providing
customers with full banking services. In its efforts to rehabilitate the Bank,
the new management team adopted a business strategy designed to reduce problem
assets, increase net interest income, reduce operating expenses and cost of
funds and maximize profitability while limiting interest rate and credit risk.
Since the 1995 recapitalization, management's attention has been focused on the
foregoing initiatives. As the Company has improved its problem assets and with
the Company's return to profitability in 1996 and 1997, the Bank has been
increasingly redirecting its emphasis to its core lending functions. New
management's business strategy is based on the following key elements:
- REDUCE NON-PERFORMING ASSETS. The Bank has organized its loan review
function through the implementation of an internal asset review system.
The Bank created an internal asset review committee and established loan
review and special assets departments in order to focus on the early
identification of potential problem assets and the administration,
rehabilitation or liquidation of the Bank's non-performing assets. As a
result of the foregoing and improved economic conditions in California,
non-performing assets and troubled debt restructurings have declined from
$78.7 million or 4.6% of total assets at December 31, 1994 to $33.1
million or 1.5% of total assets at December 31, 1997. Decreases in the
Bank's non-performing assets have resulted in reductions in provisions for
losses, which have contributed to the Company's improved operating
results. See "Business--Asset Quality--Non-Performing Assets" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations."
- IMPROVE OPERATING EFFICIENCY. Since the change in the Company's
management, the Bank has emphasized improving the Bank's operating
efficiency. New management centralized the Bank's underwriting functions
which, in the opinion of management, has allowed the Bank to underwrite
and approve loans faster and more efficiently. The Bank has also
significantly reduced its operating expenses through the consolidation of
certain of its operations and, to a lesser extent, staff reductions. From
December 31, 1994 through December 31, 1997, after giving effect to the
addition of new commercial lending personnel, the Bank experienced a net
reduction of 47 employees (which included a net increase of 10 employees
during 1997). The ratio of the Company's operating expenses to average
total assets has steadily decreased, from 2.14% during the year ended
December 31, 1994 to 1.60% and 1.55% during the years ended December 31,
1996 and 1997, respectively. Despite the Bank's recent cost-cutting
efforts, management believes that it has significant operating leverage
and, therefore, continued incremental growth will not cause the Company's
operating expenses to increase by a corresponding amount. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations."
- REDUCE FUNDING COSTS. The Bank has reduced its overall cost of funds by
promoting retail deposit growth (particularly transaction accounts),
allowing its out-of-market, institutional jumbo certificates of deposit to
run off as they mature and replacing higher cost, short-term FHLB advances
with lower cost, intermediate-term reverse repurchase agreements and FHLB
advances. Prior to 1995, the Bank relied to a large extent on wholesale
sources of funds, such as out-of-market, institutional jumbo certificates
of deposits and FHLB advances, which resulted in a high cost of funds and
reduced margins. As a result of the foregoing changes, the Bank's
transactional accounts (passbook, NOW and money market accounts) have
increased from $183.2 million or 13.2% of total deposits at December 31,
1994 to $333.8 million or 26.4% of total deposits at December 31, 1997.
Over such period, out-of-market, institutional jumbo certificates of
deposit declined from $122.2 million to $2.5 million. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "Business--Sources of Funds."
3
<PAGE>
- REVISE INVESTMENT POLICY. Since June 1995, the Bank has been replacing
relatively illiquid securities with more liquid U.S. Government agency
obligations and U.S. Government agency mortgage-backed securities. The
securities disposed of included collateralized mortgage obligations and
other mortgage derivative products, which did not qualify as collateral
with respect to borrowings or other obligations of the Bank, while the
U.S. Government agency obligations and U.S. Government agency
mortgage-backed securities increase the credit quality of the Bank's
assets, require less capital under risk-based regulatory capital
requirements and may be used to collateralize borrowings or other
obligations of the Bank. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Changes in Financial
Condition--Securities." At December 31, 1997, the Bank held $428.1 million
of mortgage-backed securities, $182.2 million of which were secured by
loans with adjustable rates, and $139.7 million of U.S. Government agency
obligations. The adjustable-rate nature of the loans underlying the Bank's
mortgage-backed securities has assisted the Bank in managing its interest
rate risk exposure. See "Business--Investment Activities."
- REVISE INTEREST RATE RISK POLICY. Management's strategy is to match asset
and liability balances within maturity categories to limit the Bank's
exposure to earnings variations as well as variations in the value of
assets and liabilities as interest rates change over time. The Bank under
prior management hedged its interest rate exposure externally through the
use of various interest rate contracts, such as interest rate swaps,
corridors, caps and floors. The Bank's current strategy is to hedge
internally through the use of core transaction deposit accounts, FHLB
advances and reverse repurchase agreements, together with an emphasis on
investing in shorter-term or adjustable-rate assets. At December 31, 1997,
the Company had $1.6 billion in assets maturing or repricing within one
year and $1.6 billion in liabilities maturing or repricing within one
year. As of such date, the Company's one-year interest rate sensitivity
gap as a percent of total assets amounted to (0.10)%. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Asset and Liability Management."
- EXPAND COMMERCIAL BUSINESS AND CONSUMER LENDING. Since June 1995, the Bank
has hired approximately 20 individuals with significant expertise in
commercial and consumer lending. The increase in staffing has enabled the
Bank to increase its commercial business and consumer loan originations.
During the years ended December 31, 1997 and 1996, the Bank originated in
the aggregate $32.6 million and $9.8 million of commercial business and
consumer loans (including loans secured by deposits), which amounted to
20.3% and 15.8% of total loan originations, respectively. Management
intends to continue to place increased emphasis on building these
portfolios. Commercial business and consumer loans generally have shorter
terms and higher interest rates than single-family residential loans but
are generally considered to have a higher level of credit risk. See "Risk
Factors--Multi-Family Residential, Commercial Real Estate, Commercial
Business and Consumer Lending" and "Business--Lending Activities."
- INCREASE INTEREST-EARNING ASSETS. The Bank has and will continue to pursue
a policy of utilizing its existing infrastructure to grow its loan and
securities portfolios as well as its retail franchise. During 1997, the
Bank established People's Preferred Capital Corporation ("PPCCP"), an
operating subsidiary of the Bank and a real estate investment trust
("REIT") for federal income tax purposes under the Internal Revenue Code
of 1986, as amended (the "Code"), to acquire, hold and manage primarily
mortgage assets. In connection therewith, the Bank leveraged the $35.7
million of net proceeds generated from such transaction through wholesale
purchases 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. The initial
weighted average interest rate on the loans at the time of purchase was
6.16%. It is anticipated that these loans will adjust to a weighted
average interest rate and a weighted average yield of approximately 7.50%
and 6.90% by June 1998 and 7.80% and 7.20% by December 1998, respectively.
The weighted average rate paid on such
4
<PAGE>
FHLB advances was 5.85%. The actual schedule of this projected increase in
the weighted average interest rate and yield will be subject to the
one-year Treasury index and loan prepayments during 1998. Such loan
purchases significantly increased the size of the Bank's residential
mortgage portfolio. Similarly, the Company expects initially to leverage
the proceeds raised from the Offering through additional wholesale
purchases of primarily single-family residential loans and investment and
U.S. Government agency obligations and U.S. Government agency
mortgage-backed securities which are expected to be funded by increases in
deposits, short- to intermediate-term reverse repurchase agreements and
FHLB advances, consistent with management's asset and liability management
strategies. 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 the accelerated utilization of
existing net operating loss carryforwards ("NOLs"). See "Taxation-- Impact
of Ownership Change on Use of Net Operating Loss Carryforwards." As the
Bank is able to grow its deposit accounts and increase its loan
originations, management's strategy is to replace, over time, such
wholesale borrowings with core deposits and replace its wholesale loan
purchases with internally originated loans.
- EXPAND THE BANK'S FRANCHISE. Management of the Company is attempting to
enhance the Bank's branch franchise by opening new offices in strategic
markets and pursuing branch acquisitions within its market area when
appropriate. In connection therewith, the Bank opened a branch office in
Buena Park, California in November 1995 and a branch office in Los
Angeles, California in April 1996. As of December 31, 1997, the Bank
operated out of 19 full-service branch offices located primarily in Los
Angeles County as well as Orange and Ventura counties in Southern
California. In addition, the Company currently operates 40 ATMs, 18 of
which are in stand-alone facilities and nine automated loan machines in
various locations throughout Southern California. The Company will also
consider whole bank acquisition opportunities.
REGULATION. The Bank, as a federally chartered savings bank, is subject to
comprehensive regulation and examination by the Office of Thrift Supervision
("OTS"), as its chartering authority and primary regulator, and by the Federal
Deposit Insurance Corporation ("FDIC"), which administers the Savings
Association Insurance Fund ("SAIF"), which insures the Bank's deposits to the
maximum extent permitted by law. The Bank is a member of the Federal Home Loan
Bank ("FHLB") of San Francisco, which is one of the 12 regional banks which
comprise the FHLB System. The Bank is further subject to regulations of the
Board of Governors of the Federal Reserve System ("Federal Reserve Board")
governing reserves required to be maintained against deposits and certain other
matters. See "Regulation."
The Company's executive offices are located at 5900 Wilshire Boulevard, Los
Angeles, California 90036 and its main telephone number is (213) 938-6300.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............................. 8,866,667 shares
Common Stock offered by the Selling Stockholders................ 3,800,000 shares
Total Common Stock offered...................................... 12,666,667 shares
Common Stock to be outstanding after the Offering............... 20,546,204 shares(1)
Purchase Requirements........................................... No person may purchase in the
Offering more than a number of
shares of Common Stock equal to
4.9% of the shares of Common Stock
that will be outstanding following
consummation of the Offering.
</TABLE>
- --------------------------
(1) Gives effect to the full conversion of the Company's Series C Preferred
Stock, par value $0.01 per share (the "Series C Preferred Stock"), the
Company's Series D Preferred Stock, par value $0.01 per share (the "Series D
Preferred Stock"), and the Company's Series E Preferred Stock, par value
$0.01 per share (the "Series E Preferred Stock") (collectively, the
"Outstanding Preferred Stock"), all of which is held by the Selling
Stockholders, into an aggregate of 8,527,473 shares of Common Stock, after
giving effect to the Company's 32:1 stock split. See "Capitalization" and
"The Stockholders' Agreement."
5
<PAGE>
<TABLE>
<S> <C>
Use of Proceeds.............. Assuming an initial public offering price of $14.00 per
share (the mid- point of the range set forth on the cover
page of this Prospectus), the net proceeds to the Company
from the sale of the shares of Common Stock offered by the
Company hereby will be $114.6 million ($132.0 million, if
the Underwriters' over-allotment option is exercised in
full) after deducting the underwriting discounts and commis-
sions and estimated offering expenses payable by the
Company. The Company will not receive any of the $49.7
million of net proceeds from the sale of Common Stock by the
Selling Stockholders.
Of the $114.6 million of net proceeds received by the
Company, an aggregate of $42.4 million will be used to pay
accumulated and unpaid dividends payable to the Selling
Stockholders, repurchase senior notes held by a Selling
Stockholder and to make other payments to insiders of the
Company. Specifically, the Company intends to use (i)
approximately $19.5 million of the net proceeds to pay
accumulated and unpaid dividends through May 15, 1998 to the
Selling Stockholders on the shares of the Company's
Outstanding Preferred Stock (see "Capitalization" and "The
Stockholders' Agreement"); (ii) approximately $11.6 million
(assuming an initial public offering price of $14.00 per
share) of the net proceeds (before applicable tax benefits)
to make a one-time payment in satisfaction of benefits due
to certain senior executive officers of the Company and the
Bank under employment agreements, which benefits were agreed
to contingent on the consummation of the Offering (the
"Original Employment Agreements") (see
"Management--Employment Agreements--Original Employment
Agreements and Establishment of Grantor Trust"); and (iii)
approximately $11.4 million of the net proceeds to prepay
the $10.0 million of senior notes (plus accrued interest
through May 15, 1998) which were issued to the Bishop Estate
in the 1995 recapitalization (see "Capitalization" and "The
Stockholders' Agreement").
In addition, the Company will use approximately $4.5 million
of the net proceeds (before applicable tax benefits) to pay
the FDIC special assessment which the Bank had previously
received permission from the FDIC to defer (see
"Regulation--Regulation of Federal Savings Banks--FDIC
Assessments" and "The Stockholders' Agreement").
A substantial portion of the balance of the estimated net
proceeds, approximately $67.7 million, is expected to be
contributed to the Bank and initially invested in U.S.
Government agency obligations and U.S. Government agency
mortgage-backed securities. Subsequently, the Bank expects
to leverage such proceeds by purchasing primarily sin-
gle-family residential loans and investment and U.S.
Government agency obligations and U.S. Government agency
mortgage-backed securities and funding such purchases
through increases in deposits, short- to intermediate-term
reverse repurchase agreements and FHLB advances. Management
believes that the leveraging of such proceeds will provide
the Bank with the opportunity to expand its business and
thereby increase its earnings, which will permit acceler-
ated utilization of existing NOLs. See "Risk Factors--Impact
of Ownership Change on Use of Net Operating Loss
Carryforwards,"
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
"--Risk that Rights are Treated as Debt on Use of Net
Operating Loss Carryforwards" and "Taxation."
Benefits of the Offering to
the Selling Stockholders and
Senior Management........... It is anticipated that the Selling Stockholders will receive
net proceeds of $49.7 million (assuming an initial public
offering price of $14.00 per share) in the aggregate with
respect to the sale of shares of Common Stock held by such
Selling Stockholders in the Offering. In addition, it is
anticipated that the Selling Stockholders will receive
approximately $19.5 million in the aggregate relating to
accumulated and unpaid dividends with respect to the
Company's Outstanding Preferred Stock held by such Selling
Stockholders, which shares are to be exchanged for shares of
Common Stock in connection with the Offering. Moreover, it
is anticipated that Bishop Estate will receive approximately
$11.4 million in connection with the prepayment of certain
senior notes (and accrued interest) which were issued to
Bishop Estate in the 1995 recapitalization. Finally, it is
anticipated that certain senior officers will receive a
one-time payment, which is estimated to amount to $11.6
million in the aggregate (assuming an initial public
offering price of $14.00 per share), in satisfaction of
certain benefits due such officers under existing employment
agreements with the Bank. For additional information, see
"Use of Proceeds," "The Stockholders' Agreement" and
"Management--Employment Agreements--Original Employment
Agreements and Establishment of Grantor Trust."
Common Stock Nasdaq National
Market symbol............... PBOC
</TABLE>
The following chart sets forth in simplified form the ownership of the
Common Stock of the Company assuming the conversion of the Company's Outstanding
Preferred Stock by the Selling Stockholders into shares of Common Stock. See
"Capitalization," "The Stockholders' Agreement" and "Principal and Selling
Stockholders."
[LOGO]
The following chart sets forth in simplified form the ownership of the
Common Stock of the Company following consummation of the Offering.
[LOGO]
RISK FACTORS
Prospective investors are urged to carefully review the matters discussed
under "Risk Factors."
7
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
(Dollars in thousands, except per share data)
The following selected historical consolidated financial and other data for
the five years ended December 31, 1997 is derived in part from the audited
consolidated financial statements of the Company. The selected historical
consolidated financial and other data set forth below should be read in
conjunction with, and is qualified in its entirety by, the historical
consolidated financial statements of the Company, including the related notes,
included elsewhere herein.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
------------- ----------- ----------- ----------- -----------
SELECTED FINANCIAL CONDITION DATA:
Total assets........................................ $ 2,213,054 $ 1,747,918 $ 1,579,760 $ 1,722,256 $ 1,830,805
Cash and cash equivalents........................... 14,113 14,720 7,258 10,507 18,494
Federal funds sold.................................. 7,004 7,200 11,800 -- --
Securities purchased under agreements to resell..... -- -- 35,000 -- --
Securities available-for-sale....................... 571,160 502,301 241,645 7,677 55,477
Loans held for sale................................. -- -- -- 28,946 5,500
Mortgage-backed securities held-to-maturity......... 9,671 10,971 -- 304,620 306,530
Loans receivable, net............................... 1,533,212 1,141,707 1,228,152 1,306,057 1,346,498
Real estate held for investment and sale, net....... 15,191 22,561 16,288 17,514 36,398
Deposits............................................ 1,266,615 1,371,243 1,473,318 1,384,218 1,388,818
Securities sold under agreements to repurchase...... 340,788 192,433 -- -- 46,985
FHLB advances....................................... 472,000 80,000 31,746 310,000 314,000
Senior debt(1)...................................... 11,113(1) 11,398 10,000 38,199 33,899
Minority interest(2)................................ 33,250(2) -- -- 23,324 23,324
Stockholders' equity(3)............................. 79,602 64,822 56,613 (52,463) 6,835
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
SELECTED OPERATING DATA:
Interest, fees and dividend income.................. $ 130,979 $ 122,896 $ 122,926 $ 116,262 $ 134,931
Interest expense.................................... 97,205 90,791 97,977 97,100 108,769
--------- --------- --------- --------- ---------
Net interest income................................. 33,774 32,105 24,949 19,162 26,162
Provision for loan losses........................... 2,046 2,884 8,823 24,443 13,059
--------- --------- --------- --------- ---------
Net interest income after provision for loan
losses............................................ 31,728 29,221 16,126 (5,281) 13,103
Gain on mortgage-backed securities sales, net....... 1,275 3,638 641 485 901
Gain (loss) on loan and servicing sales, net........ 3,413 (53) (166) 2,712 2,537
Income (loss) from other real estate operations,
net............................................... (1,805) 1,946 (2,067) (5,398) (180)
Other noninterest income............................ 2,234 2,593 2,095 2,328 6,272
Operating expenses.................................. 29,543 27,816 30,751 40,923 41,070
--------- --------- --------- --------- ---------
Earnings (loss) before income tax provision
(benefit) and minority interest................... 7,302 9,529 (14,122) (46,077) (18,437)
Income tax provision (benefit)...................... (4,499) (3,015) (2,644) 11,356 (1,200)
Minority interest................................... (859) -- -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss)................................. $ 10,942 $ 12,544 $ (11,478) $ (57,433) $ (17,237)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net earnings (loss) available to common
stockholders...................................... $ 3,602 $ 5,989 $ (14,863) $ (57,433) $ (17,237)
Earnings per share, basic and diluted(4)............ $ 1.14 $ 1.90 $ (3.41) $ (9.45) $ (2.84)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS:(5)
PERFORMANCE RATIOS:
Return on average assets............................ 0.57% 0.72% (0.65)% (3.00)% (0.87)%
Return on average equity............................ 15.37 22.00 (38.21) (251.75) (118.57)
Equity to assets.................................... 3.72 3.29 1.70 (1.19) 0.73
Dividend payout ratio............................... -- -- -- -- --
Interest-earning assets to interest-bearing
liabilities....................................... 101 100 100 98 98
Interest rate spread(6)............................. 1.80 1.91 1.46 1.16 1.49
Net interest margin(6).............................. 1.84 1.92 1.45 1.04 1.38
Operating expenses to average assets................ 1.55 1.60 1.74 2.14 2.07
Efficiency ratio(7)................................. 72.17 64.52 89.72 93.58 84.24
ASSET QUALITY DATA:
Total non-performing assets and troubled debt
restructurings(8)................................. $ 33,123 $ 46,218 $ 52,640 $ 78,737 $ 76,951
Non-performing loans as a percent of loans, net..... 0.65% 1.60% 2.90% 2.10% 2.86%
Non-performing assets as a percent of total
assets(8)......................................... 1.05 2.21 2.94 2.20 3.83
Non-performing assets and troubled debt
restructurings as a percent of total assets(8).... 1.50 2.64 3.33 4.57 4.20
Allowance for loan losses as a percent of loans,
net............................................... 1.16 2.04 2.57 2.28 1.52
Allowance for loan losses as a percent of non-
performing loans(8)............................... 179.97 127.65 88.71 108.53 53.06
Allowance for loan losses as a percent of non-
performing loans and troubled debt
restructurings(8)................................. 89.84 90.30 75.67 43.66 44.99
Net charge-offs to average loans, net............... 0.63 0.95 0.55 0.95 0.45
BANK REGULATORY CAPITAL RATIOS(9):
Tier 1 leverage..................................... 5.43 4.57 4.18 1.08 4.21
Tier 1 risk-based................................... 10.74 9.15 7.56 2.01 7.41
Total risk-based.................................... 11.99 10.38 8.43 2.76 8.58
</TABLE>
- ------------------------
(1) The senior debt will be prepaid in connection with the Offering. See "Use of
Proceeds," "Capitalization" and "The Stockholders' Agreement."
(2) Minority interest consists of the interest in PPCCP held by persons other
than the Bank. See "Business-- Subsidiaries."
(3) At December 31, 1997, 1996 and 1995, stockholders' equity is net of $2.0
million, $6.1 million and $1.6 million of unrealized losses on securities
available-for-sale, respectively.
(4) Based on a weighted average number of shares of Common Stock of 3,152,064,
3,152,064, 4,361,280, 6,075,008 and 6,075,088 for 1997, 1996, 1995, 1994 and
1993, respectively.
(5) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods, except for 1993 which use
average monthly balances.
(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) Non-performing assets consist of nonaccrual loans and real estate owned.
Nonaccrual loans are loans that the Company 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 loans 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 Company 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. See "Business--Asset Quality."
(9) For information on the Bank's regulatory capital requirements, see
"Regulation--Regulation of Federal Savings Banks--Regulatory Capital
Requirements."
9
<PAGE>
RECENT DEVELOPMENTS
(Dollars in thousands, except per share data)
The following selected historical consolidated financial and other data at
March 31, 1998 and for the three month periods ended March 31, 1998 and 1997 are
derived from unaudited financial data, but, in the opinion of management,
reflects all adjustments (consisting only of normal recurring adjustments) which
are necessary to present fairly the results for such interim periods. The
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results of operations that may be expected for the
fiscal year ending December 31, 1998. 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 Company, including the related notes, included elsewhere herein.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
1998 1997
------------ ---------------
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.................................................................... $2,269,953 $ 2,213,054
Cash and cash equivalents....................................................... 14,717 14,113
Federal funds sold.............................................................. 3,000 7,004
Securities available-for-sale................................................... 525,926 571,160
Mortgage-backed securities held-to-maturity..................................... 8,628 9,671
Loans receivable, net........................................................... 1,618,290 1,533,212
Real estate held for investment and sale, net................................... 17,436 15,191
Deposits........................................................................ 1,284,386 1,266,615
Securities sold under agreements to repurchase.................................. 273,156 340,788
FHLB advances................................................................... 577,000 472,000
Senior debt(1).................................................................. 11,224 11,113(1)
Minority interest(2)............................................................ 33,250 33,250(2)
Stockholders' equity(3)......................................................... 80,519 79,602
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
SELECTED OPERATING DATA:
Interest, fees and dividend income.......................................................... $ 38,944 $ 30,701
Interest expense............................................................................ 28,771 22,372
--------- ---------
Net interest income......................................................................... 10,173 8,329
Provision for loan losses................................................................... 450 422
--------- ---------
Net interest income after provision for loan losses......................................... 9,723 7,907
Gain on mortgage-backed securities sales, net............................................... 323 40
Gain on loan and servicing sales, net....................................................... -- 3,391
Income (loss) from other real estate operations, net........................................ (148) 221
Other noninterest income.................................................................... 683 685
Operating expenses.......................................................................... 7,680 7,156
--------- ---------
Earnings before income taxes and minority interest.......................................... 2,901 5,088
Income taxes................................................................................ -- --
Minority interest........................................................................... (869) --
--------- ---------
Net earnings................................................................................ $ 2,032 $ 5,088
--------- ---------
--------- ---------
Earnings per share, basic and diluted(4).................................................... $ .64 $ 1.61
Pro forma earnings per share(5)............................................................. $ .17 N.A.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
KEY OPERATING RATIOS:(6)
PERFORMANCE RATIOS:
Return on assets............................................................................ 0.36% 1.15%
Return on equity............................................................................ 10.38 31.80
Equity to assets............................................................................ 3.49 3.60
Dividend payout ratio....................................................................... -- --
Interest-earning assets to interest-bearing liabilities..................................... 102 101
Interest rate spread(7)..................................................................... 1.65 1.80
Net interest margin(7)...................................................................... 1.77 1.85
Operating expenses to average assets........................................................ 1.37 1.61
Efficiency ratio(8)......................................................................... 75.50 85.92
ASSET QUALITY DATA:
Total non-performing assets and troubled debt
restructurings(9)......................................................................... $ 39,564 $ 50,305
Non-performing loans as a percent of loans, net............................................. 0.76% 1.31%
Non-performing assets as a percent of total assets(9)....................................... 1.31 2.47
Non-performing assets and troubled debt restructurings
as a percent of total assets(9)........................................................... 1.74 2.91
Allowance for loan losses as percent of loans, net.......................................... 1.11 1.67
Allowance for loan losses as a percent of non-performing loans(9)........................... 146.93 127.56
Allowance for loan losses as a percent of non-performing loans
and troubled debt restructurings(9)....................................................... 81.22 84.23
Net charge-offs to average loans, net....................................................... 0.08 1.77
BANK REGULATORY CAPITAL RATIOS(10):
Tier 1 leverage............................................................................. 5.40 4.91
Tier 1 risk-based........................................................................... 10.28 9.42
Total risk-based............................................................................ 11.46 10.68
</TABLE>
- --------------------------
(1) The senior debt will be prepaid in connection with the Offering. See "Use of
Proceeds," "Capitalization" and "The Stockholders' Agreement."
(2) Minority interest consists of the interest in PPCCP held by persons other
than the Bank. See "Business-- Subsidiaries."
(3) At March 31, 1998 and December 31, 1997, equity is net of $3.1 million and
$2.0 million of unrealized losses on securities available-for-sale,
respectively.
(4) Based on a weighted average number of shares of 3,152,064.
(5) Based on a weighted average number of shares of 11,679,537. See Note 22 to
the Notes to Consolidated Financial Statements.
(6) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods.
(7) 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.
(8) Efficiency ratio represents operating expenses as a percent of the aggregate
of net interest income and non-interest income.
(9) Non-performing assets consist of nonaccrual loans and real estate owned.
Nonaccrual loans are loans that the Company has removed from accrual status
because the loans are 90 or more days deliquent as to principal and/or, in
management's opinion, full collectibility of the loans 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 Company 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. See "Business--Asset Quality."
(10) For information on the Bank's regulatory capital requirements, see
"Regulation--Regulation of Federal Savings Banks--Regulatory Capital
Requirements."
11
<PAGE>
FINANCIAL CONDITION
The Company's total assets increased to $2.27 billion at March 31, 1998, an
increase of $56.9 million or 2.6% from December 31, 1997. The increase is
primarily attributable to an $85.1 million increase in loans receivable, net,
due to loan originations of $85.8 million and a purchase of $114.2 million of
one-year adjustable-rate single-family residential mortgage loans, which were
partially offset by principal repayments of $113.4 million. The increase in
loans receivable, net was partially offset by a $45.2 million or 7.9% decrease
in securities available for sale. Increases in the Company's loan portfolio were
primarily funded by FHLB advances and, to a lesser extent, deposits, which
increased by $105.0 million or 22.3% and $17.8 million or 1.4%, respectively.
Securities sold under agreements to repurchase declined by $67.6 million or
19.8%. The Company's stockholders' equity increased by $917,000 to $80.5 million
at March 31, 1998.
RESULTS OF OPERATIONS
The Company earned $2.0 million during the three months ended March 31,
1998, compared to $5.1 million during the comparable quarter in 1997. The
Company's return on assets amounted to 0.36% for the three months ended March
31, 1998, as compared to 1.15% for the three months ended March 31, 1997. During
the first quarter of 1997, the Company sold the servicing rights with respect to
substantially all of its residential mortgage loans and recognized a gain of
$3.4 million on that portion of the servicing of loans held for other parties.
See "Business--Lending Activities--Single-Family Residential Real Estate Loans."
Without giving effect to such one-time sale, the Company would have earned $1.7
million for the comparable quarter in 1997. The sale of the servicing rights
associated with residential mortgage loans held in the Company's loan portfolio
contributed to a reduction in the Company's interest rate spread, which resulted
in the decline in the Company's earnings during the period. The Company expects
that its interest rate spread and net interest margin will improve as certain
loans that the Company purchased during the fourth quarter of 1997 and the first
quarter of 1998 reprice to their fully indexed rate. See "Risk Factors--
Interest Rate Concerns," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations." The decline in the
Company's return on assets during the first quarter of 1998 was due in part to
the increase in the Company's asset size as a result of the balance sheet
restructuring in 1997. See "Business--Lending Activities--Single-Family
Residential Real Estate Loans."
The Company's net interest income increased by $1.8 million or 22.1% during
the three months ended March 31, 1998 over the comparable quarter, which is
attributable to an $8.2 million or 26.9% increase in total interest income,
which more than offset a $6.4 million or 28.6% increase in total interest
expense from funding sources. The increase in total interest income was
attributable to increased lending activity as the Bank continued to leverage its
balance sheet through purchases of adjustable-rate single-family residential
loans, $408.8 million of which the Company purchased during the fourth quarter
of 1997. On March 31, 1998, the Bank purchased $114.2 million of similar loans.
The Company's provision for loan losses increased by $28,000 to $450,000
during the quarter ended March 31, 1998, when compared to the prior comparable
period. At March 31, 1998, the Company's allowance for loan losses amounted to
$18.0 million or 1.11% of total loans and 146.9% of total non-performing loans.
The Company's total non-interest income declined significantly during the
three months ended March 31, 1998 over the prior comparable quarter, by $3.5
million or 80.2%, primarily due to the absence of the 1997 gain on sale of
servicing. Total non-interest income also decreased due to a loss of $148,000
during the March 1998 quarter from real estate operations, net, compared to
income of $221,000 during the 1997 quarter. The decrease in total non-interest
income was partially offset by a $283,000 increase in gain on mortgage-backed
securities sales, net. During the quarter ended March 31, 1998, the Company sold
$66.7 million of fixed-rate mortgage-backed securities, the proceeds of which
were utilized to fund the purchase of adjustable-rate single-family residential
loans during the quarter.
12
<PAGE>
The Company's total operating expenses increased by $524,000 or 7.3% during
the March 1998 quarter over the comparable quarter in 1997. Total operating
expenses increased as a result of a $290,000 increase in occupancy expense (due
to the installation and operation of new automated teller machines and automated
loan machines and increased security measures in the Bank's branch offices), a
$149,000 increase in professional services (resulting primarily from consulting
services provided to the Bank in connection with asset and liability management
and actuarial services provided to the Bank with respect to its benefit plans
and an increase in audit costs) and a $100,000 increase in personnel and
benefits expense (due to the hiring and training of new commercial and consumer
lending personnel). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations-- Operating
Expenses."
Net earnings during the quarter ended March 31, 1998 for PPCCP, the Bank's
REIT subsidiary, were $1.3 million. The Company's net earnings during the
quarter ended March 31, 1998 were reduced by minority interest of $869,000,
which represents dividends paid by PPCCP on its publicly outstanding Series A
Preferred Shares. See "Business--Subsidiaries."
13
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION IN
CONJUNCTION WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE
PURCHASING THE COMMON STOCK IN THE OFFERING. THIS PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO THE COMPANY THAT ARE
BASED ON THE BELIEFS OF MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND
INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. IN ADDITION, IN THOSE AND OTHER
PORTIONS OF THIS DOCUMENT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE,"
"EXPECT," "INTEND," "SHOULD" AND SIMILAR EXPRESSIONS, OR THE NEGATIVE THEREOF,
AS THEY RELATE TO THE COMPANY OR THE COMPANY'S MANAGEMENT, ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEWS
OF THE COMPANY WITH RESPECT TO FUTURE LOOKING EVENTS AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THE RISK FACTORS DESCRIBED IN
THIS PROSPECTUS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE,
OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED,
EXPECTED OR INTENDED. THE COMPANY DOES NOT INTEND TO UPDATE THESE
FORWARD-LOOKING STATEMENTS.
THE COMPANY'S LIMITED HISTORY OF STABILIZED OPERATIONS AND PROFITABILITY
Recently, the Company has redirected its attention to increasing the Bank's
lending activities. However, during 1995, new management had focused on, among
other things, reducing problem assets, increasing net interest income, reducing
operating expenses and cost of funds and maximizing profitability while limiting
interest rate and credit risk. The reduction in the Company's non-performing
assets and the Company's return to profitability in 1996 and 1997 has allowed
the Bank to actively originate and purchase loans. During 1997, the Company
increased originations in all loan categories, and began to purchase loans for
the first time in several years. Total loan originations and purchases have
increased from $26.8 million during the year ended December 31, 1995 to $61.7
million during the year ended December 31, 1996 to $666.4 million during the
year ended December 31, 1997. See "Business--Lending Activities--Origination,
Purchase and Sale of Loans." Notwithstanding the foregoing, no assurance can be
made that the Bank will be successful in continuing to increase its loan
portfolio in future periods or that the Company will be able to achieve or
maintain profitability in subsequent years. See "--Impact on 1998 Operating
Results of Benefits to Selling Stockholders and Senior Management" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
IMPACT ON 1998 OPERATING RESULTS OF BENEFITS TO SELLING STOCKHOLDERS AND SENIOR
MANAGEMENT
The Company expects to utilize an aggregate of $42.4 million of the $114.6
million of net proceeds from the Offering (assuming an initial public offering
price of $14.00) to pay accumulated and unpaid dividends to the Selling
Stockholders, repurchase senior notes held by a Selling Stockholder and to make
other payments to senior management of the Company. Such payments, along with
the payment of the FDIC special assessment, which are non-recurring and are
being undertaken in connection with the Offering, will reduce the Company's net
earnings in 1998 and could result in the Company incurring a net loss for 1998.
See "Use of Proceeds," "Capitalization" and "The Stockholders' Agreement."
DEPENDENCE ON KEY PERSONNEL
The recent success of the Company and the Bank has been dependent on Rudolf
P. Guenzel, the President and Chief Executive Officer of the Company and the
Bank, J. Michael Holmes, the Executive Vice President and Chief Financial
Officer of the Company and the Bank, and William W. Flader, the Executive Vice
President of the Company and the Bank. The Company's future success will also
depend, to a significant extent, upon the services of Messrs. Guenzel, Holmes
and Flader. The Company 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 the Company. In connection with the
Offering, the Company and the Bank will enter into three-year employment
agreements with Messrs. Guenzel, Holmes
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and Flader. The Company does not currently maintain key man life insurance
policies with respect to Messrs. Guenzel, Holmes and Flader. See "Management."
IMPACT OF OWNERSHIP CHANGE ON USE OF NET OPERATING LOSS CARRYFORWARDS
The Company has $151.5 million of federal NOLs as of December 31, 1997 which
are scheduled to expire between 2001 and 2011. In the event an "ownership
change" of the Company 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
Company in any post-change taxable year. It is anticipated that the Offering
will result in an ownership change within the meaning of Section 382 of the Code
(the "1998 Ownership Change"). Consequently, the ability of the Company to use
its NOLs to offset future taxable income will be subject to one or more
limitations under Section 382, which could result in the Company being unable to
fully utilize such tax benefits. Such inability of the Company to utilize such
tax benefits could have a material adverse effect on the net earnings and
prospects of the Company. For additional information, see "Taxation--Impact of
Ownership Change on Use of Net Operating Loss Carryforwards" and "Agreement with
Respect to Potential Goodwill Lawsuit Recovery--Tax Consequences."
RISK THAT RIGHTS ARE TREATED AS DEBT ON USE OF NET OPERATING LOSS CARRYFORWARDS
KPMG Peat Marwick LLP has issued an opinion to the Company 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 the
Company 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
the Company for federal income tax purposes. If the Shareholder Rights Agreement
is treated other than as stock in the Company (i.e., as debt of the Company),
the value of the Shareholder Rights Agreement would reduce the value of the
Company'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. Such inability of
the Company to utilize such tax benefits could have a material adverse effect on
the net earnings and prospects of the Company. Whether the Shareholder Rights
Agreement will be treated as stock for federal income tax purposes depends on
the totality of the facts and circumstances, including the intent of the parties
to the Shareholder Rights Agreement, the extent to which the Shareholder Rights
Agreement will obligate the Company to pay the Selling Stockholders a portion of
the Litigation Recovery (as defined and described under "Agreement With Respect
to Potential Goodwill Lawsuit Recovery") and the position that the Shareholder
Rights Agreement will give the Selling Stockholders in relation to the Company's
creditors and stockholders existing on and after the execution of the
Shareholder Rights Agreement. See "Taxation."
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. Such problem
assets reached $78.7 million or 4.6% of total assets at December 31, 1994. Since
the change in senior management during 1995, the Bank has focused on improving
the credit quality of its assets through the early identification of potential
problem loans and the administration, rehabilitation or liquidation of the
Bank's non-performing assets. New management has 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
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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, and improved economic conditions in California,
resulted in a substantial decline in non-performing assets and troubled debt
restructurings during 1997, as such problem assets amounted to $33.1 million or
1.5% of total assets at December 31, 1997. Management does not believe that
there are any material problems with loans in its portfolio other than those
which it has identified. See "Business--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. In particular,
although the Bank, through its new management, has been able to reduce the
amount of its non-performing assets and troubled debt restructurings in recent
years, the Bank's future results of operations may be materially adversely
affected if the Bank is unable to work-out or dispose of its remaining
non-performing assets on a timely basis, if the values of such properties
decline further or if the values of properties underlying the Bank's loan
portfolio decline further. Although management utilizes its best judgment in
providing for losses with respect to its non-performing assets and believes that
its allowance for loan losses at December 31, 1997 was adequate, 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. Significant
additional loan and real estate loss provisions would negatively impact the
Bank's future results of operations and levels of regulatory capital.
INTEREST RATE CONCERNS
It is expected that the Bank will continue to realize income primarily from
the differential or "spread" between the interest earned on loans, securities
and other interest-earnings assets, and interest paid on deposits, borrowings
and other interest-bearing liabilities. Net interest rate 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 portion of the Bank's assets
will continue to be indexed to changes in market interest rates and a
substantial portion of its liabilities will continue to be short term, which
will mitigate the negative effect of a decline in yield on its assets. At
December 31, 1997, the Bank had $1.6 billion in assets maturing or repricing
within one year and $1.6 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. As such, there can be no assurance that the
Bank's interest rate risk will be minimized or eliminated. Furthermore, 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 rate spread, asset quality, loan
origination volume and overall financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Asset and Liability Management."
MULTI-FAMILY RESIDENTIAL, COMMERCIAL REAL ESTATE, COMMERCIAL BUSINESS AND
CONSUMER LENDING
At December 31, 1997, the Bank's multi-family residential and commercial
real estate loans amounted to $561.7 million in the aggregate or approximately
36.1% of the Bank's total loans receivable. In addition, while commercial
business and consumer loans (including loans secured by deposits) amounted to
only $31.0 million in the aggregate at December 31, 1997 (which represented 2.0%
of the Bank's total loans receivable), such loans represented 20.3% and 15.8% of
the Bank's total loan originations for the years
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ended December 31, 1997 and 1996, respectively. 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 December 31, 1997, an aggregate of $1.5 million and $12.4
million of the Bank's multi-family residential and commercial real estate loans
were classified non-accrual or included in real estate owned, respectively. In
an effort to increase its commercial business and consumer lending business, the
Bank has been placing increased emphasis on providing customers with additional
banking services, has increased expenditures with respect to its infrastructure
and has hired and trained new commercial and consumer lending personnel. The
Bank intends to increase this emphasis on commercial business and consumer
lending during the next several years. No assurance can be made that the Bank
will be successful in building up these portfolios to levels consistent with the
Bank's business plan. See "Business--Lending Activities."
NO PRIOR MARKET; DETERMINATION OF MARKET PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock. The initial public offering price was determined by negotiations
between the pricing committee of the Company and Sandler O'Neill & Partners,
L.P., as representative (the "Representative") of the underwriters named in the
Underwriting Agreement ("Underwriting Agreement") among the Company, the Bank,
the Selling Stockholders and the Representative. Among the factors considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, were the estimate of the business potential and
earnings prospects of the Company, an assessment of the Company's management and
the consideration of the above factors in relation to market valuation of
companies in related businesses and other factors deemed to be relevant. In
connection with the Offering, Rudolf P. Guenzel, President and Chief Executive
Officer of the Company, and J. Michael Holmes, Executive Vice President and
Chief Financial Officer of the Company, each a member of the pricing committee
of the Company, will receive a one-time payment in satisfaction of certain
benefits due under an existing employment agreement with the Bank. Such one-time
payment will increase in the event there is an increase in the initial public
offering price per share. See "Management--Employment Agreements--Original
Employment Agreements and Establishment of Grantor Trust."
The Company has applied to have the Common Stock quoted on the Nasdaq
National Market under the symbol "PBOC." However, there can be no assurance that
such application will be approved, or that if approved, an established and
liquid trading market for the Common Stock will develop, that it will continue
if it does develop, or that after the completion of the Offering, the Common
Stock will trade at or above the initial public offering price set forth on the
cover of this Prospectus. The Representative has advised the Company that it
intends to make a market in the Common Stock. However, the Representative is not
obligated to make a market in such shares, and any such market making may be
discontinued at any time at the sole discretion of the Representative. In
addition, the substantial amount of Common Stock which is expected to be
retained by the Selling Stockholders may adversely affect the development of an
active and liquid trading market. See "--Control of the Company by the Selling
Stockholders," "Market for Common Stock" and "Underwriting."
DIVIDENDS
The Company has never paid a cash dividend on the Common Stock and does not
expect to pay a cash dividend on its Common Stock following the Offering.
Rather, the Company intends to retain earnings and increase capital in
furtherance of its overall business objectives. The Company will periodically
review its dividend policy in view of the operating performance of the Company,
and may declare dividends in the future if such payments are deemed appropriate
and in compliance with applicable law and regulations. Cash and stock dividends
are subject to determination and declaration by the Board of Directors, which
will take into account the Company's consolidated earnings, financial condition,
liquidity and capital
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requirements, applicable governmental regulations and policies, and other
factors deemed relevant by the Board of Directors. See "Dividends,"
"Regulation--Regulation of Federal Savings Banks--Capital Distribution
Regulation" and "Taxation."
HOLDING COMPANY STRUCTURE
Substantially all of the Company's assets and operations are held by or
conducted through the Bank and, to that extent, the Company is effectively a
holding company. The Company relies on dividends from the Bank to meet its debt
service obligations and other liabilities. Although the Company has no current
intention to pay dividends on the Common Stock, the Company's ability to pay
such dividends will depend on cash dividends from the Bank. As discussed below,
there are significant limitations on the ability of the Bank to pay dividends or
otherwise pay cash to the Company. See "Dividends." In addition, claims of
creditors of the Bank, including tax authorities and trade creditors, will
generally have a priority claim to the assets of the Bank over the claims of the
Company.
DILUTION
Upon completion of the Offering, there will be an immediate dilution of the
net tangible book value per share of Common Stock from the initial public
offering price. This dilution primarily results from the sale by the Company of
Common Stock in the Offering at a price above the current book value per share.
Without taking into account any changes in net tangible book value after
December 31, 1997, other than those resulting from the sale by the Company of
the Common Stock offered hereby (after deduction of underwriting discounts and
commissions and estimated Offering expenses), the pro forma net tangible book
value at December 31, 1997 would have been $8.01 per share (excluding any tax
benefits relating to the Company's future use of its NOLs), representing an
immediate dilution of $5.99 per share to persons purchasing the Common Stock
offered hereby at the initial public offering price. See "Dilution."
LEVERAGE STRATEGY
As a result of the substantial amount of proceeds expected to be raised in
the Company's offering of Common Stock and contributed to the Bank, the Bank
intends to leverage such proceeds 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. See "Use of Proceeds." 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 Company in accelerating the utilization of its existing
NOLs. If market rates of interest fluctuate in such a manner that the Company is
unable to earn a positive spread as a result of its leverage strategy, the
Company's net interest margin and net earnings will be adversely affected in
future periods. For information concerning the Company's leveraging of its
balance sheet during the year ended December 31, 1997, See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"--Impact of Ownership Change on Use of Net Operating Loss Carryforwards" and
"Taxation."
YEAR 2000 COMPLIANCE ISSUES
The Company 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 Company's data processing and loan
servicing is performed by third-party vendors from which the Company has
received confirmation that they expect to be compliant with Year 2000 issues on
a timely basis. The Company has not incurred significant expense to
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date, but expects to incur total expenses of $200,000 through 1999 to address
Year 2000 issues. Management is currently evaluating 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 Company's costs associated therewith will be as estimated. However, the
Company does not believe any Year 2000 issues will materially affect the
Company's products, services or competitive conditions. In addition, the Company
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.
RISKS RELATING TO GOODWILL LITIGATION
Legal, accounting, consulting and other fees and expenses related to the
Goodwill Litigation (as defined and described under "Agreement with Respect to
Potential Goodwill Lawsuit Recovery") may become substantial. During the period
from the commencement of the Goodwill Litigation to December 31, 1997, the Bank
has incurred legal fees of $78,000. To the extent the Company and the Bank must
continue to engage in protracted litigation, the Company and the Bank will
continue to incur significant legal, accounting, consulting and other fees and
expenses in the future. Under the Shareholder Rights Agreement, the Company has
agreed to establish a Goodwill Litigation Committee of the Board of Directors,
comprised of the Chief Executive Officer and two representatives designated in a
specified manner by the Selling Stockholders. Among other things, the Goodwill
Litigation Committee has the exclusive right to oversee the Goodwill Litigation
and any Ancillary Litigation (as defined herein) and to make final
determinations with respect to the dismissal, settlement or termination of the
Goodwill Litigation or any Ancillary Litigation. The Selling Stockholders have
agreed to reduce the amount of the Recovery Payment (as defined herein) which is
to be paid to them in connection with a Litigation Recovery 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 Selling Stockholders have advised the Board of Directors of their
willingness to reimburse the Company and the Bank for such fees and expenses
periodically upon request by the Company and/or the Bank. No assurance can be
made that the Company and/or the Bank will prevail in the Goodwill Litigation or
any Ancillary Litigation or that the Company and/or the Bank achieve recoveries
sufficient to offset the fees and expenses for which the Company remains
responsible. In addition, no assurance can be made that the Selling Stockholders
will in fact reimburse the Company or the Bank for any fees and expenses
incurred with respect to the Goodwill Litigation and any Ancillary Litigation
and the Selling Stockholders are not obligated to do so. See "Agreement With
Respect to Potential Goodwill Lawsuit Recovery."
CONTROL OF THE COMPANY BY THE SELLING STOCKHOLDERS
All of the Company's Common Stock prior to the Offering is 100% owned by the
Bishop Estate, BIL Securities and Arbur. Following the Offering, it is
anticipated that such Selling Stockholders will own 24.97%, 10.03% and 3.34% of
the Common Stock, respectively. In addition, in connection with the consummation
of the Offering, the Company and the Selling Stockholders will enter into the
Stockholders' Agreement (as defined herein) pursuant to which the Company will
agree to use all authority under applicable law to cause the Selling
Stockholders' nominees to be included in the slate of nominees to the Board of
Directors and will agree to use all practical efforts to cause the election of
such slate. Under the Stockholders' Agreement, Bishop will be entitled to
designate two, one or no nominees, and BIL Securities and Arbur collectively one
or no nominees, in each case based on such Selling Stockholders' percentage
ownership of Common Stock. As a result, the Selling Stockholders will continue
to be able to influence the
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election of the Company's Board of Directors, and thereby the policies of the
Company and its subsidiaries, including mergers, sales of assets and similar
transactions. The Stockholders' Agreement further provides that, subject to any
applicable regulatory prohibitions, the Selling 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 until such time
as the Goodwill Litigation shall have been settled or otherwise terminated. In
addition, unless otherwise approved by stockholders of the Company pursuant to
the Company's Amended and Restated Articles of Incorporation, as long as the
Selling Stockholders are Material Stockholders, the Bylaws of the Company shall
provide for and the Board of Directors shall be comprised of seven directors.
See "The Stockholders' Agreement," "Principal and Selling Stockholders" and
"Description of Capital Stock--Restrictions on Acquisition of the
Company--Amendment of Certificate of Incorporation and Bylaws."
SHARES AVAILABLE FOR FUTURE SALE
The Company and the Selling Stockholders have agreed not to, and the Company
has further agreed not to allow its directors and executive officers to, offer,
sell, contract to sell or otherwise dispose of, except as provided in the
Underwriting Agreement, any securities of the Company that are substantially
similar to the Common Stock, including but not limited to any securities that
are convertible into or exchangeable for, or that represent the right to
receive, Common Stock or any substantially similar securities, for a period of
180 days after the date of this Prospectus without the prior written consent of
the Representative. See "Underwriting." Notwithstanding the foregoing, the
future sale of a substantial number of shares of Common Stock by the Selling
Stockholders or stockholders who purchased shares of Common Stock in the
Offering, or the perception that such sales could occur, could have an adverse
effect on the market price of the Common Stock. See "Shares Eligible For Future
Sale" and "Principal and Selling Stockholders."
ECONOMIC CONDITIONS
The Bank's loan portfolio is concentrated in California. As a result, the
financial condition of the Bank will be subject to general economic conditions
and, in particular, to conditions in the California residential real estate
market. 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.
COMPETITION
The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans.
The Bank competes with other thrift institutions, commercial banks,
insurance companies, credit unions, thrift and loan associations, money market
mutual funds and brokerage firms in attracting and retaining deposits.
Competition for deposits from large commercial banks is particularly strong.
Many of the nation's thrift institutions and many large commercial banks have a
significant number of branch offices in the areas in which the Bank operates.
In addition, there is strong competition in originating and purchasing real
estate and consumer loans, principally from other savings and loan associations,
commercial banks, mortgage banking companies, insurance companies, consumer
finance companies, pension funds and commercial finance companies. The primary
factors in competing for loans are the quality and extent of service to
borrowers and brokers, economic factors such as interest rates, interest rate
caps, rate adjustment provisions, loan maturities, loan-to-value ("LTV") ratios,
loan fees, and the amount of time it takes to process a loan from receipt of the
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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 the Company 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.
On September 30, 1996, the Deposit Insurance Funds ("DIF") Act of 1996 was
enacted into law. The DIF Act contemplates the development of a common charter
for all federally chartered depository institutions and the abolition of
separate charters for national banks and federal savings associations. It is not
known what form the common charter may take and what effect, if any, the
adoption of a new charter would have on the financial condition or results of
operations of the Bank. See "Regulation."
ANTI-TAKEOVER PROVISIONS
In addition to the amount of Common Stock controlled by the Selling
Stockholders and the governance provisions of the Stockholders' Agreement (as
discussed under "The Stockholders' Agreement"), certain provisions of the
Company's Amended and Restated Certificate of Incorporation and Bylaws and
certain provisions of the Delaware General Corporation Law could have the effect
of discouraging non-negotiated takeover attempts which certain stockholders
might deem to be in their interest and make it more difficult for stockholders
of the Company to remove members of its Board of Directors and management. In
addition, various federal laws and regulations could affect the ability of a
person, firm or entity to acquire the Company or shares of its Common Stock. See
"--Control of the Company by the Selling Stockholders," "The Stockholders'
Agreement" and "Description of Capital Stock--Restrictions on Acquisition of the
Company."
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DIVIDENDS
The Company has never paid a cash dividend on the Common Stock and does not
expect to pay a cash dividend on its Common Stock following the Offering.
Rather, the Company intends to retain earnings and increase capital in
furtherance of its overall business objectives. The Company will periodically
review its dividend policy in view of the operating performance of the Company,
and may declare dividends in the future if such payments are deemed appropriate
and in compliance with applicable law and regulations. Cash and stock dividends
are subject to determination and declaration by the Board of Directors, which
will take into account the Company's consolidated earnings, financial condition,
liquidity and capital requirements, applicable governmental regulations and
policies, and other factors deemed relevant by the Board of Directors. See
"Regulation--Regulation of Federal Savings Banks--Capital Distribution
Regulation" and "Taxation."
MARKET FOR COMMON STOCK
All of the Common Stock of the Company is currently held by the Selling
Stockholders. As such, there is no established market for the Common Stock at
this time. The Company expects that following the Offering, the Common Stock
will be traded in the over-the-counter market. The Company has applied to have
the Common Stock quoted on the Nasdaq National Market under the symbol "PBOC."
The Representative has advised the Company that, upon completion of the
Offering, it intends to act as a market maker in the Common Stock. However, the
Representative is not obligated to make a market in such shares, and any such
market making may be discontinued at any time at the sole discretion of the
Representative. Accordingly, there can be no assurance that an active and liquid
trading market for the Common Stock will develop or that, if developed, it will
continue, nor is there any assurance that persons purchasing shares of Common
Stock will be able to sell them at or above the initial public offering price
set forth on the cover page hereof. In addition, the substantial amount of
Common Stock which is expected to be retained by the Selling Stockholders may
adversely affect the development of an active and liquid trading market. See
"Risk Factors--Control of the Company by the Selling Stockholders."
USE OF PROCEEDS
Assuming an initial public offering price of $14.00 per share, the net
proceeds to the Company from the sale of the shares of Common Stock offered by
the Company hereby will be $114.6 million ($132.0 million, if the Underwriters'
over-allotment option is exercised in full) after deducting the underwriting
discounts and commissions and estimated Offering expenses payable by the
Company. The Company will not receive any of the $49.7 million of net proceeds
from the sale of Common Stock by the Selling Stockholders (assuming an initial
public offering price of $14.00 per share).
Of the $114.6 million of net proceeds received by the Company, an aggregate
of $42.4 million will be used to pay accumulated and unpaid dividends payable to
the Selling Stockholders, repurchase senior notes held by a Selling Stockholder
and to make other payments to insiders of the Company. Specifically, the Company
intends to use approximately $19.5 million of the net proceeds from the sale of
the Common Stock offered by the Company to pay accumulated and unpaid dividends
through May 15, 1998 to the Selling Stockholders on the shares of the Company's
Outstanding Preferred Stock, which is being exchanged for Common Stock of the
Company in connection with the Offering. See "Capitalization" and "The
Stockholders' Agreement." In addition, the Company intends to utilize
approximately $11.6 million of such net proceeds to make a one-time payment in
satisfaction of benefits due to certain senior executive officers of the Company
and the Bank under the Original Employment Agreements, which benefits were
agreed to subject to consummation of the Offering. A portion of such funds will
be contributed to certain trusts the Company is establishing in connection with
the Offering and will be used to purchase Common Stock of the Company in the
Offering on behalf of such executive officers. Such one-time payment will
increase in the event there is an increase in the initial public offering price
per share. See "Management--
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Employment Agreements--Original Employment Agreements and Establishment of
Grantor Trust." Furthermore, the Company intends to use approximately $11.4
million of such net proceeds to prepay the $10.0 million of senior notes (plus
accrued interest through May 15, 1998) which were issued to the Bishop Estate in
the 1995 recapitalization. The Company also intends to use approximately $4.5
million of such net proceeds to pay the FDIC special assessment which the Bank
had previously received permission from the OTS to defer. See
"Regulation--Regulation of Federal Savings Institutions--FDIC Assessments." A
substantial portion of the balance of the estimated net proceeds, approximately
$67.7 million, is expected to be contributed to the Bank and initially invested
in U.S. Government agency obligations and U.S. Government agency mortgage-backed
securities. The Bank expects to leverage such proceeds by purchasing primarily
single-family residential loans and investment and U.S. Government agency
obligations and U.S. Government agency mortgage-backed securities and funding
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. See "Risk Factors-- Impact of Ownership Change on
Use of Net Operating Loss Carryforwards," "--Risk that Rights are Treated as
Debt on Use of Net Operating Loss Carryforwards" and "Taxation."
The following table sets forth the anticipated use of the net proceeds from
the sale of the Common Stock by the Company (assuming an initial public offering
price of $14.00 per share).
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Gross proceeds from the Offering.................................................................. $ 124,133
Estimated Offering expenses and discounts......................................................... 9,569
--------------
Net proceeds from the Offering................................................................ 114,564
Payment of accumulated and unpaid dividends on the Outstanding Preferred Stock(1)................. 19,456
Funding of certain employment agreement benefits(2)(3)............................................ 11,557
Prepayment of outstanding senior notes(1)(2)(4)................................................... 11,373
Payment of FDIC special assessment(2)............................................................. 4,500
--------------
Remaining cash proceeds available for general corporate purposes.................................. $ 67,678
--------------
--------------
</TABLE>
- ------------------------
(1) Amount is estimated as of May 15, 1998.
(2) Before applicable tax benefits. After giving effect to such tax benefits
(assuming a 41% tax rate), the net after tax effect is expected to be $6.8
million in the case of funding the employment agreement benefits, $11.3
million in the case of the senior notes and $2.7 million in the case of the
FDIC special assessment.
(3) See "Management--Employment Agreements--Original Employment Agreements and
Establishment of Grantor Trust."
(4) Consists of the $10.0 million principal amount of senior notes, plus an
estimated $1.4 million of accrued but unpaid interest thereon.
23
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
December 31, 1997 and as adjusted to give effect to (i) the sale of 8,866,667
shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $14.00 per share (after deducting the underwriting
discounts and commissions and estimated Offering expenses payable by the
Company); (ii) the exchange of all of the Company's Outstanding Preferred Stock
into an aggregate of 8,527,473 shares of Common Stock in connection with the
Offering; (iii) the payment of approximately $19.5 million of accumulated and
unpaid dividends owed to the Selling Stockholders on the shares of the Company's
Outstanding Preferred Stock; (iv) the payment of approximately $6.8 million (net
of applicable tax benefits) (assuming an initial public offering price of $14.00
per share) to make a one-time payment in satisfaction of benefits due to certain
senior executive officers of the Company and the Bank under the Original
Employment Agreements; (v) the payment of approximately $11.3 million (net of
applicable tax benefits) to prepay the $10.0 million of senior notes (plus
accrued interest) which were issued to the Bishop Estate in the 1995
recapitalization; and (vi) the payment of approximately $2.7 million (net of
applicable tax benefits) to pay the FDIC special assessment which the Bank had
previously received permission from the OTS to defer. See "Use of Proceeds."
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
---------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Senior notes............................................................................. $ 11,113 $ --
---------- -----------
---------- -----------
Stockholders' equity:
Series preferred stock; $0.01 par value. Authorized 1,000,000 shares and 25,000,000
shares:
Preferred stock, Series C, voting, issued and outstanding 85,000 shares and 0
shares............................................................................. 1 --
Preferred stock, Series D, voting, issued and outstanding 68,000 shares and 0
shares............................................................................. 1 --
Preferred stock, Series E, nonvoting, issued and outstanding 332,000 shares and 0
shares............................................................................. 3 --
Common stock, par value $0.01 per share. Authorized 500,000 and 75,000,000 shares;
issued and outstanding 98,502 shares and 20,546,204 shares........................... 1 205
Additional paid-in capital, preferred and common stock................................. 129,814 244,290
Unrealized losses on securities available-for-sale..................................... (1,974) (1,974)
Minimum pension liability, net of tax.................................................. (293) (293)
Accumulated deficit.................................................................... (47,951) (77,035)
---------- -----------
Total stockholders' equity......................................................... $ 79,602 $ 165,193
---------- -----------
---------- -----------
</TABLE>
24
<PAGE>
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 December 31, 1997, the Bank's tangible, tier 1 leverage capital and
risk-based capital amounted to $120.1 million or 5.43% of adjusted total assets,
$120.1 million or 5.43% of adjusted total assets, and $134.1 million or 11.99%
of risk-weighted assets, respectively.
The following tables set forth the pro forma regulatory capital and pro
forma regulatory capital ratios of the Bank at December 31, 1997, as adjusted to
give effect to the receipt of the estimated net proceeds from the sale of the
Common Stock in the Offering. The Company anticipates contributing a substantial
portion of the net proceeds from the Offering to the Bank. For purposes of the
following table, it is assumed that the Company contributes approximately $67.7
million of the net proceeds to the Bank. See "Use of Proceeds" and
"Regulation--Regulation of Federal Savings Banks--Regulatory Capital
Requirements."
<TABLE>
<CAPTION>
TIER 1
TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- ---------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Stockholders' equity of the Bank............................................. $ 165,193 $ 165,193 $ 165,193
Minority interest--Series A Preferred Shares of PPCCP........................ 33,250 33,250 33,250
Unrealized losses on securities available for sale........................... 1,974 1,974 1,974
Non-allowable capital:
Direct real estate investments............................................. (1,908) (1,908) (1,908)
Intangible assets.......................................................... (529) (529) (529)
Supplemental capital:
Allowance for loan losses.................................................. -- -- 13,988
---------- ---------- -----------
Regulatory capital of the Bank............................................... $ 197,980 $ 197,980 $ 211,968
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
RISK-BASED
TIER 1 ----------------------
TANGIBLE LEVERAGE TOTAL
CAPITAL CAPITAL TIER 1 CAPITAL
RATIO RATIO RATIO RATIO
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Regulatory capital of the Bank............................................. 8.66% 8.66% 17.70% 18.95%
Well-capitalized ratio..................................................... 1.50 5.00 6.00 10.00
--- --- --------- -----
Excess above well-capitalized ratio........................................ 7.16% 3.66% 11.70% 8.95%
--- --- --------- -----
--- --- --------- -----
</TABLE>
The amount of adjusted total assets used for the tangible and core (or Tier
1 leverage) capital ratios was approximately $2.3 billion. Risk-weighted assets
used for the risk-based capital ratios amounted to approximately $1.1 billion.
25
<PAGE>
DILUTION
Upon completion of the Offering, there will be an immediate dilution of the
net tangible book value per share of Common Stock from the initial public
offering price. This dilution primarily results from the sale by the Company of
Common Stock in the Offering at a price above the current book value per share.
As of December 31, 1997, the Company had a net tangible book value of $79.1
million or $25.09 per share. "Net tangible book value per share" represents the
tangible net worth of the Company (total assets less intangible assets (i.e,
goodwill) and total liabilities), divided by the number of shares of Common
Stock deemed to be outstanding.
Without taking into account any changes in net tangible book value after
December 31, 1997, other than to give effect to the sale by the Company of the
8,866,667 shares of Common Stock in the Offering (after deduction of
underwriting discounts and commissions and estimated Offering expenses), the pro
forma net tangible book value at December 31, 1997 would have been $8.01 per
share, representing an immediate dilution of $5.99 per share to new investors
purchasing the shares of Common Stock offered hereby at an assumed initial
public offering price of $14.00 per share. See "Underwriting."
<TABLE>
<S> <C>
Initial public offering price....................................... $ 14.00
Net tangible book value per share before Offering................... 6.77
Increase per share attributable to new investors.................... 1.24
---------
Pro forma net tangible book value per share after Offering(1)....... 8.01
---------
Dilution per share to new investors after Offering(1)............... $ 5.99
---------
---------
</TABLE>
- ------------------------
(1) Reflects the issuance by the Company of an aggregate of 8,527,473 shares of
Common Stock in exchange for shares of Outstanding Preferred Stock. See "The
Stockholders' Agreement." Also reflects the other assumptions set forth
under "Capitalization."
The following table compares on a pro forma basis at December 31, 1997 the
total number of shares of Common Stock purchased from the Company, the total
cash consideration paid and the average price per share paid by the Selling
Stockholders and the new investors purchasing the shares of Common Stock offered
hereby (assuming the sale by the Company of 8,866,667 shares of Common Stock at
an assumed initial public offering price of $14.00 per share and before
deduction of underwriting discounts and commissions and estimated Offering
expenses).
<TABLE>
<CAPTION>
SHARES OWNED AFTER THE
OFFERING TOTAL CONSIDERATION
------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ---------- ----------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selling Stockholders(1)............................... 7,879,537 38% $ 129,820 42% $ 11.12(2)
New investors......................................... 12,666,667 62 177,333 58 $ 14.00
------------ ----- ---------- ----- ------
Total............................................. 20,546,204 100% $ 307,153 100%
------------ ----- ---------- -----
------------ ----- ---------- -----
</TABLE>
- ------------------------
(1) Reflects the issuance by the Company of an aggregate of 8,527,473 shares of
Common Stock in exchange for shares of Outstanding Preferred Stock. See "The
Stockholders' Agreement."
(2) Includes Total Consideration divided by the 7,879,537 shares of the Selling
Stockholders outstanding after the Offering plus the 3,800,000 shares sold
by the Selling Stockholders in the Offering.
26
<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 COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS.
GENERAL
The Company conducts its business primarily through the Bank, which is a
community oriented savings bank which emphasizes customer service and
convenience. The Company has operated profitably during 1996 and 1997 and is
currently well capitalized under applicable regulatory requirements. As a result
of the Bank's capital position, together with the deterioration in the Southern
California economy which had begun with the national recession at the start of
the decade, the Company recognized significant credit losses on its real estate
assets, which resulted in the Company reporting losses in 1993, 1994 and 1995.
Aggregate losses reached a high of $57.4 million during the year ended December
31, 1994. In 1995, the Company, in conjunction with its 1995 recapitalization,
replaced its former senior managers with a new management team with considerable
experience in commercial banking and problem asset rehabilitation. Management
has adopted a business strategy designed to reduce problem assets, increase its
net interest income, reduce operating expenses and costs of funds and maximize
profitability while limiting interest rate and credit risk. Management's actions
contributed to the Company's return to profitability in 1996.
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
has increased its emphasis on commercial business and consumer lending which
complements the Bank's existing residential and commercial real estate lending
operations. In addition, the Bank has increased its investment in U.S.
Government agency obligations and U.S. Government agency mortgage-backed
securities with the intention of enhancing net interest income while limiting
credit and interest rate risk. On the liability side of the Bank's balance
sheet, the Bank is focused on accessing cost-efficient funding sources,
including retail deposits, securities sold under agreements to repurchase and
FHLB advances.
The Bank's business strategy focuses on achieving attractive returns
consistent with the Company's risk management objectives. The Bank has sought to
implement this strategy by (i) reducing non-performing assets; (ii) improving
operating efficiency by maintaining a low level of operating expenses relative
to interest-earning assets; (iii) reducing funding costs through the utilization
of retail deposits and other borrowings; (iv) revising the Bank's investment
policy and, in connection therewith, replacing illiquid mortgage-related
securities with U.S. Government agency obligations and U.S. Government agency
mortgage-backed securities; (v) managing the Bank's interest rate risk through
on-balance sheet hedging; (vi) developing new business relationships through an
increased emphasis on commercial lending and diversifying the Bank's retail
products and services, including an increase in consumer loan originations;
(vii) increasing the Bank's securities portfolio as a means of enhancing net
interest income while minimizing the Bank's credit and interest rate risk
exposure; and (viii) expanding the Bank's franchise through new branch openings
and pursuing acquisition opportunities when appropriate. In addition, the
Company intends to leverage the net proceeds of the Offering as a means of
expanding its lending and investment portfolios and thereby increasing its
earnings, which will permit the Company to accelerate utilization of existing
NOLs. See "Risk Factors--Impact of Ownership Change on Use of Net Operating Loss
Carryforwards," "--Risk that Rights are Treated as Debt on Use of Net Operating
Loss Carry-forwards," "Use of Proceeds" and "Taxation."
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets increased by $465.1 million or 26.6% to $2.2 billion
during the year ended December 31, 1997 and increased by $168.2 million or 10.6%
during the year ended December 31, 1996.
27
<PAGE>
The increase in total assets during 1997 primarily reflected an increase in the
Bank's loans receivable, net as well as investments in U.S. Government agency
mortgage-backed securities. During 1997, the Bank took advantage of the leverage
opportunities presented as a result of the capital raised from the PPCCP REIT
offering, and purchased $408.8 million of adjustable-rate single-family
residential mortgage loans, which were funded by short to-intermediate-term FHLB
advances. Total investments increased by $67.5 million during 1997 and were the
primary reason for the increase in total assets in 1996. These assets were
funded primarily through the use of short- and intermediate-term borrowings,
consisting of reverse repurchase agreements and FHLB advances. The shift in the
composition of the Bank's asset and liability mix since 1996 reflects the new
management's operational philosophy, discussed above.
CASH, CASH EQUIVALENTS AND OTHER SHORT-TERM INVESTMENTS. Cash, cash
equivalents and other short-term investments (consisting of cash,
interest-bearing deposits in other banks, federal funds sold and securities
purchased under agreements to resell) amounted to $21.1 million, $21.9 million
and $54.0 million at December 31, 1997, 1996 and 1995, respectively. The Bank
manages its cash, cash equivalents and other short-term investments based upon
the Bank's operating, investing and financing activities. The Bank generally
attempts to invest its excess liquidity into higher yielding assets such as
loans or securities. At December 31, 1997, the Bank's regulatory liquidity
exceeded the minimum OTS requirements. See "--Liquidity and Capital Resources."
SECURITIES. Since June 1995, the Bank has increased its investment in
adjustable-rate mortgage-backed securities which are insured or guaranteed by
U.S. Government agencies or government sponsored enterprises. At December 31,
1997, the Bank's securities portfolio (both held-to-maturity and available-
for-sale) amounted to $580.8 million or 26.2% of the Company's total assets, as
compared to $513.3 million or 29.4% and $241.6 million or 15.3% at December 31,
1996 and 1995, respectively. At December 31, 1997, 1996 and 1995, $428.1
million, $474.6 million and $231.7 million or 74%, 92% and 96% of the Bank's
securities portfolio consisted of mortgage-backed securities and $139.7 million,
$38.7 million and $10.0 million or 24%, 8% and 4% 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 December 31,
1997, $9.7 million of the Bank's securities portfolio was classified as
held-to-maturity and reported at historical cost and $571.2 million of such
portfolio was classified as available-for-sale and reported at fair value, with
unrealized gains and losses excluded from earnings and instead reported as a
separate component of stockholders' 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 December 31,
1997, the Bank's securities classified as available for sale had in the
aggregate $2.0 million of unrealized losses. See "Business--Investment
Activities."
LOANS RECEIVABLE. Net loans receivable increased by $391.5 million or 34.3%
during the year ended December 31, 1997 and decreased by $86.4 million or 7.0%
during the year ended December 31, 1996. The significant increase during 1997
was directly attributable to management's strategy of leveraging the capital
generated from the PPCCP REIT offering. The Bank purchased $408.8 million of
adjustable-rate, single-family residential mortgage loans in the last quarter of
1997 on a servicing retained basis. At December 31, 1997, $231.2 million in
principal balance of such purchases were secured by properties located outside
of the state of California. Beginning in the last quarter of 1996, the Bank
again began to increase its loan origination activities, which is reflected in
its 1997 origination levels. See "Business--Lending Activities-- Origination,
Purchase and Sale of Loans."
Certain factors in the Bank's 1995 recapitalization plan contributed to the
decrease in loans receivable in 1996, including management's focus on reducing
non-performing assets and the reorientation of the
28
<PAGE>
Bank's adjustable-rate residential and commercial loan portfolios to indexes
that adjust more rapidly to changes in market rates of interest (as compared to
the FHLB 11th District Cost of Funds Index ("COFI") which had been traditionally
utilized by the Bank). As a result, loan originations declined during the year.
During the year ended December 31, 1997, the Bank sold $85.2 million of such
COFI-based residential mortgage loans and used the sale proceeds to purchase
$59.0 million of one-year adjustable-rate loans tied to the U.S. Treasury index
of comparable maturity.
NON-PERFORMING LOANS AND TROUBLED DEBT RESTRUCTURINGS. The Bank's new
management has successfully taken steps to reduce 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 $68.3 million at December 31, 1994 to an aggregate of $19.8
million at December 31, 1997. See "Business--Asset Quality."
REAL ESTATE HELD FOR INVESTMENT AND SALE. Net real estate held for
investment and sale consists of real estate acquired through foreclosure (i.e.,
real estate owned) and real estate held for investment. Real estate owned is
included in total non-performing assets. Management aggressively sold real
estate owned in 1997, taking advantage of favorable conditions in the California
real estate market. The Bank's real estate owned had increased dramatically in
the early 1990's as a result of the deterioration in the Southern California
economy, and amounted to a high of $31.6 million at December 31, 1993. As a
result of the sales conducted during 1997, real estate owned declined to $13.3
million at December 31, 1997. See "Business-- Asset Quality."
Real estate held for investment has historically consisted of the Bank's
indirect investment (through subsidiaries of the Bank) in limited partnerships
which were engaged in the acquisition, development, construction and sale of
single-family residential developments. Real estate held for investment amounted
to $1.9 million at December 31, 1997, which was comprised of one 62 acre parcel
of vacant land in Corona, California. In March 1998, the Bank entered into a
contract to sell the property. See "Business-- Subsidiaries."
DEPOSITS. Total deposits decreased by $104.6 million or 7.6% during the
year ended December 31, 1997 and by $102.1 million or 6.9% during the year ended
December 31, 1996. The Bank's aggregate certificates of deposit declined from
$1.0 billion or 73.0% of total deposits at December 31, 1996 to $932.8 million
or 73.6% of total deposits at December 31, 1997. Of the total decline in
certificates of deposit, out-of-market, institutional jumbo certificates of
deposit declined from $103.4 million or 7.02% of total deposits to $2.5 million
or 0.20% of total deposits from December 31, 1995 to December 31, 1997. New
management, after evaluating all potential sources of funds (including retail
and non-retail deposits and short- and long-term borrowings), has focused on a
strategy which results in an all-in cost to the Bank that meets its funding
benchmark and is consistent with the Bank's asset and liability policies. 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, NOW and money market accounts) increased from $275.5 million or 18.7%
of total deposits at December 31, 1995 to $333.8 million or 26.4% of total
deposits at December 31, 1997. See "Business--Sources of Funds--Deposits."
BORROWINGS. The Company recapitalized the Bank in both 1992 and 1995 using
a combination of debt and equity. Total senior debt has decreased from $38.2
million at December 31, 1994 to $11.1 million at December 31, 1997. Senior debt
was reduced to $10.0 million at December 31, 1995 due to the contribution of the
previously outstanding senior notes to the Bank as part of the 1995
recapitalization. The $10.0 million of aggregate senior notes presently
outstanding, which are owned by the Bishop Estate, will be prepaid in connection
with the Offering. See "Use of Proceeds," "Capitalization" and "The
Stockholders' Agreement."
29
<PAGE>
Other than deposits, the Bank's primary sources of funds consist of reverse
repurchase agreements and advances from the FHLB of San Francisco. At December
31, 1997, reverse repurchase agreements amounted to $340.8 million, as compared
to $192.4 million and $0 at December 31, 1996 and 1995, respectively. The Bank
has been utilizing reverse repurchase agreements as part of its overall asset
growth and leverage strategy and, in connection therewith, during 1997, the Bank
increased the weighted average remaining term to maturity of such instruments.
As of December 31, 1997, the weighted average remaining term to maturity of the
Bank's reverse repurchase agreements increased to 2.71 years, as compared to
0.63 years at December 31, 1996, and such reverse repurchase agreements had a
weighted average interest rate of 5.76% compared to 5.49% at December 31, 1996.
The Bank had no reverse repurchase agreements outstanding at December 31, 1995.
See "Business--Sources of Funds--Borrowings."
Advances from the FHLB of San Francisco amounted to $472.0 million, $80.0
million and $31.7 million at December 31, 1997, 1996 and 1995, respectively. The
significant increase in FHLB advances during 1997 is directly attributable to
management's strategy of leveraging the capital raised in the PPCCP REIT
offering. Fixed-rate FHLB advances of short to-intermediate-term maturities were
used to fund the wholesale purchase of $408.8 million of one-year
adjustable-rate single-family mortgage loans. The decrease in FHLB advances from
$310.0 million at December 31, 1994 to $80.0 million at December 31, 1996
reflects the actions taken by new management in paying off the Bank's short-term
FHLB advances and utilizing, as needed, reverse repurchase agreements at more
attractive rates. Of the Bank's FHLB advances outstanding as of December 31,
1997, $357.0 million were scheduled to mature during 1998 and the remaining
$115.0 million matures during 2002. As of December 31, 1997, the weighted
average remaining term to maturity of the Bank's FHLB advances amounted to 1.61
years, compared to 0.95 and 0.74 years at December 31, 1996 and 1995,
respectively, and had a weighted average interest rate of 5.87% at December 31,
1997, as compared to 5.91% and 5.84% at December 31, 1996 and 1995,
respectively. At December 31, 1997, the Bank had a collateralized available line
of credit of approximately $31.0 million with the FHLB of San Francisco. See
"--Liquidity and Capital Resources" and "Business--Sources of
Funds--Borrowings."
STOCKHOLDERS' EQUITY. Stockholders' equity increased from $56.6 million at
December 31, 1995 to $64.8 million at December 31, 1996 and further increased to
$79.6 million at December 31, 1997. The $14.8 million or 22.8% increase in
stockholders' equity during the year ended December 31, 1997 reflected a $4.1
million decrease in unrealized losses on securities classified as available for
sale and the $10.9 million of net earnings recognized during the period, which
was offset by a $293,000 increase in minimum pension liability, net of taxes.
The $8.2 million or 14.5% increase in stockholders' equity during the year ended
December 31, 1996 reflected the $12.5 million of net earnings recognized during
the year, which was partially offset by a $4.4 million increase in unrealized
losses on securities classified as available for sale.
RESULTS OF OPERATIONS
GENERAL. The Company'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 Company's results of operations are
also significantly affected by the Bank's net costs of hedging its interest rate
exposure; its provisions for losses on loans resulting from the Bank's
assessment of the adequacy of its allowance for losses on loans; the level of
its other income, including loan service and related fees, net gains on sales of
securities, loans and loan servicing, and net 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 Company reported net earnings (loss) of $10.9 million, $12.5 million and
$(11.5) million during the years ended December 31, 1997, 1996 and 1995,
respectively. Net earnings decreased by $1.6 million or 12.8% during the year
ended December 31, 1997, as compared to the same period in the prior year, due
to
30
<PAGE>
a $3.0 million decrease in total other income and a $1.7 million increase in
total operating expenses, which was partially offset by a $2.5 million or 8.6%
increase in net interest income after provision for loan losses and a $1.5
million increase in income tax benefit recognized during the year.
Net earnings increased by $24.0 million during the year ended December 31,
1996 as the Company returned to profitability due to a $7.6 million increase in
total other income, a $5.9 million decrease in the provision for loan losses, a
$7.2 million increase in net interest income, a $2.9 million decrease in total
operating expenses and a $371,000 increase in the income tax benefit recognized
during the year.
NET INTEREST INCOME. Net interest income is determined by the Company'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 $33.8 million, $32.1 million and $24.9 million
during the years ended December 31, 1997, 1996 and 1995, respectively. Net
interest income increased by $1.7 million or 5.2% during the year ended December
31, 1997, as compared to the prior year, due to a $167.2 million or 10.0%
increase in the average balance of interest-earning assets (consisting primarily
of a $113.7 million increase in the average balance of mortgage-backed
securities and a $23.2 million increase in the average balance of loans
receivable), which was partially offset by a decrease in the interest rate
spread of 11 basis points. Net interest income increased by $7.2 million or
28.7% during the year ended December 31, 1996 due to a 45 basis point increase
in the interest rate spread (reflecting a 22 basis point increase in the average
yield earned on the interest-earning assets and a 23 basis point reduction in
the average rate paid on the interest-bearing liabilities).
31
<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 Company 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 31,
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995
----------------------------------- --------------------------------- --------------------
<CAPTION>
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST
--------- ----------- ----------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)..... $1,200,137 $ 89,938 7.49% $1,176,944 $ 89,020 7.56% $1,284,090 $ 94,473
Mortgage-backed
securities(2)......... 501,261 32,672 6.52 387,603 26,136 6.74 328,446 21,836
Other interest-earning
assets(3)............. 135,949 8,369 6.16 105,583 7,740 7.33 108,114 6,617
--------- ----------- --------- --------- --------- ---------
Total interest-earning
assets.............. 1,837,347 130,979 7.13% 1,670,130 122,896 7.36% 1,720,650 122,926
----------- --------- ---------
Noninterest-earning
assets.................. 74,487 65,179 48,945
--------- --------- ---------
Total assets.......... $1,911,834 $1,735,309 $1,769,595
--------- --------- ---------
--------- --------- ---------
Interest-bearing
liabilities:
Deposits:
Transaction
accounts(4)......... $ 340,348 12,476 3.67% $ 352,853 12,737 3.61% $ 197,441 5,287
Term certificates of
deposit............. 966,863 54,771 5.66 1,069,484 62,399 5.83 1,212,989 69,579
--------- ----------- --------- --------- --------- ---------
Total deposits...... 1,307,211 67,247 -- 1,422,337 75,136 1,410,430 74,866
Senior debt............. 11,404 1,271 11.15 10,294 1,160 11.27 21,666 2,983
Other borrowings........ 506,077 28,420 5.62 232,668 14,108 6.06 293,606 18,443
Hedging costs........... -- 267 -- 387 -- 1,685
--------- ----------- --------- --------- --------- ---------
Total
interest-bearing
liabilities....... 1,824,692 97,205 5.33% 1,665,299 90,791 5.45% 1,725,702 97,977
----------- --------- ---------
Noninterest-bearing
liabilities............. 15,957 12,998 13,854
--------- --------- ---------
Total liabilities..... 1,840,649 1,678,297 1,739,556
Stockholders' equity...... 71,185 57,012 30,039
--------- --------- ---------
Total liabilities and
stockholders'
equity.............. $1,911,834 $1,735,309 $1,769,595
--------- --------- ---------
--------- --------- ---------
Net interest-earning
assets (liabilities).... $ 12,655 $ 4,831 $ (5,052)
--------- --------- ---------
--------- --------- ---------
Net interest
income/interest rate
spread.................. $ 33,774 1.80% $ 32,105 1.91% $ 24,949
----------- ----- --------- ----- ---------
----------- ----- --------- ----- ---------
Net interest margin....... 1.84% 1.92%
----- -----
----- -----
Ratio of average interest-
earning assets to
average interest-bearing
liabilities............. 1.01% 1.00%
----- -----
----- -----
<CAPTION>
<S> <C>
AVERAGE
YIELD/
COST
-----------
<S> <C>
Interest-earning assets:
Loans receivable(1)..... 7.36%
Mortgage-backed
securities(2)......... 6.65
Other interest-earning
assets(3)............. 6.12
Total interest-earning
assets.............. 7.14%
Noninterest-earning
assets..................
Total assets..........
Interest-bearing
liabilities:
Deposits:
Transaction
accounts(4)......... 2.68%
Term certificates of
deposit............. 5.74
Total deposits......
Senior debt............. 13.77
Other borrowings........ 6.28
Hedging costs...........
Total
interest-bearing
liabilities....... 5.68%
Noninterest-bearing
liabilities.............
Total liabilities.....
Stockholders' equity......
Total liabilities and
stockholders'
equity..............
Net interest-earning
assets (liabilities)....
Net interest
income/interest rate
spread.................. 1.46%
-----
-----
Net interest margin....... 1.45%
-----
-----
Ratio of average interest-
earning assets to
average interest-bearing
liabilities............. 1.00%
-----
-----
</TABLE>
- ------------------------
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(2) Includes mortgage-backed securities classified as held to maturity and
available for sale.
(3) Includes short-term investments, securities purchased under agreements to
resell, investment securities and FHLB stock.
(4) Includes passbook, NOW and money market accounts.
32
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in rate (changes in rate
multiplied by prior volume); (ii) effects on interest income attributable to
changes in volume (changes in volume multiplied by prior rate); and (iii)
changes in rate/volume (change in rate multiplied by change in volume).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
YEAR ENDED DECEMBER 31, 1997 COMPARED
COMPARED TO YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED TO DECEMBER 31, 1995
------------------------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------------- -----------------------------------
<CAPTION>
TOTAL NET
RATE/ INCREASE RATE/
RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME
--------- ----------- ----------- ----------------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............... $ (820) $ 1,754 $ (16) $ 918 $ 2,651 $ (7,883) $ (221)
Mortgage-backed securities..... (872) 7,664 (256) 6,536 311 3,933 56
Other interest-earning
assets....................... (1,240) 2,226 (357) 629 1,310 (155) (32)
--------- ----------- ----------- ------- --------- ----------- -----------
Total net change in income on
interest-earning assets........ (2,932) 11,644 (629) 8,083 4,272 (4,105) (197)
--------- ----------- ----------- ------- --------- ----------- -----------
Interest-bearing liabilities:
Deposits:
Transaction accounts......... 197 (451) (7) (261) 1,840 4,162 1,448
Term certificates of
deposit.................... (1,815) (5,987) 174 (7,628) 1,193 (8,232) (141)
--------- ----------- ----------- ------- --------- ----------- -----------
Total deposits............. (1,618) (6,438) 167 (7,889) 3,033 (4,070) 1,307
Senior debt.................... (13) 125 (1) 111 (542) (1,566) 285
Other borrowings............... (1,042) 16,578 (1,224) 14,312 (630) (3,826) 121
Hedging costs.................. -- -- (120) (120) -- -- (1,298)
--------- ----------- ----------- ------- --------- ----------- -----------
Total net change in expense on
interest-bearing liabilities... (2,673) 10,265 (1,178) 6,414 1,861 (9,462) 415
--------- ----------- ----------- ------- --------- ----------- -----------
Change in net interest income.... $ (259) $ 1,379 $ 549 $ 1,669 $ 2,411 $ 5,357 $ (612)
--------- ----------- ----------- ------- --------- ----------- -----------
--------- ----------- ----------- ------- --------- ----------- -----------
<CAPTION>
<S> <C>
TOTAL NET
INCREASE
(DECREASE)
-----------------
<S> <C>
Interest-earning assets:
Loans receivable............... $ (5,453)
Mortgage-backed securities..... 4,300
Other interest-earning
assets....................... 1,123
-------
Total net change in income on
interest-earning assets........ (30)
-------
Interest-bearing liabilities:
Deposits:
Transaction accounts......... 7,450
Term certificates of
deposit.................... (7,180)
-------
Total deposits............. 270
Senior debt.................... (1,823)
Other borrowings............... (4,335)
Hedging costs.................. (1,298)
-------
Total net change in expense on
interest-bearing liabilities... (7,186)
-------
Change in net interest income.... $ 7,156
-------
-------
</TABLE>
INTEREST INCOME. Total interest income increased by $8.1 million or 6.6%
during the year ended December 31, 1997 and decreased slightly by $30,000 during
the year ended December 31, 1996. Interest income on loans receivable, the
largest component of interest-earning assets, increased by $918,000 or 1.0%
during the year ended December 31, 1997 and decreased by $5.5 million or 5.8%
during the year ended December 31, 1996. The small increase in interest income
on loans receivable during 1997 is attributable to (i) the sale during the year
of $85.2 million of COFI-based residential mortgage loans to diversify the loan
portfolio to reduce the amount of loans based on the COFI index, an index which
lags increases in interest rates, and (ii) the purchase during the fourth
quarter of 1997 of $408.8 million of Treasury-indexed adjustable-rate
single-family mortgage-loans which had an initial weighted average interest rate
of 6.16%. This purchased loan portfolio in the aggregate is expected to adjust
to a weighted average interest rate and a weighted average yield of
approximately 7.50% and 6.90% by June 1998 and 7.80% and 7.20% by December 1998,
respectively. The actual schedule of this projected increase in the weighted
average interest rate and yield will be subject to the one-year Treasury index
and loan prepayments during 1998. The purchase of such loans during the fourth
quarter of 1997 reflected management's strategy to leverage the capital raised
in the PPCCP REIT offering and to better position the Bank against interest rate
risk. Although these activities contributed in part to a decline in the
Company's interest rate spread and net interest margin during the year, the
Company anticipates that its interest rate spread and net interest margin will
improve as such purchased loans reprice to their fully indexed rate. Such loan
purchases were funded by FHLB advances with a weighted average rate of 5.85%.
The decline in interest income on loans receivable during 1996 was attributable
to management's focus on non-performing assets, as well as a change in the
Bank's orientation with respect to lending. See "Business--Lending Activities--
33
<PAGE>
Origination, Purchase and Sale of Loans." See also "Recent Developments" for
information on the Bank's purchase of additional adjustable-rate mortgage-loans
during the first quarter of 1998.
Interest income on mortgage-backed securities increased by $6.5 million or
25.0% during the year ended December 31, 1997 and increased by $4.3 million or
19.7% during the year ended December 31, 1996. Since June 1995, the Bank has
increased its investment in adjustable-rate U.S. Government agency
mortgage-backed securities in order, among other things, to reduce the Bank's
exposure to interest rate and prepayment risk, limit the Bank's credit risk and
earn a positive interest rate spread. See "Business-- Investment Activities."
Interest income on investment securities and other interest-earning assets
(which consist of U.S. Government agency securities, FHLB stock, securities
purchased under agreements to resell and other short-term investments) increased
by $629,000 or 8.1% during the year ended December 31, 1997 and increased by
$1.1 million or 17.0% during the year ended December 31, 1996. The increase in
such interest income during the year ended December 31, 1997 was primarily due
to a $30.4 million increase in the average balance of such investments, which
was partially offset by a decrease in the average yield earned thereon of 117
basis points. The increase in such interest income during 1996 was due primarily
to an increase in the weighted average yield earned on such investments of 121
basis points. See "Business-- Investment Activities."
INTEREST EXPENSE. Total interest expense increased by $6.4 million or 7.1%
during the year ended December 31, 1997 and decreased by $7.2 million or 7.3%
during the year ended December 31, 1996. The increase during 1997 is the result
of a $159.4 million or 9.6% increase in the average balance of interest-bearing
liabilities, reflecting the growth in the balance sheet. One of the primary
elements of the Bank's business strategy since the change in management in March
1995 has been to reduce the Bank's overall funding costs, subject to the Bank's
asset and liability management policies. Interest expense on deposits, the
largest component of the Bank's interest-bearing liabilities, decreased by $7.9
million or 10.5% during the year ended December 31, 1997 and marginally
increased by $270,000 or 0.4% during the year ended December 31, 1996. The
Bank's new management has emphasized transactional accounts and has allowed the
Bank's out-of-market, institutional jumbo certificates of deposit to run off as
they mature, which during 1997 reduced the average rate paid on the Bank's
deposit accounts. See "Business--Sources of Funds-- Deposits."
Interest expense on borrowings consists of senior notes and other
borrowings, which is comprised of reverse repurchase agreements and FHLB
advances. Interest expense on senior notes amounted to $1.3 million, $1.2
million and $3.0 million during the years ended December 31, 1997, 1996 and
1995, respectively. The senior notes outstanding during the periods were
purchased by the Selling Stockholders during the 1992 and 1995 recapitalizations
of the Bank. The reduction of interest expense during 1996 reflects the
contribution by certain of the Selling Stockholders, as part of the 1995
recapitalization, of the then outstanding senior notes to the capital of the
Bank. The Bishop Estate purchased $10.0 million of aggregate principal amount of
senior notes in connection with the 1995 recapitalization, which the Company
will prepay in connection with the Offering. See "Use of Proceeds,"
"Capitalization" and "The Stockholders' Agreement."
Interest expense on other borrowings increased by $14.3 million or 101.4%
during the year ended December 31, 1997 and decreased by $4.3 million or 23.5%
during the year ended December 31, 1996. Interest expense on reverse repurchase
agreements increased by $8.7 million or 80.1% during 1997 and $3.8 million or
54.3% during 1996. The Bank's new management has utilized reverse repurchase
agreements when the rates and other terms on such borrowings are favorable as
compared to its other funding sources. See "Business--Sources of
Funds--Borrowings."
Interest expense on advances from the FHLB of San Francisco increased by
$5.6 million or 174% during the year ended December 31, 1997 and decreased by
$8.2 million or 71.8% during the year ended December 31, 1996. The Bank's new
management initially allowed the Bank's short-term, high cost FHLB
34
<PAGE>
advances to mature and utilized reverse repurchase agreements as an alternative
source of funds. During 1997, however, the Bank utilized short-to
intermediate-term FHLB advances to fund the wholesale purchase of $408.8 million
of adjustable-rate single-family residential mortgage loans. See "Business--
Sources of Funds--Borrowings."
The Bank's interest expense during the years ended December 31, 1997, 1996
and 1995 included the costs of hedging the Bank's interest rate exposure. Such
hedging costs amounted to $267,000, $387,000 and $1.7 million during such
respective periods. The Bank in the past has 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. As a result, the Bank's hedging costs have declined significantly
since 1994. At December 31, 1997, the Bank had one remaining interest rate swap
contract with a notional amount of $4.7 million and nine remaining interest rate
corridors with an aggregate contract amount of $57.0 million.
PROVISION FOR LOAN LOSSES. The Bank established provisions for loan losses
of $2.0 million, $2.9 million and $8.8 million during the years ended December
31, 1997, 1996 and 1995, respectively. The substantial provision taken during
1995 reflected new management's initiatives to reduce non-performing assets
which resulted, in large part, from the deterioration in the Southern California
economy and the decline in market values of real estate resulting in part from
the Northridge earthquake of 1994. As shown under "Business--Asset Quality," new
management has aggressively charged off non-performing loans, 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 Company'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 Company's
underwriting policies.
Management believes that its allowance for loan losses at December 31, 1997
was 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. See "Business--Asset
Quality--Allowance for Loan Losses." 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 Company'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 $3.0 million or 37.0% during
the year ended December 31, 1997 and increased by $7.6 million during the year
ended December 31, 1996. Loan service and loan related fees amounted to
$481,000, $1.4 million and $1.6 million during the years ended December 31,
1997, 1996 and 1995, respectively. The decline in such fees during these periods
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--Lending
Activities--Single-Family Residential Real Estate Loans."
The Bank recognized net gains on sales of mortgage-backed and other
securities of $1.3 million, $3.6 million and $641,000 during the years ended
December 31, 1997, 1996 and 1995, respectively. During such respective periods,
the Bank sold $234.3 million, $158.4 million and $184.3 million of
mortgage-backed securities.
35
<PAGE>
Net gains (losses) on the sale of loans and loan servicing amounted to $3.4
million, $(53,000) and $(166,000) during the years ended December 31, 1997, 1996
and 1995, respectively. The Bank sold $92.9 million, $0 and $27.7 million of
loans during the years ended December 31, 1997, 1996 and 1995, respectively, and
loan servicing with respect to $868.4 million of real estate loans 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 of
the lives of the loans. See "Business--Lending Activities--Single-Family
Residential Real Estate Loans."
Net income (loss) from real estate operations amounted to $(1.8) million,
$1.9 million and $(2.1) million during the years ended December 31, 1997, 1996
and 1995, respectively. Net income (loss) from real estate operations consists
of (i) losses from real estate operations (rental income less operating
expenses), (ii) gains on sales of real estate owned and real estate held for
investment, and (iii) provisions for losses on real estate owned and real estate
held for investment. During the years ended December 31, 1997, 1996 and 1995,
losses from real estate operations amounted to $(1.3) million, $(634,000) and
$(448,000), respectively, gains on sales of real estate owned and real estate
held for investment amounted to $2.2 million, $3.3 million and $392,000,
respectively, and provisions for losses on real estate owned and real estate
held for investment amounted to $2.8 million, $766,000 and $2.0 million,
respectively. The improving economy in southern California since 1996 has
assisted in new management's efforts to dispose of the Bank's real estate
holdings and has facilitated sales in 1996 and 1997.
Miscellaneous other income (consisting primarily of fees on deposit
accounts) amounted to $1.8 million, $1.2 million and $513,000 during the years
ended December 31, 1997, 1996 and 1995, respectively.
OPERATING EXPENSES. Total operating expenses increased by $1.7 million or
6.2% during the year ended December 31, 1997 and decreased by $2.9 million or
9.5% during the year ended December 31, 1996. The increase in operating expenses
during 1997 is attributable to new personnel hired by management to further the
Bank's commercial lending emphasis as well as to leasing expenses associated
with the Bank's new data processing equipment. From the time of the change in
the Bank's management in March 1995 through 1996, the Bank reduced its operating
expenses through staff reductions, consolidation of certain operations, the
closing of the Bank's loan production offices and operations center, the
relocation of the Bank's corporate headquarters and the sale of a substantial
portion of the Bank's residential loan servicing portfolio. During the years
ended December 31, 1997, 1996 and 1995, total operating expenses as a percentage
of average total assets amounted to 1.55%, 1.60% and 1.74%, respectively, and
the Company's efficiency ratio amounted to 72.17%, 64.52% and 89.72%,
respectively.
The principal category of the Company's operating expenses is personnel and
benefits expense of the Bank, which amounted to $11.8 million, $10.8 million and
$12.1 million during the years ended December 31, 1997, 1996 and 1995,
respectively. The decline in such expense from 1995 to 1996 is attributable to
management's streamlining of the Bank's operations, which resulted in a 17.2%
reduction in the number of full-time equivalent employees from 273 at December
31, 1994 to 226 at December 31, 1997. Personnel and benefits expense increased
during the year ended December 31, 1997, primarily as a result of the hiring and
training of new commercial and consumer lending personnel. Management intends to
increase its emphasis in these lending areas in future years. See
"Business--Lending Activities." In connection with the Offering, the Company,
the Bank and certain of their senior executive officers have agreed to a one-
time payment of funds pursuant to the Original Employment Agreements, which will
increase compensation expense during 1998. See "Management--Employment
Agreements--Original Employment Agreements and Establishment of Grantor Trust"
and "Risk Factors--Impact on 1998 Operating Results of Benefits to Selling
Stockholders and Senior Management."
Occupancy expense amounted to $7.1 million, $6.4 million and $7.0 million
during the years ended December 31, 1997, 1996 and 1995, respectively. The
increase in such expense during the year ended December 31, 1997 was primarily
due to the data processing equipment lease and expenses associated with
36
<PAGE>
security personnel. The general decline in occupancy expense during the prior
period occurred notwithstanding the Bank opening a branch office in Buena Park,
California in November 1995 and a branch office facility in Los Angeles,
California in April 1996. Management expects occupancy expense to continue to
increase over the next year as the Bank has begun to operate 20 new ATMs within
a chain of health clubs located in Southern California. The Bank also has an
option to install and operate up to an additional three ATMs within such chain
of health clubs. In 1997, the Company 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. The Company believes it is the first institution to receive
approval to operate such units at remote locations, nine of which were placed in
operation in late 1997. The new ATMs and automated loan machines are also
expected to contribute to an increase in occupancy expense in future periods.
See "Recent Developments."
FDIC insurance premiums totaled $4.9 million, $4.4 million and $4.3 million
during the years ended December 31, 1997, 1996 and 1995, respectively. FDIC
insurance premiums are a function of the size of the Bank's deposit base.
Pursuant to legislation effective September 30, 1996, SAIF member institutions
were required to pay a one-time special assessment equal to 65.7 basis points
for all SAIF-assessable deposits as of December 31, 1995. As a result of the
Bank's financial condition, the Bank applied for and obtained an exemption from
paying such special assessment, which would have amounted to approximately $9.0
million. During the fourth quarter of 1996, the FDIC lowered the assessment
rates for SAIF members so that the highest rated institutions are currently
paying 6.28 basis points in deposit insurance premiums. However, as a result of
the Bank's exemption from paying the one-time special assessment, the Bank has
continued to pay assessments at the assessment rate schedule in effect as of
December 31, 1995 (i.e. 35.28 basis points including the debt service paid to
the Financing Corporation). The Company expects to pay the special assessment
owing to the FDIC, which will amount to $2.7 million (net of applicable tax
benefits) as of June 30, 1998, the next available payment date, from the
proceeds of the Offering. Consequently, the Bank anticipates material reductions
in its deposit insurance premiums in future periods. See "Use of Proceeds,"
"Capitalization" and "Regulation--Regulation of Federal Savings Banks--FDIC
Assessments."
Professional services expense amounted to $528,000, $771,000 and $2.1
million during the years ended December 31, 1997, 1996 and 1995, respectively.
The significant expense recognized during 1995 and in prior periods reflected
legal expenses associated with problem asset resolution. For information with
respect to possible increases in legal fees and expenses in future periods due
to the Goodwill Litigation (as defined and discussed under "Agreement with
Respect to Goodwill Litigation Recovery"). See "Risk Factors--Risks Relating to
Goodwill Litigation."
Office related expenses have remained relatively stable over the periods
presented and amounted to $3.9 million, $4.0 million and $4.0 million during the
years ended December 31, 1997, 1996 and 1995, respectively.
Miscellaneous other expense (consisting primarily of regulatory assessments)
amounted to $1.3 million, $1.5 million and $1.3 million during the years ended
December 31, 1997, 1996 and 1995, respectively.
INCOME TAXES. During the years ended December 31, 1997, 1996 and 1995, the
Company recognized $4.5 million, $3.0 million and $2.6 million in income tax
benefits primarily as a result of offsetting available NOLs against taxable
income. At December 31, 1997, the Company had $151.5 million of federal NOLs
which expire between 2001 and 2011 and no state NOLs.
The 1992 recapitalization resulted in an ownership change of the Company
(the "1992 Ownership Change"). The 1992 Ownership Change resulted in an annual
Section 382 limitation on the Company's ability to utilize its NOLs in any one
year of approximately $7.7 million. However, that annual limitation has
increased due to unused limitations from previous years, and amounts to
approximately $38.7 million
37
<PAGE>
as of the beginning of 1998. There are $43.3 million of pre-change losses
carried over to 1998 that are subject to this limitation (the "1992 limited
NOLs").
It is anticipated that the Offering will result in the 1998 Ownership
Change. The actual annual Section 382 limitation from the 1998 Ownership Change
will equal the sum of (i) the fair market value of the stock of the Company
immediately before the Offering and (ii) the fair market value of the Company's
and the Bank's goodwill claim with respect to the Goodwill Litigation (as
defined and described under "Agreements With Respect to the Potential Goodwill
Lawsuit Recovery"), multiplied by the applicable long-term tax-exempt rate. For
illustration purposes only, the annual Section 382 limitation from the 1998
Ownership Change is estimated to be approximately $21.5 million. The actual
annual Section 382 limitation from the 1998 Ownership Change may be higher or
lower than the $21.5 million estimated, due to a change in the initial public
offering price or an increase or decrease in the value of the Company's and the
Bank's goodwill claim with respect to the Goodwill Litigation. All $151.5
million of the NOLs carried over to 1998 (including the $43.3 million that are
1992 limited NOLs), plus any NOLs for 1998 that is attributable to the period
before the 1998 Ownership Change, are subject to this limitation (the "1998
limited NOLs").
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 Company 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
Company'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.
The foregoing strategies are more fully described below.
Internal hedging through balance sheet restructuring generally involves
either the attraction of longer-term or less rate sensitive funds (i.e., core
transaction deposit accounts which are not as rate sensitive as other deposit
instruments or FHLB advances) or the investment in certain types of shorter-term
or adjustable rate assets such as adjustable-rate mortgage-backed securities,
shorter-term U.S. Government agency securities and commercial business and
consumer loans. On the asset side of the balance sheet, since the change in the
Bank's management, the Bank has not originated any additional adjustable-rate
mortgage products tied to COFI, which tends to react more slowly to changes in
interest rates, and has
38
<PAGE>
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 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--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 were $186.0 million, $216.8 million and $49.7 million during the
years ended December 31, 1997, 1996 and 1995, respectively. At December 31,
1997, $139.7 million or 32.6% of the Bank's mortgage-backed securities were
adjustable-rate instruments. See "Business--Investment Activities." For
information with respect to recent sales of fixed-rate mortgage-backed
securities, see "Recent Developments."
During the years ended December 31, 1997, 1996 and 1995, the Bank originated
in the aggregate $32.6 million, $9.8 million and $4.5 million of commercial
business and consumer loans, respectively, which amounted to 20.3%, 15.8% and
16.7% of total loan originations, respectively. The Bank intends to increase its
origination of commercial business and consumer loans which have adjustable
rates of interest and shorter terms. See "Business--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
have declined from $103.4 million at December 31, 1995 to $2.5 million at
December 31, 1997 and FHLB advances and reverse repurchase agreements have
increased from $31.7 million in the aggregate at December 31, 1995 to $812.8
million in the aggregate at December 31, 1997.
External hedging involves the use of interest rate swaps, collars,
corridors, caps and floors. The notional amount of interest rate contracts
represents the underlying amount on which periodic cash flows are calculated and
exchanged between counterparties. However, this notional amount does not
represent the principal amount of loans or securities which would effectively be
hedged by that interest rate contract. In selecting the type and amount of
interest rate contract to utilize, the Bank compares the duration of a
particular contract, or its change in value for a 100 basis point movement in
interest rates, to that of the loans or securities to be hedged. An interest
rate contract with the appropriate offsetting duration may have a notional
amount much greater than the face amount of the securities being hedged.
At December 31, 1997, the Bank was a party to one interest rate swap
agreement. The interest rate swap consists of an agreement whereby the Bank has
agreed to pay a floating-rate of interest on a notional principal amount to a
second party (i.e., a broker) in exchange for receiving from the second party a
fixed-rate of interest on the same notional amount for a predetermined period of
time. No actual assets were exchanged and interest payments are netted. This
swap contract was entered into in 1994 in order to limit the interest rate risk
related to the relative repricing characteristics of the Bank's interest-bearing
deposits. The swap agreement has an aggregate notional amount of approximately
$4.7 million and expires in 1999. The Bank pays a floating-rate (based on the
one-month London Interbank Offer Rate ("LIBOR") and receives a fixed rate
amounting to 5.69% at December 31, 1997. At December 31, 1997, one-month LIBOR
was 5.72%. The net expense (income) relating to the Bank's interest rate swap
agreements was $2,000, $35,000 and $1.2 million during the years ended December
31, 1997, 1996 and 1995, respectively.
At December 31, 1997, the Bank was also a party to nine interest rate
corridor agreements, which agreements expire from 1998 through 2001 and cover an
aggregate contract amount of approximately $57.0 million. An interest rate
corridor consists of an agreement whereby the issuer agrees to pay the
purchaser, in exchange for the payment of a premium, the prevailing rate of
interest in the event interest rates rise above a specified rate on a specified
interest rate index and do not exceed a specified upper rate on the same index.
The Bank entered into interest rate corridors as a means to artificially raise
the interest rate
39
<PAGE>
cap on certain loans. As of December 31, 1997, the interest rate corridors have
an average strike price of 6.56% and an average limit rate of 8.20% (the Bank's
interest rate corridors are based on either three month LIBOR or COFI). The
aggregate net expense relating to the Bank's interest rate corridors and floors
was $265,000, $352,000 and $468,000 during the years ended December 31, 1997,
1996, and 1995, respectively. See Note 16 to the Notes to Consolidated Financial
Statements.
The Asset/Liability Management Committee's methods for evaluating interest
rate risk include an analysis of the Bank's interest rate sensitivity "gap,"
which is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities. A gap is considered
negative when the amount of interest-rate sensitive liabilities exceeds
interest-rate sensitive assets. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to affect net interest income adversely. Because
different types of assets and liabilities with the same or similar maturities
may react differently to changes in overall market rates or conditions, changes
in interest rates may affect net interest income positively or negatively even
if an institution were perfectly matched in each maturity category.
40
<PAGE>
The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1997, based on the information and assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
MORE THAN
THREE TO MORE THAN THREE YEARS
WITHIN THREE TWELVE ONE YEAR TO TO FIVE OVER FIVE
MONTHS MONTHS THREE YEARS YEARS YEARS TOTAL
------------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets (1):
Loans receivable (2):
Single-family residential loans:
Fixed.................................. $ 23,064 $ 40,836 $ 40,315 $ 28,550 $ 78,446 $ 211,211
Adjustable............................. 290,543 443,512 -- -- -- 734,055
Multi-family residential:
Fixed.................................. 8,852 3,263 6,960 6,384 8,778 34,237
Adjustable............................. 382,175 9,437 -- -- -- 391,612
Commercial, industrial and land:
Fixed.................................. 5,844 9,313 4,957 5,243 10,243 35,600
Adjustable............................. 92,325 12,313 -- -- -- 104,638
Other loans (3).......................... 22,474 2,540 3,878 1,216 3,148 33,256
Mortgage-backed and other securities (4)... 59,715 161,433 46,156 91,269 224,283 582,856
Other interest-earning assets (5).......... 7,004 219 -- -- 23,634 30,857
------------- --------- ----------- ----------- ----------- ---------
Total.................................. $ 891,996 $ 682,866 $ 102,266 $ 132,662 $ 348,532 $2,158,322
------------- --------- ----------- ----------- ----------- ---------
------------- --------- ----------- ----------- ----------- ---------
Interest-bearing liabilities:
Deposits:
NOW accounts............................. $ 98,550 $ -- $ -- $ -- $ -- $ 98,550
Passbook accounts........................ 182,690 -- -- -- -- 182,690
Money market accounts.................... 52,550 -- -- -- -- 52,550
Term certificates of deposit............. 178,131 631,450 114,764 8,449 31 932,825
Senior debt................................ -- -- -- 4,341 6,772 11,113
Other borrowings........................... 180,788 253,000 129,000 250,000 -- 812,788
------------- --------- ----------- ----------- ----------- ---------
Total.................................. $ 692,709 $ 884,450 $ 243,764 $ 262,790 $ 6,803 $2,090,516
------------- --------- ----------- ----------- ----------- ---------
------------- --------- ----------- ----------- ----------- ---------
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities.............................. $ 199,287 $(201,584) $(141,498) $(130,128) $ 341,729 $ 67,806
------------- --------- ----------- ----------- ----------- ---------
------------- --------- ----------- ----------- ----------- ---------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets............. 9.01% (9.11)% (6.39)% (5.88)% 15.44% 3.06%
------------- --------- ----------- ----------- ----------- ---------
------------- --------- ----------- ----------- ----------- ---------
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities.............................. $ 199,287 $ (2,297) $(143,795) $(273,923) $ 67,806
------------- --------- ----------- ----------- -----------
------------- --------- ----------- ----------- -----------
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total
assets................................... 9.01% (0.10)% (6.50)% (12.38)% 3.06%
------------- --------- ----------- ----------- -----------
------------- --------- ----------- ----------- -----------
</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
Company's region.
(2) Balances have been reduced for non-performing loans, which amounted to $9.9
million at December 31, 1997.
(3) Comprised of commercial and consumer loans and loans secured by deposits.
(4) Does not include an unrealized loss on securities available for sale of $2.0
million.
(5) Comprised of short-term investments, securities purchased under agreements
to resell, investment securities and FHLB stock.
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, the Asset/Liability Management Committee also regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and net portfolio value ("NPV"), which is defined as the net
present value of an institution's existing assets, liabilities and off-balance
sheet instruments, and evaluating such impacts against the maximum potential
changes in net interest income and NPV that is authorized by the Board of
Directors of the Bank.
41
<PAGE>
The following table sets forth as of December 31, 1997 the Bank's estimated
net interest income over a eight-quarter period and NPV based on the indicated
changes in interest rates.
<TABLE>
<CAPTION>
NET INTEREST INCOME
CHANGE (IN BASIS POINTS) (NEXT EIGHT
IN INTEREST RATES(1) QUARTERS) NPV
- ------------------------- ------------------- ---------
<S> <C> <C>
(IN THOUSANDS)
+400 $ 68,724 $ 83,720
+300 77,922 101,079
+200 85,597 115,317
+100 89,788 125,563
0 93,036 129,767
-100 89,113 122,805
-200 84,465 111,998
-300 79,088 103,754
-400 72,324 98,885
</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 December 31,
1997, the Bank would not have been required to deduct an IRR component in
calculating total risk-based capital had the IRR component of the capital
regulations been in effect.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. As the Bank is the primary operating vehicle for the Company,
liquidity management is generally handled by the Bank's management. Liquidity
refers to a company'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 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
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
42
<PAGE>
provide an additional source of funds. At December 31, 1997, the Bank had $31.0
million in borrowing capacity under a collateralized line of credit with the
FHLB of San Francisco. Although the Bank has in the past utilized brokered
deposits as a source of liquidity, the Bank does not currently rely upon
brokered deposits as a source of liquidity, and does not anticipate a change in
this practice in the foreseeable future. During 1997, the Bank began extending
the maturities of both its FHLB advances and reverse repurchase agreements. See
"Business--Sources of Funds--Borrowings."
At December 31, 1997, the Bank had outstanding commitments (including unused
lines of credit) to originate and/or purchase mortgage and non-mortgage loans of
$42.9 million. Certificates of deposit which are scheduled to mature within one
year totaled $809.6 million at December 31, 1997, and borrowings that are
scheduled to mature within the same period amounted to $433.8 million. The Bank
anticipates that it will have sufficient funds available to meet its current
loan commitments.
Beginning September 30, 1997, the Company began making interest payments on
its senior debt, which were funded through dividends from the Bank. The Company
made an initial payment of $1.8 million (reflecting accruals since the senior
debt was issued in 1995) at September 30, 1997 and quarterly interest payments
in the amount of $192,000 beginning with the December 31, 1997 quarter. The
Company intends to prepay the senior notes in connection with the Offering. See
"Use of Proceeds," "Capitalization" and "The Stockholders' Agreement."
CAPITAL RESOURCES. Federally insured savings institutions such as the Bank
are required to maintain minimum levels of regulatory capital. See
"Regulation--Regulation of Federal Savings Banks--Regulatory Capital
Requirements." The following table reflects the Bank's actual levels of
regulatory capital and applicable regulatory capital requirements at December
31, 1997.
<TABLE>
<CAPTION>
REQUIRED(4) ACTUAL EXCESS
---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
----------- --------- ----------- ---------- ----------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital......................................... 1.50% $ 33,188 5.43% $ 120,141 3.93% $ 86,953
Tier 1 leverage capital(1)............................... 3.00 66,376 5.43 120,141 2.43 53,765
Tier 1 risk-based capital(2)(3).......................... 4.00 44,738 10.74 120,141 6.74 75,403
Risk-based capital(2)(3)................................. 8.00 89,475 11.99 134,129 3.99 44,654
</TABLE>
- ------------------------
(1) Does not reflect amendments which were proposed by the OTS in April 1991,
which would increase this requirement to between 4% and 5%.
(2) Does not reflect the interest-rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
(3) Tangible and Tier 1 leverage (or core) capital are computed as a percentage
of adjusted total assets of $2.2 billion. Risk-based capital is computed as
a percentage of adjusted risk-weighted assets of $1.1 billion.
(4) Does not reflect the requirements to be met in order for an institution to
be deemed "adequately capitalized" under applicable laws and regulations.
See "Regulation--Regulation of Federal Savings Banks--Prompt Corrective
Action."
INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars (except with respect to available for sale securities which
are carried at market value), without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial
companies, substantially all of the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a more significant impact
on the Company'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.
43
<PAGE>
BUSINESS
LENDING ACTIVITIES
GENERAL. Recently, the Company has redirected its attention to increasing
the Bank's lending activities. During 1995, new management had focused on the
implementation of its business strategy, which includes, among other things, the
reduction of problem assets and the improvement of operating efficiency, and
managing the Bank's interest rate risk through on-balance sheet hedging. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General." With the reduction in the Company's non-performing assets
and the Company's return to profitability in 1996 and 1997, the Bank is again
actively originating and purchasing loans. During 1997, the Company increased
originations in all loan categories, and began to purchase loans for the first
time in several years. Total loan originations and purchases have increased from
$26.8 million during the year ended December 31, 1995 to $61.7 million during
the year ended December 31, 1996 and to $666.4 million during the year ended
December 31, 1997.
At December 31, 1997, the Bank's total loans receivable amounted to $1.5
billion, which represented 69.3% of the Company's $2.2 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
December 31, 1997, such loans constituted $953.7 million and $426.3 million, or
61% and 27%, respectively, of the total loan portfolio. Substantially all of the
Bank's loan portfolio consists of conventional loans, which are loans that are
neither insured by the Federal Housing Administration nor partially guaranteed
by the Department of Veterans Affairs. The Bank has also historically originated
to a much lesser extent commercial real estate loans, which amounted to $135.4
million or 9% of the total loan portfolio at December 31, 1997. At December 31,
1997, commercial business and consumer loans (including loans secured by
deposits) amounted to $22.5 million and $10.8 million, respectively. The Bank's
total loan portfolio also included a small amount of land and other
miscellaneous loans, which amounted to $5.9 million at December 31, 1997.
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 for originations is
Los Angeles County and, to a lesser extent, Orange and Ventura Counties in
Southern California, and the Bank believes that the majority of the loans in the
Bank's portfolio are secured by properties located in California. Nevertheless,
the Bank purchased $408.8 million of adjustable-rate, single-family residential
mortgage loans in the last quarter of 1997, $231.2 million of which were located
outside of the State of 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.
44
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994
------------------------- ------------------------- ------------------------- -------------------------
<CAPTION>
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ------------- ---------- ------------- ---------- ------------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family
residential......... $ 953,701 62% $ 595,915 51% $ 658,412 52% $ 721,801 54%
Multi-family
residential......... 426,254 27 453,064 39 479,100 38 480,547 36
Commercial............ 135,407 9 110,931 10 120,109 10 129,768 10
Land and other........ 5,896 -- 1,639 -- 3,176 -- 7,546 --
---------- --- ---------- --- ---------- --- ---------- ---
Total mortgage
loans............. 1,521,258 98 1,161,549 100 1,260,797 100 1,339,662 100
---------- --- ---------- --- ---------- --- ---------- ---
Other loans:
Commercial business... 22,484 1 3,523 -- -- -- -- --
Consumer.............. 8,485 1 988 -- -- -- -- --
Secured by deposits... 2,287 -- 2,132 -- 1,976 -- 908 --
---------- --- ---------- --- ---------- --- ---------- ---
Total loans
receivable.......... 1,554,514 100% 1,168,192 100% 1,262,773 100% 1,340,570 100%
---------- --- ---------- --- ---------- --- ---------- ---
--- --- --- ---
Less:
Undistributed loan
proceeds............ 6,206 473 28 1,376
Unamortized net loan
discounts and
deferred origination
fees................ (6,859) 2,732 3,021 3,336
Deferred gain on
servicing sold...... 4,131 -- -- --
Allowance for loan
losses.............. 17,824 23,280 31,572 29,801
---------- ---------- ---------- ----------
Loans receivable,
net................. $1,533,212 $1,141,707 $1,228,152 $1,306,057
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<CAPTION>
<S> <C> <C>
1993
-------------------------
PERCENT OF
AMOUNT TOTAL
---------- -------------
<S> <C> <C>
Mortgage loans:
Single-family
residential......... $ 759,157 55%
Multi-family
residential......... 457,740 33
Commercial............ 142,468 11
Land and other........ 11,127 1
---------- ---
Total mortgage
loans............. 1,370,492 100
---------- ---
Other loans:
Commercial business... -- --
Consumer.............. -- --
Secured by deposits... 724 --
---------- ---
Total loans
receivable.......... 1,371,216 100%
---------- ---
---
Less:
Undistributed loan
proceeds............ 1,087
Unamortized net loan
discounts and
deferred origination
fees................ 3,205
Deferred gain on
servicing sold...... --
Allowance for loan
losses.............. 20,426
----------
Loans receivable,
net................. $1,346,498
----------
----------
</TABLE>
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization of the Bank's total loan portfolio
at December 31, 1997, as well as the dollar amount of such loans which are
scheduled to mature after one year which have fixed or adjustable interest
rates. Demand loans, loans having no schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
PRINCIPAL REPAYMENTS CONTRACTUALLY DUE OR REPRICING
IN YEAR(S) ENDED DECEMBER 31,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL AT
DECEMBER 31, 2001- 2003- 2009-
1997 1998 1999 2000 2002 2008 2014
------------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential............. $ 953,701 $ 161,759 $ 116,800 $ 99,807 $ 158,465 $ 263,672 $ 101,930
Multi-family residential.............. 426,254 54,845 41,357 36,495 63,784 138,423 59,745
Commercial............................ 135,407 53,792 41,029 6,293 13,621 17,065 2,732
Land.................................. 5,896 5,000 141 27 728 -- --
Other loans:
Commercial............................ 22,484 8,139 1,984 881 1,252 7,287 160
Consumer.............................. 8,485 4,767 1,019 800 1,012 623 97
Secured by deposits................... 2,287 1,737 34 28 -- 324 164
------------- ---------- ---------- ---------- ---------- ---------- ----------
Total(1)............................ $ 1,554,514 $ 290,039 $ 202,364 $ 144,331 $ 238,862 $ 427,394 $ 164,828
------------- ---------- ---------- ---------- ---------- ---------- ----------
------------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
<S> <C>
THEREAFTER
-----------
<S> <C>
Mortgage loans:
Single-family residential............. $ 51,268
Multi-family residential.............. 31,605
Commercial............................ 875
Land.................................. --
Other loans:
Commercial............................ 2,781
Consumer.............................. 167
Secured by deposits................... --
-----------
Total(1)............................ $ 86,696
-----------
-----------
</TABLE>
- ------------------------
(1) Of the $1.26 billion of loan principal repayments contractually due after
December 31, 1998, $220.8 million have fixed rates of interest and $1.04
billion 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
45
<PAGE>
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).
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the Bank
are subject to the written, non-discriminatory underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. Loan originations are obtained by a variety of sources, including
referrals from real estate brokers, existing customers, walk-in customers and
advertising. In its present marketing efforts, the Bank emphasizes its community
ties, customized personal service, competitive rates, and an efficient
underwriting and approval process. With an orientation under new management to
make the branch office network more responsive to customers needs, loan
applications now are taken at all of the Bank's branch offices. The Bank's
centralized underwriting department supervises the obtaining of credit reports,
appraisals and other documentation involved with a loan. Property valuations are
performed by the Bank's staff as well as by independent outside appraisers
approved by the Bank's Board of Directors. The Bank requires title, hazard and,
to the extent applicable, flood insurance on all security property.
Mortgage loan applications are initially processed by loan officers who have
approval authority up to designated limits. Senior officers of the Bank who
serve on the Credit Committee acting together have additional approval
authority. All loans in excess of such designated limits are referred to the
Bank's Credit Committee, comprised of the Bank's Senior Credit Officer, the
Chief Executive Officer, the Chief Financial Officer and the Executive Vice
President of Retail Banking, which has approval authority for all 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 or the Vice
President, Branch Administration, each of whom has authority to approve loans up
to $500,000. The Bank's Chief Executive Officer or Senior Credit 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.
Prior to new management, the Bank's loan origination program operated
similar to that of a mortgage banking business. The Bank maintained loan
production offices and loans were originated by officers who were partially
compensated on a commission basis. A substantial amount of such loans, primarily
fixed rate, were then sold in the secondary market as a means of generating fee
income as well as providing additional funds for lending, investing and other
purposes. While the Bank under prior management was an active purchaser of loans
secured by single-family, multi-family and commercial real estate located in
both Southern and Northern California, shortly after commencing employment in
mid-1995, new management discontinued the origination for resale approach and
closed the Bank's loan production facilities. Under the Bank's new management,
the origination of mortgage loans by commissioned loan officers operating from
loan production facilities has been discontinued. The Bank's current emphasis is
on providing a full range of services to customers at all of its branch offices,
including the taking of loan applications. This necessarily involved hiring and
training sufficient personnel, which was a contributing factor to the decline in
loan originations from historical levels during the early 1990s.
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<PAGE>
With the reduction in the Company's non-performing assets and the Company's
return to profitability in 1996 and 1997, the Bank in 1997 began redirecting its
attention to increasing loan originations and purchases. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Asset and Liability Management."
Management used the balance of the sale proceeds to purchase $4.8 million and
$5.0 million of multi-family residential loans and a land loan, respectively. In
addition, during the last quarter of 1997, management leveraged the capital
raised in the PPCCP REIT offering by purchasing $408.8 million of
adjustable-rate single-family residential mortgage loans. The Bank intends to
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 December 31, 1997, the Bank's regulatory limit
on loans-to-one borrower was $15.5 million and its five largest loans or groups
of loans-to-one borrower, including related entities, aggregated $12.6 million,
$8.2 million, $7.4 million, $6.3 million and $5.0 million. All of these five
largest loans or loan concentrations were secured by commercial real estate and
multi-family residential properties. All of these loans or loan concentrations
were originated between the late 1980's and early 1990's and were performing in
accordance with their terms at December 31, 1997.
The following table shows the activity in the Bank's loan portfolio during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1997 1996 1995
----------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Gross loans held at beginning of period.................................. $ 1,168,192 $ 1,262,773 $ 1,369,516
Originations of loans:
Mortgage loans:
Single-family residential............................................ 88,077 37,129 19,593
Multi-family residential............................................. 15,806 7,823 1,120
Commercial........................................................... 24,232 6,945 878
Land................................................................. -- -- 746
Other loans:
Commercial........................................................... 20,869 4,303 --
Consumer............................................................. 8,050 1,069 --
Secured by deposits.................................................. 3,664 4,389 4,482
----------- ----------- -----------
Total originations................................................. 160,698 61,658 26,819
----------- ----------- -----------
Purchases of loans:
Single-family residential.............................................. 482,943 -- --
Multi-family residential............................................... 4,834 -- --
Commercial............................................................. 12,899 -- --
Land................................................................... 5,000 -- --
Consumer............................................................... 5 -- --
----------- ----------- -----------
Total purchases...................................................... 505,681 -- --
----------- ----------- -----------
Total originations and purchases................................... 666,379 61,658 26,819
----------- ----------- -----------
Loans sold:
Single-family residential.............................................. (85,241) -- (27,174)
----------- ----------- -----------
Total sold........................................................... (85,241) -- (27,174)
Repayments............................................................... (163,467) (113,721) (85,957)
Transfers to real estate owned........................................... (31,349) (42,518) (20,431)
Net activity in loans.................................................... 386,322 (94,581) (106,743)
----------- ----------- -----------
Gross loans held at end of period........................................ $ 1,554,514 $ 1,168,192 $ 1,262,773
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
47
<PAGE>
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank has historically
concentrated its lending activities on the origination of loans secured by first
mortgage liens on existing single-family residences. At December 31, 1997,
$953.7 million or 61% of the Bank's total loan portfolio consisted of such
loans. The single-family residential loans originated by the Bank are generally
made on terms, conditions and documentation which permit the sale of loans to
the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National
Mortgage Association ("FNMA") and other institutional investors in the secondary
market.
Although the Bank has historically originated its single-family residential
loans internally, in an effort to enhance its ability to originate a greater
volume 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 80% of its single-family residential loans pursuant to such
mortgage broker relationships. The Bank currently utilizes approximately 35
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 December 31, 1997 was 738). 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 PPCCP as a REIT and, in
connection with a public offering of preferred stock of such REIT, leveraged the
capital generated from such offering through wholesale purchases 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, the Bank expects to leverage the
proceeds raised from the Offering through additional wholesale purchases of
single-family residential loans. 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 December 31, 1997, the Bank had $212.6 million
or 13.7% of fixed rate single-family residential loans in its portfolio. The
Bank previously offered loan products, the interest rates on which were fixed at
an initial rate for a specified period of years and adjusted thereafter to a
specified fixed-rate. As of December 31, 1997, the Bank had $26.2 million of
such loans in its loan portfolio.
Since the 1980's, the Bank has also offered a variety of adjustable rate
single-family residential mortgage loans. Such loans generally have up to 30
year terms. Presently, the Bank offers a "5/1 Product," in which the loan is
fixed at origination for a five year period, after which the interest rate
adjusts every year in accordance with a designated index (the weekly average
yield on U.S. Treasury securities adjusted to a constant comparable maturity of
one year, as made available by the Federal Reserve Board). Such loans currently
have a 2% cap on the amount of any increase or decrease in the interest rate per
year, and a 6% limit on the amount by which the interest rate can increase or
decrease over the life of the loan. In addition, the Bank's adjustable rate
loans are currently not convertible into fixed rate loans and do not contain
prepayment penalties. Approximately 77.7% of the single-family residential loans
in the Bank's loan portfolio at December 31, 1997 had adjustable interest rates.
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<PAGE>
Under prior management, the Bank's adjustable rate loans were tied to COFI,
which does not adjust as rapidly to changes in interest rates as the U.S.
Treasury constant comparable maturity index now utilized by the Bank. The Bank
has discontinued the use of COFI-based loans. As discussed under "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Asset
and Liability Management," during the year ended December 31, 1997, the Bank
sold $85.2 million of such loans. At December 31, 1997, 31.9% of the Bank's
adjustable rate single-family loans were tied to COFI.
Adjustable rate mortgage loans decrease but do not eliminate the risks
associated with changes in interest rates. Because periodic and lifetime caps
limit the interest rate adjustments, the value of adjustable rate mortgage loans
also fluctuates inversely with changes in interest rates. In addition, as
interest rates increase, the required payments by the borrower increase, thus
increasing the potential for default.
The Bank previously offered a variety of adjustable rate programs, which
provided for interest rates which adjusted periodically based on COFI. However,
to protect borrowers from unlimited interest rate and payment increases, the
majority of these adjustable rate loans have a maximum interest rate change
("interest rate cap") from the initial reduced interest rate period and/or over
the life of the loan. In certain loan programs, these protections for borrowers
can result in monthly payments which are greater or less than the amount
required to amortize the loan by its maturity at the interest rate in effect in
any particular month. In the event that the monthly payment is not sufficient to
pay the interest accruing during the month, the deficiency is added to the
loan's principal balance ("negative amortization"). In the event that a loan
incurs significant negative amortization, there is an increased risk that the
market value of the underlying collateral on the loan may be insufficient to
fully satisfy the outstanding principal and interest. While the outstanding
balance of the loan may increase because of negative amortization, the risk of
default may be decreased as borrowers have a lower debt service burden or a debt
service requirement that increases more slowly than fully amortizing loans. In
the event that the monthly payment exceeds the amount necessary to pay the
interest accruing during the month, the excess is applied to reduce the loan's
principal balance, which would result in an earlier payoff of the loan. At
December 31, 1997, the Bank had approximately $177.6 million of single-family
residential loans with negative amortization features.
The Bank is permitted under applicable law to lend up to 100% of the
appraised value of the real property securing a residential loan (referred to as
the loan-to-value ratio). However, if the amount of a residential loan
originated or refinanced exceeds 90% of the appraised value, the Bank is
required by federal regulations to obtain private mortgage insurance on the
portion of the principal amount that exceeds 80% of the appraised value of the
security property. Pursuant to underwriting guidelines adopted by the Board of
Directors, the Bank will generally lend up to 90% of the appraised value of the
property securing a single-family residential loan. However, the Bank generally
obtains private mortgage insurance on the principal amount that exceeds 80% of
the appraised value of the security property. For properties with an appraised
value in excess of $400,000, the Bank will generally not lend in excess of 80%.
At December 31, 1997, $21.3 million or 2.2% 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
69.5%.
In March 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 (the "Residential Servicing Agent"), a wholly owned subsidiary of
Guaranty Federal Bank, F.S.B., which is wholly owned by Temple-Inland Inc., an
unrelated third party. 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 a
period of the lives of the loans.
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<PAGE>
In connection with the Bank's sale of servicing, the Bank in March 1997
entered into a servicing agreement with the Residential Servicing Agent (the
"Residential Servicing Agreement"), pursuant to which the Residential Servicing
Agent will service substantially all of the Bank's residential mortgage loans.
In July 1997, the Bank entered into a Forward Production Servicing Purchase and
Sale Agreement pursuant to which the Bank would sell to the Residential
Servicing Agent the servicing rights associated with, among other things,
residential mortgage loans owned by the Bank and closed and funded subsequent to
the closing of the Residential Servicing Agreement. Notwithstanding the
foregoing, management in late 1997 made the determination that since it is now
offering standardized residential loan products, it can service its new loan
originations in a cost efficient manner. Accordingly, the Bank in early 1998
terminated the Forward Production Servicing Purchase and Sale Agreement and
began to service residential loans originated after February 20, 1998.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LOANS. At December 31, 1997, the
Bank had an aggregate of $426.3 million and $135.4 million invested in
multi-family and commercial real estate loans, respectively, or 27% and 9% of
the total 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 later based on the one year U.S.
Treasury index of constant comparable maturities. Adjustable rate loans may have
an established ceiling and floor, and the maximum loan-to-value for these loan
products is 75%. As part of the criteria for underwriting commercial real estate
loans, the Bank generally requires a debt coverage ratio (the ratio of net cash
from operations before payment of debt service to debt service) of 1.20:1 or
more. It is also the Bank's general policy to seek additional protection to
mitigate any weaknesses identified in the underwriting process. Additional
coverage may be provided through secondary collateral and personal guarantees
from the principals of the borrowers.
Commercial real estate lending entails different and significant risks when
compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. The Bank attempts to minimize its
risk exposure by limiting the extent of its commercial real estate lending
generally. In addition, the Bank imposes stringent loan-to-value ratios,
requires conservative debt coverage ratios, and continually monitors the
operation and physical condition of the collateral.
With the resolution of a significant portion of the Bank's non-performing
assets and the hiring of experienced commercial bankers, the Bank is increasing
its emphasis on multi-family and commercial real estate loan originations and
purchases. Originations of multi-family and commercial real estate loans
increased from an aggregate of $2.0 million during the year ended December 31,
1995 to $14.8 million during the year ended December 31, 1996 to $40.0 million
during the year ended December 31, 1997. The Bank also began making purchases of
multi-family and commercial real estate loans during the year ended December 31,
1997, which aggregated $17.7 million. No such purchases were made during 1996 or
1995.
COMMERCIAL BUSINESS AND CONSUMER LOANS. The Bank is placing increased
emphasis on the development of a commercial business and consumer lending
program within the areas serviced by its branches. Toward that end, the Bank has
hired eight individuals with significant expertise in commercial and
50
<PAGE>
consumer credit administration and lending. Except for loans secured by
deposits, the Bank during the 1990s did not engage in this type of lending
activity. Both lending programs were initiated in August 1996. During the year
ended December 31, 1997 and 1996, the Bank originated $32.6 million and $9.8
million, respectively, of commercial business and consumer loans, which amounted
to 20.3% and 15.8% of total originations during such respective periods.
The Bank is making and intends to make commercial business loans including
working capital lines of credit, inventory and accounts receivable loans,
equipment financing (including equipment leases), term loans and loans
guaranteed by the Small Business Administration ("SBA"). Depending on the
collateral pledged to secure the extension of credit, maximum loan-to-value
ratios are 75% or less. Loan terms may vary from one to 7 years. The interest
rates on such loans are generally variable and are indexed to the WALL STREET
JOURNAL Prime Rate, plus a margin.
The Bank intends to grow its SBA lending business, on which loans are
guaranteed up to certain levels by the SBA. The SBA-guaranteed loans bear
adjustable rates tied to the lowest published New York prime rate, adjusted
monthly, plus a margin, which depends on the term of the loan. The loans
generally have amortization schedules of seven to 25 years, depending on the
purpose of the loan. Each loan is reviewed by the SBA and, depending on the size
of the loan and the proposed use of proceeds, the SBA establishes what
percentage of the loan it will guarantee. The guarantee cannot exceed 80% of the
loan or $750,000, whichever is less. The guarantee applies not only to the
principal, but also covers accrued interest, foreclosure costs, legal fees and
other expenses. The Bank has established two Small Business Development Centers
within its branches and plans to obtain preferred lender status, which will
permit it to underwrite and close such loans much more promptly. At December 31,
1997, approximately $4.4 million of the Bank's $22.5 million in commercial
business loans were comprised of SBA loans.
The Bank is authorized to make loans for a wide variety of personal or
consumer purposes but has not engaged in any lending other than loans secured by
deposits for most of the 1990s. The Bank began originating home equity loans and
lines of credit and automobile loans in August 1996 in order to provide a wide
range of products and services to its customers. The Bank also offers overdraft
protection and unsecured lines of credit. At December 31, 1997, home equity
loans and lines of credit amounted to $4.9 million. On owner-occupied homes,
these loans and lines are originated by the Bank for up to 80% of the first
$350,000 of appraised value plus up to 50% of the remainder, less the amount of
any prior liens on the property. For non-owner occupied properties, the Bank
will lend up to 75% of the first $250,000 of appraised value plus 50% of the
remainder, less the amount of existing liens on the property. Home equity loans
and lines of credit have a maximum term of 25 years and carry variable interest
rates. The Bank will secure each of these types of loans with a mortgage on the
property (generally a second mortgage).
The Bank also originates loans secured by new and used automobiles. The
maximum term for the Bank's automobile loans is 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. At December 31,
1997, the Bank had $2.0 million of automobile loans in portfolio.
Commercial business and consumer loans generally have shorter terms and
higher interest rates than mortgage loans but generally involve more credit risk
than mortgage loans because of the type and nature of the collateral. In
addition, consumer lending collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness and personal bankruptcy. The Bank
believes that the generally higher yields earned on commercial business and
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<PAGE>
consumer loans compensate for the increased credit risk associated with such
loans and the Bank intends to continue to offer such loans in order to provide a
full range of services to its customers.
ASSET QUALITY
GENERAL. During 1995 and 1996, the Bank's new management reorganized the
Bank's loan review function through the implementation of an internal asset
review system. The Bank created an internal asset review committee and
established loan review and special assets departments and revised its loan
underwriting, credit, collection and monitoring procedures. New 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
reduce its level of non-performing assets without incurring additional material
losses.
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 new management team, the accounts are monitored on a weekly
basis by the servicing department. With respect to commercial loans, a trial
balance is updated weekly, and those accounts that are identified as being past
the due date are assigned to staff to begin the collection process. With respect
to commercial loans, delinquent reports and a listing of those accounts for
which a Notice has been issued are sent to senior management and the Special
Assets Department to provide advance information as to potential problems which
may fall under their Department in the coming quarter. 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," the Residential
Servicing Agent services a substantial amount of the Bank's loan portfolio. The
Bank terminated the Forward Production Servicing Purchase and Sale Agreement
with the Residential Servicing Agent in early 1998, and the Bank began servicing
all of the residential mortgage loans it originates after February 20, 1998. The
Residential Servicing Agreement requires the Residential Servicing Agent to
foreclose upon or otherwise comparably convert the ownership of properties
securing such residential mortgage loans which 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 Residential
Servicing Agent go into non-accrual status, the Bank may request that they be
transferred back to the Bank. All loans serviced by the Residential Servicing
Agent 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,
52
<PAGE>
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 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 of 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 RESTRUCTURING. A loan constitutes a troubled debt
restructuring ("TDR") if the Bank, for economic or legal reasons related to the
borrower's financial difficulties, grants a concession to the
53
<PAGE>
borrower that it would not otherwise consider. Among other things, a TDR
involves the modification of the 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. 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 returned to accrual status when the borrower
has had a period of repayment performance for twelve consecutive months.
Under the Bank's new management, the Bank has aggressively focused on
problem asset rehabilitation, and has undertaken a number of initiatives in this
area. The Bank has established an Internal Asset Review Committee, which is
comprised of the Chief Executive Officer, the Chief Financial Officer, the
Senior Vice President in charge of Real Estate, the Senior Credit Officer, the
Assistant Vice President of Internal Assets and the Commercial Loan Officer. The
Committee meets approximately every three weeks and monitors the Bank's assets
to ensure proper classification. All multi-family and commercial assets in
excess of $500,000, regardless of performance, are reviewed at least once each
year. Assets that are classified as special mention are reviewed every six
months and those assets classified as substandard are reviewed every three
months and, if collateral dependent, a market value analysis is performed on the
property to determine whether valuation allowances are required. Loans that are
non-performing, subject to workout or forbearance or classified substandard are
monitored and managed through the Special Assets Department. Assets that are
foreclosed and become real estate owned continue to be managed by the Special
Assets Department through resolution.
54
<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 TDRs at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-performing loans, net:
Mortgage loans:
Single-family residential................................ $ 8,435 $ 7,947 $ 10,467 $ 14,780 $ 27,310
Multi-family residential................................. 405 9,198 16,840(1) -- 4,138
Commercial............................................... 1,064 1,093 8,173 8,446 2,001
Land..................................................... -- -- 112 4,232 5,050
--------- --------- --------- --------- ---------
Total non-performing loans, net........................ 9,904 18,238 35,592 27,458 38,499
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Real estate owned, net:
Single-family residential................................ 678 3,268 6,387 5,322 16,568
Multi-family residential................................. 6,482 8,310 901 3,999 10,213
Commercial............................................... 5,921 8,614 3,506 1,095 4,769
Land..................................................... 202 244 121 69 --
--------- --------- --------- --------- ---------
Total real estate owned, net............................... 13,283 20,436 10,915 10,485 31,550
--------- --------- --------- --------- ---------
Total non-performing assets................................ $ 23,187 $ 38,674 $ 46,507 $ 37,943 $ 70,049
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Troubled debt restructurings............................... $ 9,936 $ 7,544 $ 6,133 $ 40,794(1) $ 6,902
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total non-performing assets and troubled debt
restructurings........................................... $ 33,123 $ 46,218 $ 52,640 $ 78,737 $ 76,951
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Non-performing loans to total loans, net................... 0.65% 1.60% 2.90% 2.10% 2.86%
Non-performing loans to total assets....................... 0.45 1.04 2.25 1.59 2.10
Non-performing assets to total assets...................... 1.05 2.21 2.94 2.20 3.83
Total non-performing assets and troubled debt
restructurings to total assets........................... 1.50 2.64 3.33 4.57 4.20
</TABLE>
- ------------------------
(1) Reflects to a large extent problems associated with the 1994 Northridge
earthquake.
The interest income that would have been recorded during the years ended
December 31, 1997, 1996 and 1995 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 $644,000, $1.4 million and $3.2 million, respectively.
The Bank recognized significant credit losses in the early 1990's due, in
large part, to the continued deterioration in the Southern California economy
which had begun with the national recession at the start of the decade, together
with a decline in market values of real estate resulting from the Northridge
earthquake of 1994. As the real estate that secured the Bank's mortgage loans
decreased in value and as borrowers, particularly developers of, and investors
in, residential and commercial real estate became less able to meet their debt
service obligations, non-performing assets and TDRs increased dramatically,
amounting to $78.7 million or 4.6% of total assets as of December 31, 1994. As a
result of the focus given by new management to rehabilitate or liquidate the
Bank's problem assets, nonperforming assets and TDRs have declined from $46.2
million or 2.6% of total assets at December 31, 1996 to $33.1 million or 1.5% of
total assets at December 31, 1997.
Management's actions to acquire non-performing assets, make necessary
improvements and list such properties for resale, coupled with improved real
estate market conditions in California, contributed to significant declines in
each of the major real estate owned property categories in 1997. In particular,
during 1997, management foreclosed on several multi-family residential
properties and sold them before year-
55
<PAGE>
end, including one larger concentration of four loans which had an aggregate
carrying value on disposition of $4.5 million. As a consequence of such actions,
at December 31, 1997, an aggregate of $405,000 of multi-family residential loans
were on a non-accrual status (compared to $9.2 million at December 31, 1996) and
$6.5 million was in real estate owned (compared to $8.3 million at December 31,
1996), which constituted 29.7% of total non-performing assets at such date.
Of the Bank's $9.9 million of non-performing loans at December 31, 1997, the
largest loan was secured by a strip shopping center, with a carrying value of
$1.1 million. This loan has been classified as collateral dependent, and as of
December 31, 1997 was carried at fair value. The Bank's $13.3 million of real
estate owned at December 31, 1997 was comprised of eight multi-family and
commercial properties aggregating $12.6 million and various residential
properties aggregating $678,000. The Bank's largest property was a shopping
center with a net book value as of December 31, 1997 of $5.5 million. The second
largest property was an apartment building with a net book value as of December
31, 1997 of $2.1 million.
The decline in real estate owned in 1994 was due to a significant extent to
the Bank financing purchases of such real estate owned through loans to
facilitate (which loans generally carry more favorable terms to the borrower
than what is otherwise obtainable in the market). To the extent that new
management has financed the disposition of real estate owned, such loans have
been made consistent with market terms and conditions and cash downpayments to
qualify the transaction as a sale under applicable accounting guidelines. During
1996 and 1997, the Bank extended an aggregate of $12.6 million and $16.1 million
to finance the disposition of real estate owned, respectively, which constituted
23.9% and 40.8% of total sales of real estate owned during such years,
respectively.
With the downturn in the California economy experienced during the early
1990s and the problems associated with the Northridge earthquake in 1994, prior
management entered into a significant number of TDRs. Since the change in the
Bank's management, the Bank enters into TDRs only on a limited basis.
ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated loan losses 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. Provisions for loan
losses 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 portfolio.
The Bank periodically reviews the assumptions and formula by which additions are
made to the specific and general valuation allowances for losses in an effort to
refine such allowances in light of the current status of the factors described
above.
Although management believes that it uses the best information available to
make such determinations, future adjustments to the allowance may be 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.
The OTS, in conjunction with the Office of the Comptroller of the Currency,
the FDIC and the Federal Reserve Board, has issued an Interagency Policy
Statement on the Allowance for Loan and Lease Losses ("Policy Statement"), which
includes guidance (i) on the responsibilities of management for the assessment
and establishment of an adequate allowance and (ii) for the agencies' examiners
to use in evaluating the adequacy of such allowance and the policies utilized to
determine such allowance. The Policy Statement also sets forth quantitative
measures for the allowance with respect to assets classified
56
<PAGE>
substandard and doubtful and with respect to the remaining portion of an
institution's loan portfolio. Specifically, the Policy Statement sets forth the
following quantitative measures which examiners may use to determine the
reasonableness of an allowance: (i) 50% of the portfolio that is classified
doubtful, (ii) 15% of the portfolio that is classified substandard and (iii) for
the portions of the portfolio that have not been classified (including loans
designated special mention), estimated credit losses over the upcoming twelve
months based on facts and circumstances available on the evaluation date. While
the Policy Statement sets forth this quantitative measure, such guidance is not
intended as a "floor" or "ceiling."
The following table sets forth the activity in the Bank's allowance for loan
losses during the periods indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- ---------- --------- ---------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period......................... $ 23,280 $ 31,572 $ 29,801 $ 20,426 $ 18,509
--------- ---------- --------- ---------- ---------
Provision for loan losses................................ 2,046 2,884 8,823 22,330 8,393
--------- ---------- --------- ---------- ---------
Charge-offs:
Mortgage loans:
Single-family residential.............................. (1,967) (2,213) (3,416) (5,428) (3,507)
Multi-family residential............................... (5,599) (5,039) (1,854) (1,787) (817)
Commercial............................................. (42) (3,371) (860) (5,813) (2,392)
Land................................................... -- (1,478) (956) -- --
--------- ---------- --------- ---------- ---------
Total charge-offs.................................... (7,608) (12,101) (7,086) (13,028) (6,716)
--------- ---------- --------- ---------- ---------
Recoveries:
Mortgage loans:
Single-family residential.............................. 106 16 34 73 235
Multi-family residential............................... -- 22 -- -- --
Commercial............................................. -- 2 -- -- 5
Land................................................... -- 885 -- -- --
--------- ---------- --------- ---------- ---------
Total recoveries..................................... 106 925 34 73 240
Net charge-offs.......................................... (7,502) (11,176) (7,052) (12,955) (6,476)
--------- ---------- --------- ---------- ---------
Allowance at end of period............................... $ 17,824 $ 23,280 $ 31,572 $ 29,801 $ 20,426
--------- ---------- --------- ---------- ---------
--------- ---------- --------- ---------- ---------
Allowance for loan losses to total nonperforming loans at
end of period.......................................... 179.97% 127.65% 88.71% 108.53% 53.06%
--------- ---------- --------- ---------- ---------
--------- ---------- --------- ---------- ---------
Allowance for loan losses to total nonperforming loans
and troubled debt restructurings at end of period...... 89.84% 90.30% 75.67% 43.66% 44.99%
--------- ---------- --------- ---------- ---------
--------- ---------- --------- ---------- ---------
Allowance for loan losses to total loans, net at end of
period................................................. 1.16% 2.04% 2.57% 2.28% 1.52%
--------- ---------- --------- ---------- ---------
--------- ---------- --------- ---------- ---------
</TABLE>
As shown in the table above, loan charge-offs (net of recoveries) amounted
to $7.5 million, $11.2 million and $7.1 million, during the years ended December
31, 1997, 1996 and 1995, respectively. The net charge-offs recognized by the
Bank during the years ended December 31, 1997, 1996 and 1995 primarily reflected
the transfer of loans (particularly multi-family residential loans) to real
estate owned, as shown in the preceding non-performing assets table. Such
multi-family loans had specific valuation allowances which had been established
through increased provisions for loan losses 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 significantly
57
<PAGE>
since 1995, which has contributed to the decrease in the Bank's provision for
loan losses. Management believes that its allowance for loan losses at December
31, 1997 was adequate. Nevertheless, there can be no assurances that additions
to such allowance will not be necessary in future periods, particularly if the
growth in the Bank's commercial and consumer lending continues.
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,
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ----------------------
<CAPTION>
PERCENT TO PERCENT TO PERCENT TO PERCENT TO
TOTAL TOTAL TOTAL TOTAL
AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate......... $ 5,014 28.1% $ 4,051 17.4% $ 5,109 16.2% $ 7,809 26.2%
Multi-family residential........ 8,964 50.3 15,753 67.7 18,509 58.6 11,396 38.2
Commercial...................... 3,062 17.2 3,267 14.0 7,850 24.9 6,964 23.4
Land............................ 305 1.7 94 0.4 104 0.3 3,120 10.5
Other loans..................... 479 2.7 115 0.5 -- -- 512 1.7
--------- ----- --------- ----- --------- ----- --------- -----
Total........................... $ 17,824 100.0% $ 23,280 100.0% $ 31,572 100.0% $ 29,801 100.0%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
<CAPTION>
<S> <C> <C>
1993
----------------------
PERCENT TO
TOTAL
AMOUNT ALLOWANCE
--------- -----------
<S> <C> <C>
Residential real estate......... $ 5,787 28.3%
Multi-family residential........ 4,582 22.4
Commercial...................... 8,815 43.2
Land............................ 757 3.7
Other loans..................... 485 2.4
--------- -----
Total........................... $ 20,426 100.0%
--------- -----
--------- -----
</TABLE>
INVESTMENT ACTIVITIES
The Bank's securities portfolio is managed by the Executive Vice President
and Chief Financial Officer in accordance with a comprehensive written
Investment Policy which addresses strategies, types and levels of allowable
investments and which is reviewed and approved annually by the Board of
Directors of the Bank. The management of the securities portfolio is set in
accordance with strategies developed by the Bank's Asset/Liability Management
Committee.
The Bank's Investment Policy authorizes the Bank to invest in U.S. Treasury
obligations (with a maturity of up to five years), U.S. agency obligations (with
a maturity of up to five years), U.S. Government agency mortgage-backed
securities (limited to no more than 50% of the Bank's total assets), bankers'
acceptances (with a maturity of 180 days or less), FHLB overnight deposits,
investment grade commercial paper (with a maturity of up to nine months),
federal funds (with a maturity of one month or less), certificates of deposit in
other financial institutions (with a maturity of one year or less), repurchase
agreements (with a maturity of six months or less), reverse repurchase
agreements (with a maturity of two years or less) and certain collateralized
mortgage obligations (with a weighted average life of less than ten years).
At December 31, 1997, the Bank's securities portfolio consisted of $428.1
million of mortgage-backed securities, $418.4 million of which were classified
as available for sale and $9.7 million of which were classified as held to
maturity, $139.7 million of U.S. Government agency obligations and $13.0 million
of SBA certificates. Of the Bank's total investment in mortgage-backed
securities at December 31, 1997, $60.1 million consisted of Government National
Mortgage Association ("GNMA") certificates, $202.5 million consisted of FNMA
certificates, $32.5 million consisted of non-agency certificates and $133.0
million consisted of FHLMC certificates. Of the $428.1 million of
mortgage-backed securities at December 31, 1997, $245.9 million consisted of
fixed-rate securities and $182.2 million consisted of adjustable-rate
securities. Of the Bank's $139.7 million of U.S. Government and federal agency
obligations at December 31, 1997, zero were scheduled to mature within one year
thereof, $55.3 million were scheduled to mature after one through five years
thereof, $74.3 million were scheduled to mature after five through ten years
thereof and $10.1 million were scheduled to mature after ten years. Of the
Bank's $580.8 million of mortgage-backed and other securities available for sale
as well as held to maturity at December 31, 1997, none were scheduled to mature
within one year thereof, $55.3 million were scheduled to mature after one
through five years thereof, $127.6 million were scheduled to mature after five
through ten years thereof and $397.9 million were scheduled to mature after ten
years.
58
<PAGE>
Under new management, the Bank has significantly increased its purchases of
primarily adjustable-rate mortgage-backed securities with interest rate
adjustments tied to the U.S. Treasury index of constant comparable maturity. The
Bank's aggregate securities portfolio, net of repayments and prepayments and
sales, increased by $271.6 million or 112.4% between 1995 and 1996 and increased
by $67.6 million or 13.2% during 1997. At December 31, 1997, such portfolio
amounted to $580.8 million.
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 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 $227,150. 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.
59
<PAGE>
The following table sets forth information regarding the carrying and market
value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
---------------------- ---------------------- ----------------------
<CAPTION>
CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale (at market):
U.S. Government and federal agency
obligations.................................. $ 139,719 $ 139,719 $ 38,714 $ 38,714 $ 9,994 $ 9,994
Mortgage-backed securities..................... 418,450 418,450 463,587 463,587 231,651 231,651
SBA certificates............................... 12,991 12,991 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
$ 571,160 $ 571,160 $ 502,301 $ 502,301 $ 241,645 $ 241,645
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Held to maturity:
Mortgage-backed securities..................... $ 9,671 $ 9,743 $ 10,971 $ 10,899 -- --
---------- ---------- ---------- ---------- ---------- ----------
$ 9,671 $ 9,743 $ 10,971 $ 10,899 -- --
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The following table sets forth the activity in the Bank's aggregate
securities portfolio (both securities classified available-for-sale and
held-to-maturity) during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Securities at beginning of period............................................ $ 513,272 $ 241,645 $ 312,297
Purchases.................................................................... 408,729 487,719 212,155
Sales........................................................................ (234,339) (158,448) (222,947)
Repayments and prepayments................................................... (110,941) (53,207) (58,245)
Decrease (increase) in unrealized losses on available-for-sale
securities(1).............................................................. 4,110 (4,437) (1,615)
---------- ---------- ----------
Securities at end of period(2)(3)............................................ $ 580,831 $ 513,272 $ 241,645
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) At December 31, 1997, the cumulative unrealized losses on securities
classified as available-for-sale amounted to $2.0 million, which reduces
stockholders' equity.
(2) At December 31, 1997, the book value and market value of the Bank's
securities (including held-to-maturity and available for sale securities)
amounted to $580.8 million and $580.9 million, respectively.
(3) At December 31, 1997, $207.3 million or 35.7% of the Bank's securities
portfolio consisted of adjustable-rate securities, as compared to $222.4
million or 43.3% and $115.8 million or 47.9% at December 31, 1996 and 1995,
respectively.
SOURCES OF FUNDS
SENIOR DEBT OF THE COMPANY. In June 1995, the Company issued $10.0 million
aggregate principal amount of unsecured senior notes in conjunction with the
1995 recapitalization. The senior notes contain an initial pay rate and accrual
rate of 7% and 10.75%, respectively, and the accrual rate increased to 11.15% on
June 30, 1996. The difference between the pay rate and accrual rate is deferred
and compounded annually at the accrual rate commencing on June 30, 1996.
Interest of approximately $1.8 million, calculated at the pay rate of 7%, was
paid on September 30, 1997 for the period from issuance of the senior notes to
that date. Beginning with the quarter ending December 31, 1997, interest at the
pay rate is payable quarterly. The Company may repay all or part of the
outstanding balance of the senior
60
<PAGE>
notes at any time without penalty, and intends to repay the outstanding balance,
plus accrued interest, in connection with the Offering. See "Use of Proceeds,"
"Capitalization," "The Stockholders' Agreement" and Note 13 of the Notes to
Consolidated Financial Statements.
THE BANK'S SOURCES OF FUNDS GENERALLY. 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,
subject to the Bank's asset and liability management policies. 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 ("NOW") accounts, money market deposit
accounts, fixed rate, fixed-maturity retail certificates of deposit ranging in
terms from 90 days to five years, individual retirement accounts, and non-retail
certificates of deposit consisting of jumbo (generally greater than $100,000)
certificates and public deposits.
The Bank's retail deposits are generally obtained from residents in its
primary market area. The principal methods currently used by the Bank to attract
deposit accounts include offering a wide variety of products and services and
competitive interest rates. The Bank utilizes traditional marketing methods to
attract new customers and savings deposits, including various forms of
advertising. Although the Bank has in the past utilized the services of deposit
brokers to attract 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 40 ATMs, of which 18 are in
stand-alone facilities. The Bank recently began to operate 20 of such ATMs
within a chain of health clubs located in Southern California. The Bank also has
an option to install and operate up to an additional three ATMs within such
chain of health clubs. As of June 30, 1997, after giving effect to the
consolidation activity in California, the Bank ranked seventh in terms of thrift
deposit market share in Los Angeles, Orange and Ventura Counties.
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,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995
--------------------------- --------------------------- ------------
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE
------------ ------------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NOW accounts.................................. $ 83,248 1.96% $ 58,511 0.77% 54,837
Money market accounts......................... 21,938 2.94 29,665 2.52 47,269
Passbook accounts............................. 235,162 4.34 264,677 4.64 95,335
------------ ------------ ------------
Total transaction accounts................ 340,348 352,853 197,441
Term certificates of deposit.................. 966,863 5.66 1,069,484 5.76 1,212,989
------------ ------------ ------------
Total deposits............................ $ 1,307,211 5.14% $ 1,422,337 5.28% $ 1,410,430
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
<S> <C>
WEIGHTED
AVERAGE
RATE PAID
-------------
<S> <C>
NOW accounts.................................. 0.84
Money market accounts......................... 3.01
Passbook accounts............................. 3.67
Total transaction accounts................
Term certificates of deposit.................. 5.73
Total deposits............................ 5.31%
</TABLE>
61
<PAGE>
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance....................................................... $ 1,371,243 $ 1,473,318 $ 1,384,218
Net increase (decrease) before interest................................. (157,599) (160,804) 35,836
Interest credited....................................................... 52,971 58,729 53,264
------------ ------------ ------------
Net increase (decrease) in deposits..................................... (104,628) (102,075) 89,100
------------ ------------ ------------
Ending balance.......................................................... $ 1,266,615 $ 1,371,243 $ 1,473,318
------------ ------------ ------------
------------ ------------ ------------
</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,
--------------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ------------ ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
0.00% to 2.99%..................................................... $ 4,071 $ 4,299 $ 3,964
3.00 to 3.99....................................................... 2,993 3,833 4,900
4.00 to 4.99....................................................... 5,700 46,771 49,037
5.00 to 6.99....................................................... 918,842 909,895 1,092,316
7.00 to 8.99....................................................... 1,219 36,244 47,613
---------- ------------ ------------
Total.......................................................... $ 932,825(1) $ 1,001,042(1) $ 1,197,830(1)
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
- ------------------------
(1) At December 31, 1997, 1996 and 1995, certificates of deposit in amounts
greater than or equal to $100,000 amounted to $138.2 million, $158.7 million
and $219.4 million, respectively.
The following table sets forth the amount and remaining maturities of the
Bank's term certificates of deposit at December 31, 1997.
<TABLE>
<CAPTION>
OVER SIX
MONTHS OVER ONE OVER TWO
SIX MONTHS THROUGH ONE YEAR THROUGH YEARS THROUGH OVER THREE
AND LESS YEAR TWO YEARS THREE YEARS YEARS
----------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
0.00% to 1.99%............................. $ 1,091 $ -- $ 77 $ -- $ --
2.00 to 2.99............................... 2,172 647 84 -- --
3.00 to 3.99............................... 2,976 -- 17 -- --
4.00 to 4.99............................... 4,742 307 651 -- --
5.00 to 6.99............................... 423,481 373,414 106,762 6,705 8,480
7.00 to 8.99............................... 733 18 180 288 --
----------- ------------ ------------ ------ -----------
Total.................................. $ 435,195 $ 374,386 $ 107,771 $ 6,993 $ 8,480
----------- ------------ ------------ ------ -----------
----------- ------------ ------------ ------ -----------
</TABLE>
The following table presents the maturity of term certificates of deposit in
amounts greater than $100,000 at December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER
31, 1997
--------------
<S> <C>
(IN THOUSANDS)
3 months or less.................................................................................. $ 20,776
Over 3 months through 6 months.................................................................... 41,934
Over 6 months through 12 months................................................................... 58,729
Over 12 months.................................................................................... 16,734
--------------
Total......................................................................................... $ 138,173
--------------
--------------
</TABLE>
62
<PAGE>
BORROWINGS. The following table sets forth certain information regarding
the short-term borrowings of the Bank at or for the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER
31,
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB OF SAN FRANCISCO ADVANCES:
Average balance outstanding............................................... $ 148,681 $ 53,666 $ 193,535
Maximum amount outstanding at any month-end during the period............. 472,000 80,000 310,000
Balance outstanding at end of period...................................... 472,000 80,000 31,746
Weighted average interest rate during the period.......................... 5.91% 5.49% 6.37%
Weighted average interest rate at end of period........................... 5.87% 5.91% 5.84%
Weighted average remaining term to maturity at end of period (in years)... 1.61 0.95 0.74
SECURITIES SOLD UNDER AGREEMENTS TO PURCHASE:
Average balance outstanding............................................... $ 357,396 $ 179,002 $ 103,699
Maximum amount outstanding at any month-end during the period............. 415,676 219,229 151,626
Balance outstanding at end of period...................................... 340,788 192,433 --
Weighted average interest rate during the period.......................... 5.49% 6.09% 6.25%
Weighted average interest rate at end of period........................... 5.76% 5.49% --
Weighted average remaining term to maturity at end of period (in years)... 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 December 31, 1997, the Bank had total FHLB of San Francisco
advances of $472.0 million at a weighted average interest rate of 5.87%, $357.0
million of which matures in 1998 and the remaining $115.0 million of which
matures in 2002. FHLB advances increased by $392.0 million during 1997, as the
Bank leveraged the capital raised in the PPCCP public offering. The Bank used
such short- and intermediate-term FHLB advances to fund the wholesale purchase
of $408.8 million of adjustable-rate single-family residential mortgage loans.
Since 1996, the Bank has increasingly relied on obtaining funds from the
sale of securities to investment dealers under reverse repurchase agreements. At
December 31, 1997, reverse repurchase agreements amounted to $340.8 million, as
compared to $192.4 million and $0 at December 31, 1996 and 1995, respectively.
As of December 31, 1997, the weighted average remaining term to maturity of the
Bank's reverse repurchase agreements was 2.71 years compared to 0.63 years at
December 31, 1996, and such reverse repurchase agreements had a weighted average
interest rate of 5.76% compared to 5.49% at December 31, 1996. The Bank had no
reverse repurchase agreements outstanding at December 31, 1995. 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
five 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
63
<PAGE>
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 U.S. 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 Company's
Consolidated Financial Statements.
SUBSIDIARIES
The Bank is permitted to invest up to 2% of its assets in the capital stock
of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
primarily for community development purposes. In addition, the Bank is permitted
to make an unlimited investment in one or more operating subsidiaries, which are
permitted to engage only in activities that the Bank may undertake directly.
PPCCP is such an operating subsidiary of the Bank. As of December 31, 1997, the
Bank maintained one operating subsidiary, four direct service corporations and
one indirect service corporation 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 December 31, 1997, the
Bank's investment in its five service corporation subsidiaries amounted to $41.9
million in the aggregate.
PPCCP 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. In October 1997,
PPCCP commenced its operations upon consummation of a public offering of
1,426,000 shares of its 9.75% Noncumulative Exchangeable Preferred Stock, Series
A (the "Series A Preferred Shares"), at a liquidation preference of $25.00 per
share. The Series A Preferred Shares are traded on the Nasdaq National Market
under the symbol "PPCCP." PPCCP used the gross proceeds raised of $35.7 million
from the initial public offering of the Series A Preferred Shares and the
concurrent contribution of $38.8 million of additional capital by the Bank to
purchase from the Bank PPCCP's initial portfolio of residential and commercial
mortgage loans at an aggregate purchase price of $72.1 million. In December
1997, PPCCP purchased additional mortgage loans from the Bank at an aggregate
purchase price of $2.6 million.
SMC is an inactive corporation which was formed in 1987 to originate
mortgage loans. However, SMC has never conducted any business since it was
organized. DIC was formed in 1987 to acquire, develop, construct and sell real
estate developments and is currently inactive. DIC owns 100% of the capital
stock of SCP which was formed in 1989 to invest in various real estate
development projects. SCP currently holds the Bank's last remaining real estate
development project consisting of 62 acres of vacant land located in Corona,
California. At December 31, 1997, the land had a net carrying value of $1.9
million. As of March 31, 1998, the property was under contract for sale.
CDC was formed in 1969 for the purpose of acquiring, developing,
constructing and selling real estate developments. CDC does not currently hold
any real estate and CDC's sole operation consists of acting as trustee under the
Bank's deeds of trust with respect to its mortgage lending.
SCS was formed in 1984 in order to sell, through the Bank's branch offices,
annuities and various other investments as well as other insurance products to
the Bank's account holders and members of the general public. During the years
ended December 31, 1997, 1996 and 1995, SCS recognized net earnings of $362,000,
$336,000 and $40,000, respectively.
64
<PAGE>
LEGAL PROCEEDINGS
Except with respect to the Goodwill Litigation and the Ancillary Litigation,
each of which is defined and discussed under "Agreement With Respect to
Potential Goodwill Lawsuit Recovery", neither the Company nor the Bank is
involved in any legal proceedings which are material to the Company. The Bank is
involved in routine legal proceedings from time to time which arise in the
normal course of its business.
OFFICE LOCATIONS
The following table set forth certain information with respect to the
Company's offices at December 31, 1997.
<TABLE>
<CAPTION>
TOTAL DEPOSITS
NET BOOK VALUE OF AT
LEASE/OWNED PROPERTY AT DECEMBER 31,
OFFICE LOCATION LEASE EXPIRATION DATE DECEMBER 31, 1997 1997
- -------------------------------------------------- ------------------------- ----------------- ---------------
<S> <C> <C> <C>
(IN THOUSANDS)
EXECUTIVE OFFICE (AND BRANCH):
Los Angeles Leased $ 2,338 $ 6,731
5900 Wilshire Boulevard 04/2006
15th Floor Option: 1-5 years
Los Angeles, CA 90036
BRANCH OFFICES:
Beverly Hills Leased 109 116,318
9100 Wilshire Boulevard 03/2000
Beverly Hills, CA 90212 Option: 2-10 years
Orange Leased 129 52,254
216 E. Chapman Avenue 01/2001
Orange, CA 92866-1506 Option: 2-5 years
Pacific Palisades Leased 104 54,686
15305 Sunset Boulevard 12/2006
Pacific Palisades, CA 90272 Option: 1-10 years
Montebello Leased 129 87,949
1300 W. Beverly Boulevard 08/2003
Montebello, CA 90640 Option: 1-10 years
Garden Grove Owned 96 79,138
12112 Valley View
Garden Grove, CA 92845-1796
Simi Valley Leased 53 92,851
1445 Los Angeles Avenue 07/1999
Simi Valley, CA 93065 Option: 2-30 months
followed by 3-5 years
Sylmar Leased 98 45,194
13831 Foothill Boulevard 09/2002
Sylmar, CA 91342 Option: 2-10 years
Buena Park Leased 86 12,985
5470 Beach Boulevard 12/2004
Buena Park, CA 90621 Option: 3-5 years
North Hollywood Leased 66 77,612
12848 Victory Boulevard 05/2000
North Hollywood, CA 91606
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
TOTAL DEPOSITS
NET BOOK VALUE OF AT
LEASE/OWNED PROPERTY AT DECEMBER 31,
OFFICE LOCATION LEASE EXPIRATION DATE DECEMBER 31, 1997 1997
- -------------------------------------------------- ------------------------- ----------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Beverly/Serrano Leased $ 153 $ 36,691
4500 W. Beverly Boulevard 01/2006
Los Angeles, CA 90004 Option: 2-5 years
Woodland Hills Leased 181 56,439
20259 Ventura Boulevard 11/2009
Woodland Hills 91364 Option: 1-10 years
Burbank Leased 371 156,297
240 North San Fernando Road 09/2000
Burbank, CA 91502 Option: 2-5 years
Santa Clarita Owned 168 64,219
26425 Sierra Highway
Santa Clarita, CA 91321
Ventura Leased 42 62,559
996 South Seaward Avenue 10/1998
Ventura, CA 93001 Option: 2-3 years
Calabasas Leased 83 59,213
23642 Calabasas Road, Bldg. 2 03/2007
Calabasas, CA 91302
Irvine Leased 170 55,835
15475 Jeffrey Road 10/2005
Irvine, CA 92620-4102
Fairfax Leased 80 66,654
145 South Fairfax Avenue 01/2003
Los Angeles, CA 90036 Option: 1-5 years
San Pedro Owned 713 82,990
28110 South Western Avenue
San Pedro, CA 80732
------ ---------------
$ 5,169 $ 1,266,615
------ ---------------
------ ---------------
</TABLE>
In addition to the foregoing branch office locations, the Bank currently
operates 40 ATMs, of which 18 are in stand-alone facilities, including 20 within
a chain of health clubs located in Southern California. The Bank also has an
option to install and operate an additional three ATMs within such chain of
health clubs.
The Company 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. The Company believes it is the first institution to receive approval
to operate these units at remote locations, nine of which were placed in
operation late in 1997.
EMPLOYEES
As of December 31, 1997, the Company had 226 full-time equivalent employees.
The Company's employees are not subject to any collective bargaining agreements
and the Company believes its relationship with its employees is satisfactory.
66
<PAGE>
REGULATION
GENERAL
The Bank is a federally chartered and insured stock savings bank subject to
extensive regulation and supervision by the OTS, as the primary federal
regulator of savings associations, and the FDIC, as the administrator of the
SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Company or the Bank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals.
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
HOLDING COMPANY ACQUISITIONS. The Company is a registered savings and loan
holding company. The Home Owners' Loan Act ("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. The Company 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 the Company ceases to be a unitary savings and loan
holding company, the activities of the Company and its non-savings association
subsidiaries would thereafter be subject to substantial restrictions.
The HOLA requires every savings association subsidiary of a savings and loan
holding company to give the OTS at least 30 days' advance notice of any proposed
dividends to be made on its guarantee, permanent or other non-withdrawable
stock, or else such dividend will be invalid. See "--Regulation of Federal
Savings Banks--Capital Distribution Regulation."
AFFILIATE RESTRICTIONS. Transactions between a savings association and its
"affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not make a
loan or extension of credit to an affiliate unless the affiliate is engaged only
in activities permissible for bank holding
67
<PAGE>
companies; a savings association may not purchase or invest in securities of an
affiliate other than shares of a subsidiary; a savings association and its
subsidiaries may not purchase a low-quality asset from an affiliate; and covered
transactions and certain other transactions between a savings association or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain exceptions, each
loan or extension of credit by a savings association to an affiliate must be
secured by collateral with a market value ranging from 100% to 130% (depending
on the type of collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of transactions with affiliates.
REGULATION OF FEDERAL SAVINGS BANKS
REGULATORY SYSTEM. As a federally insured savings bank, lending activities
and other investments of the Bank must comply with various statutory and
regulatory requirements. The Bank is regularly examined by the OTS and must file
periodic reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the SAIF, up to applicable limits.
FEDERAL HOME LOAN BANKS. The Bank is a member of the FHLB System. Among
other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal to the greater of: (i) 1% of the aggregate outstanding principal amount of
its residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each calendar year, (ii) .3% of total assets, or (iii) 5% of
its FHLB advances (borrowings).
LIQUID ASSETS. Under OTS regulations, for each calendar month, a savings
bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during the
preceding calendar month. This liquidity requirement, which is currently at
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 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.
68
<PAGE>
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 the 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 10.74%, its leverage capital
ratio was 5.43% and its total risk-based capital ratio was 11.99% at December
31, 1997. See "Regulatory Capital" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Capital Resources."
CERTAIN CONSEQUENCES OF FAILURE TO COMPLY WITH REGULATORY CAPITAL
REQUIREMENTS. A savings bank's failure to maintain capital at or above the
minimum capital requirements may be deemed an unsafe and unsound practice and
may subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is required
to submit a capital plan that addresses the bank's need for additional capital
and meets certain additional requirements. While the capital plan is being
reviewed by the OTS, the savings bank must certify, among other things, that it
will not, without the approval of its appropriate OTS Regional Director, grow
beyond net interest credited or make capital distributions. If a savings bank's
capital plan is not approved, the bank will become subject to additional growth
and other restrictions. In addition, the OTS, through a capital directive or
otherwise, may restrict the ability of a savings bank not in compliance with the
capital requirements to pay dividends and compensation, and may require such a
bank to take one or more of certain corrective actions, including, without
limitation: (i) increasing its capital to specified levels, (ii) reducing the
rate of interest that may be paid on savings accounts, (iii) limiting receipt of
deposits to those made to existing accounts, (iv) ceasing issuance of new
accounts of any or all classes or categories except in exchange for existing
accounts, (v) ceasing or limiting the purchase of loans or the making of other
specified investments, and (vi) limiting operational expenditures to specified
levels.
The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings bank still may be subject to
enforcement actions for other violations of law or unsafe or unsound practices
or conditions.
69
<PAGE>
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 December 31, 1997, the Bank met the capital requirements of a
"well capitalized" institution under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept brokered deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew or roll-over brokered
deposits.
Institutions that are classified as undercapitalized are subject to certain
mandatory supervisory actions, including: (i) increased monitoring by the
appropriate federal banking agency for the institution and periodic review of
the institution's efforts to restore its capital, (ii) a requirement that the
institution submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the institution guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the institution's total
assets at the time it received notice of being undercapitalized, or the amount
necessary to bring the institution into compliance with applicable capital
standards at the time it fails to comply with the plan, and (iii) a limitation
on the institution's ability to make any acquisition, open any new branch
offices, or engage in any new line of business without the prior approval of the
appropriate federal banking agency for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain additional
supervisory actions against an undercapitalized institution if the agency
determines that such actions are necessary to resolve the problems of the
institution at the least possible long-term cost to the deposit insurance fund.
These supervisory actions include: (i) requiring the institution to raise
additional capital or be acquired by another institution or holding company if
certain grounds exist, (ii) restricting transactions between the institution and
its affiliates, (iii) restricting interest rates paid by the institution on
deposits, (iv) restricting the institution's asset growth or requiring the
institution to reduce its assets, (v) requiring replacement of senior executive
officers and directors, (vi) requiring the institution to alter or terminate any
activity deemed to pose excessive risk to the institution, (vii) prohibiting
capital distributions by bank holding companies without prior approval by the
Federal Reserve Board, (viii) requiring the institution to divest certain
subsidiaries, or requiring the institution's holding company to divest the
institution or certain affiliates of the institution, and (ix) taking any other
supervisory action that the agency believes would better carry out the purposes
of the prompt corrective action provisions of FDICIA.
Institutions classified as undercapitalized that fail to submit a timely,
acceptable capital restoration plan or fail to implement such a plan are subject
to the same supervisory actions as significantly undercapitalized institutions.
Significantly undercapitalized institutions are subject to the mandatory
provisions applicable to undercapitalized institutions. The regulation also
makes mandatory for significantly undercapitalized institutions certain of the
supervisory actions that are discretionary for institutions classified as
undercapitalized, creates a presumption in favor of certain discretionary
supervisory actions, and subjects significantly undercapitalized institutions to
additional restrictions, including a prohibition on paying bonuses or raises to
senior executive officers without the prior written approval of the appropriate
federal bank regulatory agency. In addition, significantly undercapitalized
institutions may be subjected to certain of the restrictions applicable to
critically undercapitalized institutions.
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The regulation requires that an institution be placed into conservatorship
or receivership within 90 days after it becomes critically undercapitalized,
unless the OTS, with concurrence of the FDIC, determines that other action would
better achieve the purposes of the prompt corrective action provisions of
FDICIA. Any such determination must be renewed every 90 days. A depository
institution also must be placed into receivership if the institution continues
to be critically undercapitalized on average during the fourth quarter after the
institution initially became critically undercapitalized, unless the
institution's federal bank regulatory agency, with concurrence of the FDIC,
makes certain positive determinations with respect to the institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized institutions
and to a number of other severe restrictions. For example, beginning 60 days
after becoming critically undercapitalized, such institutions may not pay
principal or interest on subordinated debt without the prior approval of the
FDIC. (However, the regulation does not prevent unpaid interest from accruing on
subordinated debt under the terms of the debt instrument, to the extent
otherwise permitted by law.) In addition, critically undercapitalized
institutions may be prohibited from engaging in a number of activities,
including entering into certain transactions or paying interest above a certain
rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
CONSERVATORSHIP/RECEIVERSHIP. In addition to the grounds discussed under
"--Prompt Corrective Action," the OTS (and, under certain circumstances, the
FDIC) may appoint a conservator or receiver for a savings association if any one
or more of a number of circumstances exist, including, without limitation, the
following: (i) the institution's assets are less than its obligations to
creditors and others, (ii) a substantial dissipation of assets or earnings due
to any violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books, papers,
records or assets or refusal to submit such items for inspection to any examiner
or lawful agent of the appropriate federal banking agency or state bank or
savings association supervisor, (vi) the institution is likely to be unable to
pay its obligations or meet its depositors' demands in the normal course of
business, (vii) the institution has incurred, or is likely to incur, losses that
will deplete all or substantially all of its capital, and there is no reasonable
prospect for the institution to become adequately capitalized without federal
assistance, (viii) any violation of law or unsafe or unsound practice that is
likely to cause insolvency or substantial dissipation of assets or earnings,
weaken the institution's condition, or otherwise seriously prejudice the
interests of the institution's depositors or the federal deposit insurance fund,
(ix) the institution is undercapitalized and the institution has no reasonable
prospect of becoming adequately capitalized, fails to become adequately
capitalized when required to do so, fails to submit a timely and acceptable
capital restoration plan, or materially fails to implement an accepted capital
restoration plan, (x) the institution is critically undercapitalized or
otherwise has substantially insufficient capital, or (xi) the institution is
found guilty of certain criminal offenses related to money laundering.
ENFORCEMENT POWERS. The OTS and, under certain circumstances, the FDIC,
have substantial enforcement authority with respect to savings associations,
including authority to bring various enforcement actions against a savings
association and any of its "institution-affiliated parties" (a term defined to
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,
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(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.
Under the current regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has not
been notified by the OTS that it is in need of more than normal supervision (a
"Tier 1 association") may, after prior notice to but without the approval of the
OTS, make capital distributions during a calendar year up to the higher of: (i)
100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its surplus capital ratio at the beginning of the
calendar year, or (ii) 75% of its net income over the most recent four-quarter
period. A Tier 1 association may make capital distributions in excess of the
above amount if it gives notice to the OTS and the OTS does not object to the
distribution. A savings association that meets its regulatory capital
requirements both before and after a proposed distribution but does not meet its
fully phased-in capital requirement (a "Tier 2 association") is authorized,
after prior notice to the OTS but without OTS approval, to make capital
distributions in an amount up to 75% of its net income over the most recent
four-quarter period, taking into account all prior distributions during the same
period. Any distribution in excess of this amount must be approved in advance by
the OTS. A savings association that does not meet its current regulatory capital
requirements (a "Tier 3 association") cannot make any capital distribution
without prior approval from the OTS, unless the capital distribution is
consistent with the terms of a capital plan approved by the OTS.
At December 31, 1997, the Bank qualified as a Tier 1 association for
purposes of the capital distribution rule. The OTS may prohibit a proposed
capital distribution that would otherwise be permitted if the OTS determines
that the distribution would constitute an unsafe or unsound practice. The
requirements of the capital distribution regulation supersede less stringent
capital distribution restrictions in earlier agreements or conditions.
The OTS has proposed to amend its capital distribution regulation to bring
such regulations into greater conformity with the other bank regulatory
agencies. Under the proposed regulation, certain savings associations would not
be required to file with the OTS. Specifically, savings associations that remain
at least adequately capitalized following a capital distribution, under the
proposed regulation, would not be subject to any requirement for notice or
application unless the total amount of all capital distributions, including any
proposed capital distribution, for the applicable calendar year would exceed an
amount equal to the savings association's net income for that year to date plus
the savings association's retained net income for the preceding two years.
QUALIFIED THRIFT LENDER TEST. In general, savings associations are required
to maintain at least 65% of their portfolio assets in certain qualified thrift
investments (which consist primarily of loans and other investments related to
residential real estate and certain other assets). A savings association that
fails the qualified thrift lender test is subject to substantial restrictions on
activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by qualifying
under the Code as a "domestic building and loan association." The Bank is a
domestic building and loan association as defined in the Code.
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Recent legislation also expands the QTL test to provide savings associations
with greater authority to lend and diversify their portfolios. In particular,
credit card and educational loans may now be made by savings associations
without regard to any percentage-of-assets limit, and commercial loans may be
made in an amount up to 10 percent of total assets, plus an additional 10
percent for small business loans. Loans for personal, family and household
purposes (other than credit card, small business and educational loans) are now
included without limit with other assets that, in the aggregate, may account for
up to 20% of total assets. At December 31, 1997, under the expanded QTL test,
approximately 82.3% of the Bank's portfolio assets were qualified thrift
investments.
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 addition
assessment of 6.28 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 has achieved the
required reserve ratio, 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 (which would have amounted to
$9.0 million). Instead, the Bank has paid subsequent assessments at the
assessment rate schedule in effect as of June 30, 1995. In connection with the
Offering, the Company intends to pay the FDIC the amount due under the special
assessment, which will amount to $4.5 million ($2.7 million net of applicable
tax benefits) as of June 30, 1998, the next available payment date. Such payment
will reduce its assessment rate from 35.28 basis points to 9.28 basis points of
insured deposits (which includes in each case the Financing Corporation debt
service payments of 6.28 basis points). Based on deposits of $1.3 billion at
December 31, 1997, management estimates that the reduction in assessment rates
will amount to approximately $3.3 million on an annualized basis.
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,
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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.
THRIFT CHARTER. Congress has been considering legislation in various forms
that would require federal thrifts, such as the Bank, to convert their charters
to national or state bank charters. Recent legislation required the Treasury
Department to prepare for Congress a comprehensive study on development of a
common charter for federal savings associations and commercial banks and, in the
event that the thrift charter was eliminated by January 1, 1999, would require
the merger of the BIF and the SAIF into a single Deposit Insurance Fund on that
date. The Company cannot determine whether, or in what form, such legislation
may eventually be enacted and there can be no assurance that any legislation
that is enacted would contain adequate grandfather rights for the Company and
the Bank.
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.
NEW SAFETY AND SOUNDNESS GUIDELINES. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
CHANGE OF CONTROL. Subject to certain limited exceptions, no company can
acquire control of a savings association without the prior approval of the OTS,
and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Under recent legislation, companies subject to the Bank Holding Company Act
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 Company 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 Company and the Bank.
The Company reports its earnings on a consolidated basis with the Bank 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 the Company whereby the Bank computes and pays taxes based upon
the Bank's tax position assuming that a separate tax return was filed. However,
while the senior notes issued by the Company in connection with the 1995
recapitalization remain outstanding, Company's payment to the Bank is limited to
the amount of consolidated taxes. The Company intends to prepay the $10.0
million of senior notes (plus accrued interest) in connection with the Offering.
See "Use of Proceeds," "Capitalization" and "The Stockholders' Agreement."
METHOD OF ACCOUNTING. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns.
BAD DEBT RESERVES. The Small Business Job Protection Act of 1996 (the "1996
Act") eliminated the use of the reserve method of accounting for bad debt
reserves by savings institutions, effective for taxable years beginning after
1995 and provided for recapture of a portion of the reserves existing at the
close of the last taxable year beginning before January 1, 1996 for institutions
such as the Bank. Prior to the 1996 Act, the Bank was permitted to establish a
reserve for bad debts and to make annual additions to the reserve. These
additions could, within specified formula limits, be deducted in arriving at the
Bank's taxable income. For the tax year 1995, the Bank had a bad debt deduction
of $73 million.
As a further result of the 1996 Act, the Bank must use the specific
chargeoff method in computing its bad debt deduction beginning with its 1996
Federal tax return. Under this method, deductions may be claimed only and to the
extent that loans become wholly or partially worthless.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. As of
December 31, 1997, the Bank had an alternative minimum tax credit carryforward
of approximately $1.4 million.
NET OPERATING LOSS CARRYFORWARDS. The Code allows net operating losses
("NOLs") for tax years beginning before August 5, 1997 to be carried back and
deducted from taxable income for the two preceding taxable years and carried
forward and deducted from taxable income for the 20 succeeding taxable years.
The Company has federal tax NOLs of approximately $151.5 million at December 31,
1997.
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% 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
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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
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 Company's
ability to utilize its NOLs in any one year of approximately $7.7 million. That
annual limitation has increased due to unused limitations from previous years,
and amounts to approximately $38.7 million as of the beginning of 1998. There
are $43.3 million of pre-change losses carried over to 1998 that are subject to
this limitation (the "1992 limited NOLs").
It is anticipated that the Offering will result in the 1998 Ownership
Change. The actual annual Section 382 limitation from the 1998 Ownership Change
will equal the sum of (i) the fair market value of the stock of the Company
immediately before the Offering and (ii) the fair market value of the Company's
and the Bank's goodwill claim with respect to the Goodwill Litigation (as
defined and described under "Agreement With Respect to the Potential Goodwill
Lawsuit Recovery"), multiplied by the applicable long-term tax-exempt rate. For
illustration purposes only, the annual Section 382 limitation from the 1998
Ownership Change is estimated to be approximately $21.5 million. The assumed
annual Section 382 limitation resulting from the 1998 Ownership Change is based
on the sum of the (i) fair market value of the stock of the Company immediately
before the Offering (valued at an assumed initial public offering price of
$14.00 per share) and (ii) the unamortized balance of the Company's and the
Bank's goodwill with respect to the Goodwill Litigation as of December 31, 1989
(which amounted to $261.3 million as of such date and which in no way reflects
all of the claims which may be asserted by the Plaintiffs in the Goodwill
Litigation or any of the theories as to damages which may be asserted in
connection with the Goodwill Litigation), multiplied by 5.05%, the applicable
federal long-term tax-exempt rate for ownership changes occurring in May 1998
(used for illustration purposes only). The actual annual Section 382 limitation
from the 1998 Ownership Change may be higher or lower than the $21.5 million
estimated, due to a change in the initial public offering price or an increase
or decrease in the value of the Company's and the Bank's goodwill claim with
respect to the Goodwill Litigation. All $151.5 million of the NOLs carried over
to 1998 (including the $43.3 million that are 1992 limited NOLs), plus any NOLs
for 1998 that are attributable to the period before the 1998 Ownership Change,
are subject to this limitation. Furthermore, the Section 382 limitation from the
1998 Ownership Change would be significantly lower than estimated if the Rights
were considered other than as stock in the Company. See "Treatment of Rights"
below. Consequently, the 1992 Ownership Change in combination with the 1998
Ownership Change could result in the Company being unable to fully utilize its
NOLs in future years. Such inability of the Company to utilize such tax benefits
could have a material adverse effect on the net income and prospects of the
Company.
TREATMENT OF RIGHTS. KPMG Peat Marwick LLP has issued an opinion to the
Company 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 the Company for purposes of Sections 382(e), 311(a) and
305(a) of the Code. Thus, the Company should recognize no gain or loss on the
distribution of the Rights to the Selling Stockholders with respect to their
ownership of Company Common Stock. In addition, the Bank should not recognize
gain or loss on the Company's distribution of the Rights to the Selling
Stockholders. Finally, if the Offering results in an ownership change of the
Company within the meaning of Section 382(g) of the Code, the amount of value
taken into account for purposes of determining the annual Section 382 limitation
should include the value of the Rights. Despite the Company's receipt of the
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foregoing opinion from KPMG Peat Marwick 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 the Company for federal income tax purposes. If the
Shareholder Rights Agreement is treated other than as stock in the Company
(i.e., debt of the Company), the value of the Shareholder Rights Agreement would
reduce the value of the Company'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, including the intent of the parties to the Shareholder Rights
Agreement, the extent to which the Shareholder Rights Agreement will obligate
the Company to pay the Selling Stockholders a portion of the Litigation Recovery
and the position that the Shareholder Rights Agreement will give the Selling
Stockholders in relation to the Company's creditors and stockholders existing on
and after the execution of the Shareholder Rights Agreement. See "Agreement With
Respect to Potential Goodwill Lawsuit Recovery."
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 December 31, 1997.
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MANAGEMENT
MANAGEMENT OF THE COMPANY
The Company's Board of Directors is comprised of three individuals, each of
whom is elected annually. Upon consummation of the Offering, the Board of
Directors of the Company will be expanded to seven persons and the Board will be
divided into three classes, each of which will contain approximately one-third
of the Board. Six of the directors have been elected by the Selling Stockholders
of the Company for staggered three year terms, or until their successors are
elected and qualified, subject to consummation of the Offering, and are expected
to be seated at such time. The Board of Directors expects to fill the one
vacancy created by the increase in the size of the Board of Directors to seven
members following the Offering. Except with respect to certain agreements set
forth in the Stockholders' Agreement between the Company and the Selling
Stockholders, whose representatives sit on the Board of Directors of the Company
and the Bank, there are no arrangements or understandings between the Company
and the members of the Board of Directors with respect to their election as
directors. See "The Stockholders' Agreement." The names and biographical
information of each of the Company's directors are set forth under "--Management
of the Bank."
The following table sets forth certain information regarding the Board of
Directors of the Company upon consummation of the Offering.
<TABLE>
<CAPTION>
NAME AGE(1) DIRECTOR SINCE(2) TERM EXPIRES
- ------------------------------------------------------------------------- ----------- ------------------- ---------------
<S> <C> <C> <C>
Rudolf P. Guenzel........................................................ 57 1998 2001
Henry Peters............................................................. 56 1995 2001
Gerard Jervis............................................................ 49 1995 2000
Robert W. MacDonald...................................................... 50 1998 2000
John F. Davis............................................................ 50 1998 1999
J. Michael Holmes........................................................ 51 1998 2001
</TABLE>
- ------------------------
(1) As of December 31, 1997.
(2) See "--Management of the Bank" for the dates of service of certain directors
on the Bank's Board of Directors.
The following individuals are executive officers of the Company and hold the
offices set forth below opposite their names.
<TABLE>
<CAPTION>
EXECUTIVE POSITION HELD WITH COMPANY
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Rudolf J. Guenzel....................................... President and Chief Executive Officer
J. Michael Holmes....................................... Executive Vice President, Chief Financial Officer and
Secretary
William W. Flader....................................... Executive Vice President
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors.
Information concerning the principal occupations, employment and
compensation of the current directors, those persons who will be seated as
directors upon consummation of the Offering and officers of the Company during
the past five years is set forth under "--Management of the Bank" and
"--Executive Officers Who Are Not Directors." Upon consummation of the Offering,
directors of the Company who are not executive officers will receive $1,000 and
$500 for attendance at each meeting of the Board of Directors and each Committee
meeting, respectively. The Board of Directors has an Audit Committee
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which, upon consummation of the Offering, will be comprised of Messrs. Peters,
Jervis, MacDonald and Davis. The Audit Committee monitors the Company's internal
operations and audit functions. The Board of Directors also has established a
Compensation Committee which, upon consummation of the Offering, will be
comprised of Messrs. Jervis, MacDonald and Davis. The Compensation Committee
addresses the compensation of the Company's and the Bank's senior executive
officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee was at any time during the
fiscal year ended December 31, 1997, or at any other time, an officer or
employee of the Company.
MANAGEMENT OF THE BANK
The following table sets forth certain information regarding the Board of
Directors of the Bank. The Bank's Board of Directors is currently comprised of
six individuals. Upon consummation of the Offering, the Board of Directors of
the Bank will be expanded to seven persons. Six of the directors have been
elected by the Company for staggered three year terms, or until their successors
are elected and qualified, subject to consummation of the Offering, and are
expected to be seated at such time. The Board of Directors expects to fill the
one vacancy created by the increase in the size of the Board of Directors to
seven members following the Offering.
<TABLE>
<CAPTION>
POSITIONS HELD WITH DIRECTOR TERM
NAME AGE(1) THE BANK SINCE EXPIRES
- ------------------------------------------ ----------- ------------------------------------------ ----------- -----------
<S> <C> <C> <C> <C>
Rudolf P. Guenzel......................... 57 President, Chief Executive Officer and 1995 2001
Director
Henry Peters.............................. 56 Chairman of the Board, Director 1995 2001
Gerard Jervis............................. 49 Director 1995 2000
Robert W. MacDonald....................... 50 Director 1992 2000
J. Michael Holmes......................... 51 Executive Vice President, Chief Financial 1998 2001
Officer, and Director
John F. Davis............................. 50 Director 1998 1999
</TABLE>
- ------------------------
(1) As of December 31, 1997.
Set forth below is information with respect to the principal occupations
during at least the last five years for the directors of the Company and the
Bank.
RUDOLF P. GUENZEL. Mr. Guenzel has served as President of the Company 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 and Systems Division. In 1991,
Mr. Guenzel was hired as President and Chief Executive Officer of BancFlorida
and its wholly-owned subsidiary, Banc Florida, 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 Financial to profitability by
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<PAGE>
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 approached by the
Company.
HENRY PETERS. Mr. Peters has been a Director of the Company and the Bank
since 1995. Mr. Peters has served as a trustee of the Bishop Estate, a Selling
Stockholder, since 1984. In addition, he is chairman of the board of the Bishop
Estate's property and investment management subsidiary, Royal Hawaiian Shopping
Center, Inc. From 1978 through 1984, Mr. Peters served as Industrial Division
Manager of Dura Constructors, a construction firm located in Honolulu, Hawaii.
From 1974 through 1994, Mr. Peters served as a Representative to the House of
Representatives of the State of Hawaii and from 1981 through 1986, Mr. Peters
served as Speaker of the House.
GERARD JERVIS. Mr. Jervis has been a Director of the Company and the Bank
since 1995. Mr. Jervis has served as a trustee of the Bishop Estate, a Selling
Stockholder, since 1994. From 1986 through 1994, Mr. Jervis was partner in the
law firm of Jervis, Winer & Meheula located in Kailua, Hawaii.
ROBERT W. MACDONALD. Mr. MacDonald has been elected as a Director of the
Company to be seated upon consummation of the Offering and has been a Director
of the Bank since 1992. 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 the Company through Arbur, Inc. Mr.
MacDonald was with Salomon Brothers between 1971 and 1979 where he eventually
headed the tax-exempt mortgage-backed financing group. In 1980 he left Salomon
Brothers to start a financial advisory firm and Catalyst Energy Corporation, a
leading developer of independent power facilities. The company went public in
1984 and was sold to an investor group in 1988. Between 1988 and 1991, Mr.
MacDonald co-founded a merchant banking corporation, East Rock Partners, which
invested in alternative energy projects.
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 and Secretary of the Company and has been elected as a
Director of the Company to be seated upon consummation of the Offering. 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.
JOHN F. DAVIS. Mr. Davis, a director of PPCCP, has been elected as a
Director of the Company to be seated upon consummation of the Offering, and has
been a Director of the Bank since 1998. Mr. Davis is an attorney who specializes
in federal and state depository institution law and regulation. Mr. Davis is
also currently a director of First Charter Bank, N.A., Beverly Hills,
California. Mr. Davis has served as a legal consultant for two local financial
institutions since 1993 and 1995, respectively, during which he was actively
involved in troubled real estate work-outs, foreclosed real estate disposition
and related litigation and, with one of such institutions, a reorganization and
recapitalization. During 1991 and 1992, Mr. Davis served as Of Counsel to
Griffinger, Freed, Heinemann, Cook & Foreman, San Francisco, California.
SENIOR EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Set forth below is information with respect to the principal occupations
during the last five years for the three executive officers who are not
directors of the Company or the Bank.
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<PAGE>
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 46 branches. In addition,
Mr. Flader, who is a registered securities and insurance representative, was
responsible for the sale of various types of securities and insurance products.
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.
RICHARD I. NIEDLING. Mr. Niedling has served as the Bank's Senior Vice
President and Senior Credit Officer since January 1998. Mr. Niedling's
responsibilities include loan underwriting and approval, and SBA and accounts
receivable lending. He joined the Bank in December 1995 as Vice President and
Senior Credit Officer. Before joining the Bank, Mr. Niedling was employed by
First Interstate Bank from 1983 through 1995. Mr. Niedling worked in various
capacities for First Interstate Bank including credit and branch administration
and worked with several of First Interstate's affiliated banks located in
Arizona, Wyoming and New Mexico. From 1980 through 1983, Mr. Niedling served as
Vice President and Manager of Commercial Loans and Leasing with The Boatmen's
National Bank of St. Louis. From 1978 through 1980, Mr. Niedling was employed as
a Senior Account Officer handling accounts receivable and inventory financing at
Citicorp in St. Louis, Missouri.
WILLIAM G. CARROLL. Mr. Carroll has served as Senior Vice President in
charge of Corporate Financial Services (including branch operations and
commercial lending) 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.
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<PAGE>
SUMMARY COMPENSATION TABLE
The following table includes individual compensation information with
respect to the Chief Executive Officer of the Company and the other five most
highly compensated officers of the Company and the Bank whose total compensation
exceeded $100,000 for services rendered in all capacities during the fiscal year
ended December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM ALL OTHER
COMPENSATION COMPENSATION
NAME AND PRINCIPLE POSITION SALARY(1) BONUS AWARDS (2)
- -------------------------------------------------------- ---------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Rudolf P. Guenzel....................................... $ 325,000 $ 243,750(3) N/A $ 3,200
Director, President and Chief
Executive Officer of the Company
and the Bank
J. Michael Holmes....................................... 200,000 150,000(3) N/A 4,750
Director, Executive Vice President
and Chief Financial Officer of the
Company and the Bank
William W. Flader....................................... 170,000 127,500(3) N/A 4,750
Executive Vice President
of the Company and the Bank
Doreen J. Blauschild.................................... 150,000 5,000 N/A 3,076
Senior Vice President and General
Counsel of the Bank
Richard I. Niedling..................................... 106,104 12,000 N/A 3,579
Senior Vice President and Senior Credit Officer of the
Bank
</TABLE>
- ------------------------
(1) Does not include amounts attributable to miscellaneous benefits received by
the named officers. The costs to the Company of providing such benefits to
the named officers during the year ended December 31, 1997 did not exceed
the lesser of $50,000 or 10% of the total of annual salary and bonus
reported.
(2) Represents the employers' contribution on behalf of the employee to the
401(k) Plan. See "Benefit Plans."
(3) Amounts were accrued in 1997 and paid in 1998.
EMPLOYMENT AGREEMENTS
ORIGINAL EMPLOYMENT AGREEMENTS AND ESTABLISHMENT OF GRANTOR TRUST. In
connection with the 1995 recapitalization of the Bank and in order to induce
Messrs. Guenzel, Holmes and Flader (individually, the "Executive" and
collectively, the "Executives") to work for the Bank and develop and implement
the Bank's new business plan, the Bank and the Executives orally agreed to
employment and compensation terms in March 1995, which terms were subsequently
embodied in the Original Employment Agreements. The term of each of the Original
Employment Agreements was for three years for each of the Executives. In
addition to a base salary, the Executives are entitled to receive an annual
bonus based upon the net earnings of the Bank. In the event that the Company or
the Bank is a party to a "Capital Transaction," which is defined to include,
among other things, the sale of more than 50% of the outstanding voting
securities of the Company or the Bank, the Executives are also eligible to
receive a long-term bonus based
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<PAGE>
on the gross sales proceeds received pursuant to such a transaction. The
Original Employment Agreements further provide that if the Company becomes
publicly traded, the Board of Directors will provide the Executives with a
replacement plan or arrangement to provide the Executives with a compensation
arrangement similar to the long-term bonus arrangements set forth in such
Original Employment Agreements. The parties to the Original Employment
Agreements have agreed that the long-term bonuses for the purposes of such
Original Employment Agreements will range from 3.5% (4.5% in the case of Mr.
Guenzel) of the amount by which the product of the weighted average number of
shares of the Company outstanding immediately prior to the Offering and the
initial public offering price exceeds between $73.0 million and $138.0 million
and 5% (6% in the case of Mr. Guenzel) of the amount by which gross sales
proceeds exceed $138.0 million.
Based upon the formula set forth above and an assumed initial public
offering price of $14.00, the Executives would be entitled to receive payments
amounting to $4.5 million, $3.6 million and $3.6 million for each of Messrs.
Guenzel, Holmes and Flader, respectively. Each of the Executives has elected to
receive 50% of the amounts which would be due to them upon the consummation of
the Offering in cash. The balance of the amount which would be due to the
Executives upon consummation of the Offering will be contributed to a Deferred
Compensation Plan ("Plan") for key executives. The Company has established the
Plan in connection with the Offering and designated the Executives as
participants thereunder. Pursuant to such Plan, the Executives have each elected
to contribute the balance which would be due to them to a grantor trust which
has been established by the Company pursuant to the Plan. The Company intends to
fund the grantor trust with the balance of the amounts which would be due to the
Executives in connection with the Offering, and it is anticipated that the
grantor trust would purchase Common Stock in the Offering for the benefit of
each of the Executives. Under the grantor trust, the shares would not to be
distributed to the Executives for a period of three years from the formation of
the grantor trust, unless the Executives die or retire. After the expiration of
such three-year period, the Executives would be entitled to receive one-third of
the shares in the grantor trust, and an additional one-third of the shares held
in such grantor trust at the expiration of the fourth and fifth years. As a
result of the foregoing, based on an assumed initial public offering price of
$14.00, it is anticipated that such grantor trust would purchase 159,136 shares,
126,810 shares and 126,810 shares of Common Stock in the Offering on behalf of
Messrs. Guenzel, Holmes and Flader, respectively.
Both the cash payments to be made to the Executives and the amounts to be
contributed to the grantor trust on behalf of the Executives will be reflected
as a one-time expense which will be recognized by the Company upon consummation
of the Offering. Such expense will amount to $6.8 million on an after-tax basis.
See "Use of Proceeds." For tax purposes, the cash payments to be made to the
Executives will be taxable as ordinary income by the Executives and tax
deductible by the Company as compensation expense. The amount to be contributed
to the grantor trust on behalf of the Executives will not be taxable to the
Executives or deductible by the Company until the shares of Common Stock
purchased by the grantor trust are distributed to the Executives.
The Original Employment Agreements with each of the Executives will
terminate upon consummation of the Offering, and each of the Executives will
enter into new employment agreements with the Company and the Bank. See "--New
Employment Agreements."
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 (iv) continued
benefit of the Company'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.,
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<PAGE>
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. See "Agreement
with Respect to Potential Goodwill Lawsuit Recovery."
NEW EMPLOYMENT AGREEMENTS. The Company and the Bank (the "Employers")
intend to enter into new employment agreements with the Executives in connection
with the Offering. The Employers have agreed to employ the executives for a term
of three years, in each case in their current respective positions. The
agreements with the Executives will be initially at their current salary levels,
which amount to $325,000, $200,000 and $170,000 for Messrs. Guenzel, Holmes and
Flader, respectively. The Executives' compensation and expenses shall be paid by
the Company 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 will be reviewed annually and, prior to the second annual
anniversary of such agreements and each annual anniversary thereafter, the
Boards 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 shall be terminable with or without cause
by the Employers. The executives shall 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 the Company, 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 the Company 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 $650,000, $400,000 and $340,000,
respectively.
The employment agreements with the Executives shall 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 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 the Company required to be reported under the
federal securities laws, as well as (i) the acquisition by any person of 25% or
more of the Company's outstanding voting securities and (ii) a change in a
majority of the directors of the Company during any three-year period without
the approval of at least two-thirds of the persons who were directors of the
Company at the beginning of such period. The
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<PAGE>
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 Company, management of the Company does not
believe that the terms thereof would have a significant anti-takeover effect.
The Company and/or the Bank may determine to enter into similar employment
agreements with other officers in the future.
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 Saving Plus Plan are made on a
tax deferred basis, employee participants are able to enjoy significant income
tax savings by participating in the Savings Plus Plan. Employees are also
permitted to direct the investment of their accounts among six separate funds,
including various fixed income and equity investment funds.
An employee of the Bank becomes eligible to participate in the Savings Plus
Plan on the entry date (January 1, April 1, July 1 or October 1) nearest the
date he or she completes a year of service. A year of service is a 12
consecutive month period in which the employee works at least 1,000 hours for
the Bank. Participants may elect to defer amounts up to 15% of their annual
compensation under the Saving Plus Plan, subject to certain limits imposed by
law. The Bank matches 50% of compensation deferred up to 6% and may make
additional discretionary matching contributions. During the years ended December
31, 1997, 1996 and 1995, the Bank contributed $144,000, $155,000 and $159,000,
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 $(1,000) and $9,000 in 1997 and 1996, respectively.
There was no net periodic pension cost for 1995 (as the Bank was entitled to a
credit of $36,000).
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<PAGE>
The following table illustrates annual pension benefits for retirement at
age 65 under various levels of compensation and years of service. The figures in
the table assume that the Pension Plan continues in its present form and that
the participant elects a straight life annuity form of benefit.
<TABLE>
<CAPTION>
FIVE YEAR
AVERAGE 5 YEARS OF 10 YEARS OF OVER 10 YEARS
COMPENSATION SERVICE SERVICE OF SERVICE
- ------------------------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
$ 80,000............................................... $ 18,610 $ 37,220 $ 37,220
100,000............................................... 23,360 46,720 46,720
120,000............................................... 28,110 56,220 56,220
140,000............................................... 32,860 65,720 65,720
160,000............................................... 37,610 75,220 75,220
180,000............................................... 42,360 84,720 84,720
200,000............................................... 47,110 94,220 94,220
Over 200,000........................................... 47,110 94,220 94,220
</TABLE>
The maximum annual compensation which may be taken into account under the
Code (as adjusted from time to time by the 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 and Niedling are not participants in the Pension Plan
and have no credited service or plan benefits.
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THE STOCKHOLDERS' AGREEMENT
In connection with the consummation of the Offering, the Company intends to
file an Amended and Restated Certificate of Incorporation and to adopt new
Bylaws which are intended to provide the Company with governing corporate
documents which are customary for public companies. For a discussion of the
provisions which are included in the Amended and Restated Certificate of
Incorporation and Bylaws upon consummation of the Offering, see "Description of
Capital Stock." In order to effectuate these changes, simplify the Company's
equity structure, terminate various agreements which have governed the
relationship among the Selling Stockholders since the 1995 recapitalization and
to effect certain other changes, the Company has entered into a stockholders'
agreement with the Selling Stockholders (the "1998 Stockholders' Agreement"),
which shall be effective immediately prior to commencement of the Offering.
In anticipation of the Offering, the Company in March 1998 amended its
Amended and Restated Certificate of Incorporation to increase its authorized
Common Stock from 500,000 shares to 75,000,000 shares and its preferred stock
from 1,000,000 shares to 25,000,000 shares. Among the further changes to its
Amended and Restated Certificate of Incorporation which the Company intends to
make prior to the consummation of the Offering is to change the vote per share
which each holder of a share of Common Stock possesses from the present 0.5939
to one vote per share. In addition, in order to simplify its capital structure,
the Company intends to retire its outstanding senior notes and to exchange its
Outstanding Preferred Stock for Common Stock, each as described below. The 1998
Stockholders' Agreement authorizes the Company to file an Amended and Restated
Certificate of Incorporation and to adopt new Bylaws in connection with the
consummation of the Offering to effectuate, among other things, the corporate
changes described herein.
In accordance with the terms of the Certificate of Designation and
Preferences with respect to each series of Outstanding Preferred Stock, the
Company has the right to redeem the Outstanding Preferred Stock at its option at
any time, upon providing specified notice to each holder of the date and place
of redemption. Pursuant to the terms of the 1998 Stockholders' Agreement, Bishop
Estate and Arbor have agreed in lieu of redemption to exchange all of their
shares of Outstanding Preferred Stock for shares of Common Stock, with such
exchange to be accomplished immediately prior to the commencement of the
Offering. BIL Securities has agreed, however, to exchange only a portion of its
shares of Outstanding Preferred Stock for shares of Common Stock immediately
prior to the consummation of the Offering and to exchange the remainder of its
shares of Outstanding Preferred Stock for shares of Common Stock immediately
following the commencement of the Offering. BIL Securities will retain a portion
of its shares of Outstanding Preferred Stock and not exchange such shares for
shares of Common Stock until immediately following the consummation of the
Offering in order to avoid being deemed a thrift holding company for regulatory
purposes during the brief period between the exchange of shares of Outstanding
Preferred Stock for shares of Common Stock and the consummation of the Offering.
The Selling Stockholders shall also be paid approximately $19.5 million in
accumulated and unpaid dividends on the Outstanding Preferred Stock at the
consummation of the Offering from the proceeds therefrom. Upon consummation of
the Offering, the Outstanding Preferred Stock shall be cancelled. For additional
information on the Outstanding Preferred Stock, see Notes 15 and 22 of the Notes
to Consolidated Financial Statements. See also "Use of Proceeds" and
"Capitalization."
Due to the few shares of Common Stock currently outstanding and the
relatively high price per share associated therewith, the Board of Directors has
authorized a 32:1 stock split, to be effected in the form of a stock dividend of
additional shares of Common Stock, which shall be paid immediately prior to the
commencement of the Offering. The stock split will apply with respect to all
outstanding Common Stock, including the Common Stock referenced above to be
received in the exchange of Outstanding Preferred Stock (other than the exchange
of shares of Common Stock for shares of Outstanding Preferred Stock held by BIL
Securities which will occur immediately following the commencement of the
Offering). Thus, following the exchange and the stock split (and giving effect
to the exchange of the shares of Outstanding Preferred Stock held by BIL
Securities for shares of Common Stock, which will occur immediately
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<PAGE>
following consummation of the Offering), Bishop Estate, BIL Securities and Arbur
shall receive 5,714,286, 2,109,890 and 703,297 shares of Common Stock, or an
aggregate of 8,527,473 shares of Common Stock.
The 1998 Stockholders' Agreement provides for continuing Board of Directors
representation by the Selling Stockholders, if requested by such Selling
Stockholders, subject to maintenance by the Selling Stockholders of specified
minimum levels of beneficial ownership of Common Stock following the
consummation of the Offering and lack of any applicable regulatory prohibition
or objection. The Company has agreed that for so long as a Selling 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 Stockholder and consented to by the Board of Directors of the
Company (such consent not to be unreasonably withheld) (a "Company 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 the Company after the date of the 1998 Stockholders' Agreement
at which the term of the Company 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 Company Designated Director.
Bishop shall be considered a "Material Stockholder" entitled to nominate:
(i) two directors to the Company's Board of Directors for so long as Bishop
beneficially owns 9.9% or more of the Company's Common Stock following
consummation of the Offering, and (ii) one director to the Company's Board of
Directors for so long as Bishop beneficially owns less than 9.9% but more than
4.9% of the Company's Common Stock following consummation of the Offering. BIL
Securities and Arbur collectively shall be considered a "Material Stockholder"
and entitled to nominate one director to the Company's Board of Directors for so
long as BIL Securities and Arbur collectively beneficially own more than 4.9% of
the Company's Common Stock following consummation of the Offering. To the extent
that either Bishop, or BIL Securities and Arbur collectively, beneficially own
less than 5.0% of the Company's Common Stock following the consummation of the
Offering, such party or parties, as the case may be, shall no longer be
considered a "Material Stockholder."
The 1998 Stockholders' Agreement also provides that to the extent a Company
Designated Director elected to the Board of Directors ceases to serve as a
director for any reason while the Selling Stockholder remains a Material
Stockholder, such vacancy will be promptly filled by the Board of Directors of
the Company with a substitute Company Designated Director designated by such
Selling Stockholder. The 1998 Stockholders' Agreement provides that subject to
any applicable regulatory prohibitions, the Selling Stockholders shall at all
times have and maintain a right of attendance at Board of Director meetings,
irrespective of their continued status as Material Stockholders, until such time
as the Goodwill Litigation shall have been settled or otherwise terminated.
Finally, the 1998 Stockholders' Agreement provides that unless otherwise
approved by the requisite vote of stockholders required to amend the Company's
Bylaws, see "Description of Capital Stock--Restrictions on Acquisition of the
Company--Amendment of Certificate of Incorporation and Bylaws," for so long as a
Selling Stockholder is a Material Stockholder, the Bylaws of the Company shall
provide for and the Board of Directors shall be comprised of, seven directors.
The Agreement and Plan of Reorganization (the "Reorganization Agreement")
which was executed in June 1995 in connection with the 1995 recapitalization
provided the Selling Stockholders with a right of first refusal with respect to
the sale by the Company or the Bank of any shares of capital stock of either
entity, subject to certain exceptions. In the Reorganization Agreement, the
Company also made various ongoing covenants with respect to, among other things,
its issuance of the senior notes, discussed below. Pursuant to the terms of the
1998 Stockholders' Agreement, all provisions which survived the closing under
the Reorganization Agreement, including those discussed above, will be
terminated effective upon the consummation of the Offering. The Company and the
Selling Stockholders also executed a stockholders' agreement in connection with
the 1995 recapitalization (the "1995 Stockholders' Agreement"), which provides,
among other things, for restrictions on the ability of a Selling Stockholder to
transfer shares of Common Stock and registration rights under various
circumstances with respect to the Company's capital
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stock owned by such Selling Stockholders. Pursuant to the terms of the 1998
Stockholders' Agreement, the 1995 Stockholders' Agreement will be terminated
effective with the commencement of the Offering.
Finally, the 1998 Stockholders' Agreement provides that the Company shall
prepay the $10.0 million aggregate principal amount of senior notes which were
issued to the Bishop Estate in connection with the 1995 recapitalization, plus
accrued interest thereon to the date of prepayment (but not including the date
of prepayment) effective with the consummation of the Offering. For additional
information on the senior notes, see "Business--Sources of Funds--Senior Notes
of the Company" and Note 13 of the Notes to Consolidated Financial Statements.
See also "Use of Proceeds" and "Capitalization."
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AGREEMENT WITH RESPECT TO POTENTIAL GOODWILL LAWSUIT RECOVERY
THE GOODWILL LITIGATION
GENERAL. On January 28, 1993, the Company, the Bank and certain current and
former stockholders of the Company (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 the Company, 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 the Company's agreement to
acquire and to operate the Bank which was then a failed thrift institution. One
of the current stockholders of the Company (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
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 the Company'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 as of the date of this Prospectus have not been finally
litigated.
The United States Court of Federal Claims issued a Case Management Order
("CMO") in all of the Winstar Cases, including the 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
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$79.7 million of GAAP goodwill. Furthermore, the Government contends that only
the Bank and not the Company nor the other Plaintiffs have standing to pursue
breach of contract claims.
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. On March 3, 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 for at
least two years. 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.
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 the Company 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 of Claims has not yet ruled on
Ariadne's motion as of the date of this Prospectus. 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.
In May 1997, Ariadne filed a lawsuit against the Company, the Bank, the
Company'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 the Company and the Bank
which subordinated its interest as part of the 1992 recapitalization of the
Company to the new investors, the Selling 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 the Company 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 the Company and the Bank as a result of
such Goodwill Litigation. The Company and the Bank intend to defend this action
vigorously. For purposes of the Shareholder Rights Agreement, discussed below,
the Ariadne lawsuit against the Company and the Bank, among others, is
considered to be "Ancillary Litigation." See "The Shareholder Rights Agreement.
DAMAGES. Although the Company and the Bank have conducted preliminary
reviews of the damages allegedly suffered by the Company and the Bank, no
conclusive determination has been made regarding the amount or type of such
damages. Moreover, the Company and the Bank believe that there are no generally
recognized 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
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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. The Company, the Bank and each of the Selling Stockholders (i.e.,
the Bishop Estate, BIL Securities and Arbur) have entered into an agreement (the
"Shareholder Rights Agreement"), the effective date of which is the commencement
of the Offering, whereby each Selling Stockholder will receive one Contingent
Goodwill Participation Right (each a "Right" and collectively, the "Rights") for
each share of Common Stock held by the Selling Stockholder as of the date of the
Shareholder Rights Agreement.
Each Right will entitle the Selling Stockholders to receive 0.0009645% of
the Litigation Recovery, if any (as defined below) and all of the Rights to be
owned by the Selling Stockholders will entitle the Selling Stockholders to
receive in the aggregate 95% of the Litigation Recovery (such portion of the
Litigation Recovery, the "Recovery Payment"). As a result of the foregoing,
Bishop Estate, BIL Securities and Arbur (which as of the date of the Shareholder
Rights Agreements owned 60%, 30% and 10%, respectively, of the Common Stock)
will each be entitled to receive 59,100 Rights, 29,550 Rights and 9,850 Rights,
respectively. The remaining 5.0% of the Litigation Recovery will be retained by
the Company and/or the Bank in consideration for the time and effort incurred
previously and hereafter by the Company, the Bank and management of the Company
and the Bank with respect to prosecuting the Goodwill Litigation.
None of the Selling Stockholders will pay any cash or other consideration to
the Company and/or the Bank in connection with their entering into the
Shareholder Rights Agreement. Any successor to the Company and/or the Bank shall
assume the rights and obligations of the Company and/or the Bank with respect to
the Shareholder Rights Agreement. In addition, to the extent that the Company
enters into a definitive agreement providing for the acquisition, merger or
consolidation of the Company or the Bank in which the Company or the Bank is not
the surviving entity, the Company (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 Selling
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 the Company and
the Bank with respect to the Goodwill Litigation and any Ancillary Litigation.
See "--Management of the Goodwill Litigation and any Ancillary Litigation."
LITIGATION RECOVERY. The Litigation Recovery will equal the cash payment
(or any cash resulting from the liquidation of Non-Cash Proceeds (as defined
herein)) (the "Cash Payment"), if any, actually received by the Company 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 the Company 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 Agreement by the Company 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
Agreement by the Company and the Bank in any Ancillary Litigation, and/or (C)
the amount reimbursed to any Litigation Trustee; (ii) any income tax liability
of the Company and/or the Bank, computed on a PRO FORMA basis, as a result of
the Company's and/or the Bank's receipt of the Cash Payment (net of any income
tax benefit to the Company and/or the Bank from making the Recovery Payment to
the Selling Stockholders, and disregarding for purposes of this clause (ii) the
effect of any NOLs or other tax attributes held by the Company and the Bank or
any of their respective subsidiaries or affiliated entities); (iii) any portion
of the Litigation Recovery which is determined to be owing to one or more of the
Plaintiffs (other than the Company and the Bank) or to any other third parties;
and (iv) any portion of the Litigation Recovery which Doreen J. Blauschild is
entitled to receive as a result of her employment agreement with the Bank,
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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). See "Management--
Employment Agreements--Original Employment Agreements and Establishment of
Grantor Trust."
THE RECOVERY PAYMENT. Within five days of receipt by the Company and/or the
Bank of any Litigation Recovery, or the liquidation by the Company and the Bank
of any non-cash proceeds (which does not include nonmarketable assets or assets
which are unable to be sold or liquidated ("Non-Cash Proceeds")) received in
connection with the Litigation Recovery, the Company shall deliver to each
Selling Stockholder a written notice (the "Payment Notice") (i) specifying that
a Litigation Recovery has been paid, (ii) describing the amount of cash proceeds
received, (iii) describing the type and amount of any Non-Cash Proceeds
received, the amounts received by the Company and/or the Bank upon liquidation
of such Non-Cash Proceeds and the financial and other documentation supporting
such liquidation value, and (iv) specifying the date and method by which the
Company will redeem the Rights by payment of the Recovery Payment. To the extent
the Company and/or the Bank receives all or a portion of the Litigation Recovery
in the form of Non-Cash Proceeds, the Company and the Bank shall liquidate the
Non-Cash Proceeds. The Company shall provide to each Selling Stockholder
financial and other documentation reasonably sufficient to support the
liquidation value of such Non-Cash Proceeds. In no event shall the Bank be
required to distribute to the Company or the Company be required to distribute
any amounts to the Selling Stockholder in connection with any liquidation of
Non-Cash Proceeds which exceed the amounts received by the Company and/or the
Bank upon liquidation of such Non-Cash Proceeds.
Subject to the circumstances covered by the discussion under "--Conversion
of Rights to Preferred Stock," to the extent all or any portion of the
Litigation Recovery is received by the Bank, the Bank shall distribute such
Litigation Recovery to the Company (the "Bank Distribution"). To the extent any
Litigation Recovery is paid to the Bank in installments, the distribution to the
Company shall be made in similar installments. Any cash proceeds received in
connection with the Litigation Recovery is required by the Shareholder Rights
Agreement to be so distributed within five days of their receipt, independently
of the need for liquidation by the Bank of any Non-Cash Proceeds. The
liquidation value of any such Non-Cash Proceeds received in connection with the
Litigation Recovery shall be distributed within five days of their liquidation,
independently of the distribution of any cash proceeds.
The Shareholder Rights Agreement provides that no later than five days
following the date of the Payment Notice, the Company shall redeem all of the
outstanding Rights of each Selling Stockholder by payment of the Recovery
Payment. To the extent the Litigation Recovery is paid to the Company and/or the
Bank in installments, the redemption of the Rights and the distribution of the
Recovery Payment shall be paid in similar installments. Notwithstanding the
foregoing, however, the Company may not redeem any portion of the Rights less
than one-year from the date of an "ownership change" of the Company and/or the
Bank within the meaning of Section 382(g) of the Code, unless the Company
obtains an opinion from an independent accounting firm which states that the
redemption should not materially affect the Company's and/or the Bank's
limitation under Section 382 of the Code with respect to such ownership change.
See "Risk Factors--Impact of Ownership Change on Use of Net Operating Loss
Carryforwards."
The Selling Shareholders shall be entitled to receive any actual interest
earned by the Company and/ or the Bank which is attributable to the Recovery
Payment for the period of time between the date on which the Company and/or the
Bank receives any Litigation Recovery in connection with the Goodwill Litigation
and the date on which the Company either redeems the Rights or issues Recovery
Payment Preferred.
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 the Bank Distribution and/or the Company
from redeeming the Rights and distributing all or a portion of the Recovery
Payment, the Bank shall only distribute such portion of the Bank Distribution
and the Company
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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 Bank Distribution which it has been precluded from paying as soon as
permissible, and the Company 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
the Company's redemption of the Rights result in an aggregate distribution of an
amount greater than the Recovery Payment.
To the extent the Company is prohibited from distributing the Recovery
Payment, or any portion thereof, or cannot do so because the Bank is prohibited
from making the Bank Distribution to the Company, the Company shall, upon the
written request of any Selling Stockholder, issue to such Selling Stockholder
preferred stock of the Company with an aggregate liquidation preference equal in
value to the Recovery Payment or portion thereof which the Company shall have
been prohibited from distributing or unable to distribute (the "Recovery Payment
Preferred"). The terms of the Recovery Payment Preferred as discussed herein
shall be set forth in Certificate of Designations and Preferences filed as a
supplement to the Company's Amended and Restated Certificate of Incorporation.
The Company shall issue the Recovery Payment Preferred upon surrender to the
Company of such Selling 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 the Company 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
therof 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
the Company shall have funds or assets available for the payment of dividends.
So long as any Recovery Payment Preferred remains outstanding: (i) no
dividend shall be declared or paid upon or set apart for payment, and no
distribution shall be ordered or made in respect of the Company's Common Stock,
or (ii) any other class of stock or series thereof; and (b) no shares of Common
Stock and no shares of any other class of stock or series thereof shall be
redeemed or purchased by the Company; and (c) no moneys, funds or other assets
shall be paid to or made available for a sinking fund for the redemption or
purchase of any shares of: (i) Common Stock; or (ii) any other class of stock or
series thereof; unless, in each instance, full dividends on all outstanding
shares of Recovery Payment Preferred: (i) for all past dividend periods shall
have been paid; and (ii) for the then current calendar quarter shall have been
paid or declared and set aside for payment.
In the event of any dissolution, liquidation or winding up of the affairs of
the Company, after payment or provision for payment of the debts and other
liabilities of the Company, the holders of the Recovery Payment Preferred shall
be entitled to receive, out of the net assets of the Company available for
distribution to its stockholders and before any distribution shall be made to
the holders of Common Stock or to the holders of any other class of stock or
series thereof, 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 to but
excluding the date fixed for distribution, and no more. If upon such voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the
Company, the net assets of the Company shall be insufficient to permit payment
in full of the amounts required to be paid to the holders of the Recovery
Payment Preferred, then a pro rata portion of the full amount required to be
paid upon such dissolution, liquidation or winding up shall be paid to the
holders of Recovery Payment Preferred.
The Company shall have the right, at its option and by resolution of its
Board of Directors, to redeem at any time and from time to time the Recovery
Payment Preferred Stock, in whole or in part, upon payment in cash in 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 but excluding the
date fixed for redemption. If less than all of the outstanding shares of
Recovery Payment Preferred shall be redeemed,
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the particular shares to be redeemed shall be allocated by the Company among the
respective holders of Recovery Payment Preferred, pro rata, by lot or by as
substantially equivalent method selected by the Board of Directors of the
Company. Under such circumstances, new certificates shall be issued evidencing
unredeemed shares to the extent applicable.
The holders of the Recovery Payment Preferred shall have no voting power
except as described herein. If at any time the equivalent of six or more full
quarterly dividends (whether or not consecutive) payable on any shares of
Recovery Payment Preferred shall be in default, the number of directors
constituting the Board of Directors of the Company shall be increased by two,
and the holders of all Recovery Payment Preferred shall have the exclusive
right, voting together as one class, to elect two directors to fill such
newly-created directorships. This right shall remain vested until all dividends
in default on all outstanding Recovery Payment Preferred have been paid, or
declared and set apart for payment, at which time: (i) the right shall terminate
(subject to revesting in the case of any subsequent default of the kind
described above); (ii) the term of the directors then in office elected by the
holders of the outstanding Recovery Payment Preferred as a class shall
terminate; and (iii) the number of directors constituting the Board of Directors
of the Company shall be reduced by two.
No sinking fund or funds shall be established for the retirement or
redemption of the Recovery Payment Preferred. In addition, shares of the
Recovery Payment Preferred shall not be convertible into Common Stock or any
other class of capital stock of the Company. The Common Stock of the Company and
any other preferred stock, whether now or hereafter issued, shall be deemed to
rank junior to the Recovery Payment Preferred with respect to the payment of
dividends or the distribution of assets upon redemption, liquidation or
dissolution or winding up of the Company.
MANAGEMENT OF THE GOODWILL LITIGATION AND ANY ANCILLARY LITIGATION. The
Selling Shareholder Agreement provides that the Company shall prosecute the
Litigation vigorously following the distribution of Rights with a view to
resolution of the Litigation as promptly as practicable. In furtherance of this
prosecution of the Litigation, the Board of Directors of the Company shall
designate a special litigation committee of the Board of Directors (the
"Litigation Committee") comprised of three directors which shall include the
Chief Executive Officer of the Company, one Director designated by the Bishop
Estate, and one Director who shall be designated jointly by BIL Securities and
Arbur. The Litigation Committee shall have the exclusive right to oversee and to
direct the prosecution of the Litigation and any Ancillary Litigation. The
Litigation Committee shall be authorized to make final decisions relating to any
dismissal, settlement, or termination of the Litigation and any Ancillary
Litigation and to decline to pursue any appeal or to settle the Litigation and
any Ancillary Litigation prior to any Recovery Payment. In the event that any or
all of the Selling Stockholders should lose their representation upon the Board
of Directors before the conclusion of the Litigation or any Ancillary Litigation
and the distribution of the Recovery Payment, the relevant Selling
Stockholder(s) shall retain the right to designate member(s) of the Litigation
Committee, which designees may include persons not members of the Board of
Directors of the Company. If any such designee should not be simultaneously a
member of the Board of Directors, the Litigation Committee shall thereupon
become an advisory committee of the Company. The Litigation Committee's
authority shall thenceforward consist of making recommendations to the Board of
Directors relating to the prosecution of, and any dismissal, settlement or
termination of the Litigation and any Ancillary Litigation, in whole or in part.
The Litigation Committee shall present such recommendations in writing to the
Board of Directors of the Company and the Board of Directors may not dismiss,
settle or terminate the Litigation and any Ancillary Litigation, in whole or in
part, without first receiving the favorable recommendation to that effect from
the Litigation Committee. The adoption of any such recommendation to settle or
otherwise terminate the Litigation by the Board of Directors shall require an
affirmative vote of six of the seven members of the Board of Directors of the
Company. The Company, as the sole shareholder of the Bank, is also required
cause the Bank to take no action which is inconsistent with any action taken at
the direction of the Litigation Committee.
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As discussed above, to the extent that the Company enters into a definitive
agreement providing for the acquisition, merger or consolidation of the Company
in which the Company is not the surviving entity (an "Acquisition Transaction"),
the Company or its successor is required to create the Litigation Trust. The
Litigation Trust shall have five Trustees designated by the Selling
Stockholders, as follows: The Bishop Estate shall designate three Trustees; BIL
Securities alone shall designate one Trustee; and BIL Securities together with
Arbur shall jointly designate one Trustee. Effective upon consummation of the
Acquisition Transaction, the Company or its successor shall be contractually
obligated to assume all duties and obligations of the Company and the Bank with
respect to the Litigation Recovery and the redemption of the Rights under
Shareholder Rights Agreement.
Upon consummation of the Acquisition Transaction, the Litigation Trustees
shall assume authority, identical to and succeeding to that of the Litigation
Committee, to make all decisions on behalf of the Company and its successors
with respect to the prosecution of the Litigation and in any Ancillary
Litigation. Without prejudice to any rights of the Selling Stockholders, the
Litigation Trustees shall have the authority to bring suit on behalf of the
Selling Stockholders to enforce any provision of the Shareholder Rights
Agreement for the benefit of the Selling Stockholders. The Litigation Trustees
may seek reimbursement by the Bank and/or the Company for any expenses, costs or
fees reasonably incurred for their own administration and for management of the
Litigation and any Ancillary Litigation, which reimbursement by the Bank and/or
the Company shall be deducted from the Litigation Recovery.
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 Selling 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 Selling Stockholders have advised the Board
of Directors of their willingness to reimburse the Company and/or the Bank for
such fees and expenses upon periodic request by the Company and/or the Bank. No
assurance can be made that the Selling Stockholders will in fact reimburse the
Company and the Bank for any fees and expenses incurred with respect to the
Goodwill Litigation and any Ancillary Litigation and the Selling Stockholders
are not obligated to do so.
The Shareholder Rights Agreement provides that the Selling Stockholders
shall indemnify the Company 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 then
the Company or the Bank, challenging the validity or binding effect of the
Shareholders Rights Agreement. In both instances, such agreement to indemnify
includes any amounts paid in any judgment or settlement of such claims or any
portion of the Litigation Recovery which is determined to be owing to parties
other than a Selling Stockholder, the Company and the Bank. The litigation with
respect to either or both of the foregoing types of claims is referred to herein
as the "Ancillary Litigation." In no event will the Selling Stockholders be
liable, with respect to any and all claims or indemnities for Ancillary
Litigation, for an amount in excess of the actual monies recovered or awarded in
the Litigation and paid over to the Selling Stockholders as part of the Recovery
Payment. To the extent any liability, fees and expenses are incurred subsequent
to the distribution of the Recovery Payment to the Selling Stockholders, each
Selling Stockholder is required to bear responsibility and shall reimburse the
Company and/or the Bank for a share of such indemnification in the same
proportion as its pro rata share of the Rights outstanding. The obligations and
duties of the Selling Stockholder to indemnify the Company and the Bank under
the Shareholder Rights Agreement shall survive and continue as obligations of
the Selling Stockholders irrespective of whether the Selling Stockholders assign
any or all of the Rights to third parties.
RIGHTS OF THE SELLING STOCKHOLDERS. The Selling Stockholders will not have
any rights to receive any payment pursuant to the Shareholder Rights Agreement
except to the extent of any Litigation Recovery. The Rights (i) will be junior
to all debt obligations of the Company and the Bank existing at the time of the
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redemption except as to an obligation that is expressly made junior to the
Rights, (ii) will not have a right to vote, and (iii) will be a preferred claim
in relation to the right of the holders of the Company Common Stock on
liquidation with respect to a Recovery Payment attributable to any Litigation
Recovery received before or after liquidation (although the Selling Stockholders
will continue to have such other rights on liquidation attributable to their
status as holders of Common Stock).
TAX CONSEQUENCES. KPMG Peat Marwick LLP has issued an opinion to the
Company 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 the Company for purposes of Sections 382(e), 311(a) and
305(a) of the Code. Thus, the Company should recognize no gain or loss on the
distribution of the Rights to the Selling Stockholders with respect to their
ownership of Company Common Stock. In addition, the Bank should not recognize
gain or loss on the Company's distribution of the Rights to the Selling
Stockholders. Furthermore, the Selling Stockholders should not be required to
include the amount of the Rights in income. Finally, if the Offering results in
an ownership change of the Company within the meaning of Section 382(g) of the
Code, the amount of value taken into account for purposes of determining the
annual Section 382 limitation should include the value of the Rights.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock and as adjusted to reflect the sale of the shares
of Common Stock offered hereby with respect to (i) each Selling Stockholder;
(ii) each of the Company's directors; (iii) executive officers of the Company
and the Bank; and (iv) all executive officers and directors as a group. Each of
the stockholders has sole voting and investment power with respect to the shares
beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING
----------------------- ---------------------
<S> <C> <C> <C> <C> <C>
SHARES TO BE
SOLD
NAME AND ADDRESS OF STOCKHOLDERS NUMBER PERCENT IN THE OFFERING NUMBER PERCENT
- ------------------------------------------------ ------------ --------- ---------------- ---------- ---------
Stockholders:
Trustees of the Estate of Bernice
Pauahi Bishop
567 South King Street, Suite 200
Honolulu, Hawaii 96813.......................... 7,605,518 65.12% 2,474,496 5,131,022 24.97%
Brierly Investments Limited
P.O. Box 5018
Level 9, CML Building
22-24 Victoria Street
Wellington, New Zealand......................... 3,055,523 26.16(2) 994,131 2,061,392 10.03
Arbur, Inc.
c/o William E. Simon & Sons, Inc.
310 South Street
Morristown, New Jersey 07960-1913............... 1,018,497 8.72 331,373 687,123 3.34
------------ --------- ---------------- ---------- ---------
11,679,537 100.00% 3,800,000 7,879,537 38.35%
------------ --------- ---------------- ---------- ---------
------------ --------- ---------------- ---------- ---------
Directors and Executive Officers:
Rudolf P. Guenzel............................... -- -- -- 284,136(3) 1.4%
Henry Peters.................................... -- -- -- -- --
Gerard Jervis................................... -- -- -- -- --
Robert W. MacDonald............................. -- -- -- -- --
John F. Davis................................... -- -- -- 8,000 --
J. Michael Holmes............................... -- -- -- 151,810(3) 0.7
William W. Flader............................... -- -- -- 151,810(3) 0.7
Doreen J. Blauschild............................ -- -- -- 350 --
Robert I. Niedling.............................. -- -- -- 1,700 --
William G. Carroll.............................. -- -- -- 3,500 --
---------- ---------
Total....................................... 593,306(3) 2.8%
---------- ---------
---------- ---------
</TABLE>
- ------------------------
(1) Gives effect to the full conversion of the Outstanding Preferred Stock and
the 32:1 stock split.
(2) While the table reflects the full conversion of outstanding Preferred Stock
and stock split, BIL Securities will actually retain a portion of its
Outstanding Preferred Stock and not exchange such shares for Common Stock
until immediately following the consummation of the Offering in order to
avoid being deemed a thrift holding company for regulatory purposes. See
"The Stockholders' Agreement."
(3) Includes 159,136 shares, 126,810 shares and 126,810 shares to be purchased
by a grantor trust on behalf of Messrs. Guenzel, Holmes and Flader,
respectively, pursuant to the Deferred Compensation Plan. See
"Management--Employment Agreements--Original Employment Agreements and
Establishment of Grantor Trust."
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 100,000,000 shares of capital stock, of
which 75,000,000 are shares of Common Stock, par value $.01 per share, and
25,000,000 are shares of preferred stock, par value $.01 per share. Upon
consummation of the Offering, no shares of preferred stock will be outstanding.
Prior to consummation of the Offering, there is outstanding 85,000 shares of
Series C Preferred Stock, 68,000 shares of Series D Preferred Stock and 332,000
shares of Series E Preferred Stock, all of which are owned by the Selling
Stockholders. In connection with the Offering, the Outstanding Preferred Stock
is to be exchanged for shares of Common Stock. An aggregate of 20,546,204 shares
of Common Stock will be outstanding following consummation of the Offering,
which gives full effect to the conversion of the Outstanding Preferred Stock
into Common Stock and the 32:1 stock split. See "Capitalization" and "The
Stockholders' Agreement." Each share of Common Stock has the same relative
rights as, and is identical in all respects with, each other share of Common
Stock. The Common Stock is not subject to call for redemption.
THE CAPITAL STOCK OF THE COMPANY DOES NOT REPRESENT NONWITHDRAWABLE CAPITAL,
IS NOT AN ACCOUNT OF AN INSURABLE TYPE, AND IS NOT INSURED BY THE FDIC.
COMMON STOCK
DIVIDENDS. The Company can pay dividends if, as and when declared by its
Board of Directors, subject to compliance with limitations which are imposed by
law. See "Dividends and Market for Common Stock" and "Regulation--Regulation of
Federal Savings Banks--Capital Distribution Regulation." The holders of Common
Stock of the Company are entitled to receive and share equally in such dividends
as may be declared by the Board of Directors of the Company out of funds legally
available therefor. If the Company issues preferred stock in the future, the
holders thereof may have a priority over the holders of the Common Stock with
respect to dividends.
VOTING RIGHTS. The holders of Common Stock of the Company possess exclusive
voting rights in the Company. They elect the Company's Board of Directors and
act on such other matters as are required to be presented to them under Delaware
law or the Company's Certificate of Incorporation or as are otherwise presented
to them by the Board of Directors. As of the consummation of the Offering, each
holder of Common Stock will be entitled to one vote per share and each holder of
Common Stock does not have any right to cumulate votes in the election of
directors. Although there are no present plans to do so, if the Company issues
preferred stock in the future, holders of the preferred stock may also possess
voting rights. For information with respect to a possible issuance of preferred
stock under certain limited circumstances pursuant to the Shareholder Rights
Agreement, see "Agreement with Respect to Potential Goodwill Lawsuit Recovery."
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as the sole holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon), all assets of the Bank available for distribution. In the event of any
liquidation, dissolution or winding up of the Company, the holders of its Common
Stock would be entitled to receive, after payment or provision for payment of
all its debts and liabilities, all of the assets of the Company available for
distribution. If preferred stock is issued, the holders thereof may have a
priority over the holders of the Common Stock in the event of liquidation or
dissolution. See "Agreement With Respect to Potential Goodwill Lawsuit
Recovery."
PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company generally are
not entitled to preemptive rights with respect to any shares which may be issued
in the future.
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<PAGE>
PREFERRED STOCK
Prior to consummation of the Offering, there is outstanding 85,000 shares of
Series C Preferred Stock, 68,000 shares of Series D Preferred Stock and 332,000
shares of Series E Preferred Stock, all of which are owned by the Selling
Stockholders. In connection with the Offering, the Outstanding Preferred Stock
is to be exchanged for shares of Common Stock. See "Capitalization" and "The
Stockholders' Agreement." Consequently, following consummation of the Offering,
the Company will have no shares of preferred stock issued or outstanding.
The Board of Directors of the Company is authorized to issue preferred stock
and to fix and state voting powers, designations, preferences or other special
rights of such shares and the qualifications, limitations and restrictions
thereof. The preferred stock may be issued in distinctly designated series, may
be convertible into Common Stock and may rank prior to the Common Stock as to
dividend rights, liquidation preferences, or both.
The authorized but unissued shares of preferred stock (as well as the
authorized but unissued and unreserved shares of Common Stock) are available for
issuance in future mergers or acquisitions, in a future public offering or
private placement or for other general corporate purposes. Except as otherwise
required to approve the transaction in which the additional authorized shares of
preferred stock would be issued, stockholder approval generally would not be
required for the issuance of these shares. Depending on the circumstances,
however, stockholder approval may be required pursuant to the requirements for
listing the Common Stock on the Nasdaq Stock Market or any exchange on which the
Common Stock may then be listed, if any.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS. A
number of provisions of the Company's Amended and Restated Certificate of
Incorporation ("Certificate of Incorporation"), and Bylaws ("Bylaws"), which
shall be effective upon consummation of the Offering, deal with matters of
corporate governance and certain rights of stockholders. The following
discussion is a general summary of certain provisions of the Company's
Certificate of Incorporation and Bylaws which might be deemed to have a
potential "anti-takeover" effect. Reference should be made in each case to such
Certificate of Incorporation and Bylaws. See "Additional Information."
Notwithstanding the foregoing, under certain circumstances, the Company may be
subject to Section 2115 of the California Corporation Code (as a foreign
corporation) which may have the effect of superseding certain provisions of the
Company's Certificate of Incorporation and Bylaws as interpreted by Delaware
law, particularly those provisions providing for a staggered board of directors
and eliminating cumulative voting. However, management believes that such
provisions of the California Corporation Code will not apply to the Company
because its securities will be listed on the Nasdaq National Market and it is
anticipated that there will be at least 800 shareholders and, as such, the
Company will be exempt from the provisions of Section 2115.
BOARD OF DIRECTORS. Article VI of the Certificate of Incorporation and
Article IV of the Bylaws of the Company contain provisions relating to the Board
of Directors and provides, among other things, that the Board of Directors shall
be divided into three classes as nearly equal in number as possible with the
term of office of one class expiring each year. See "Management." Cumulative
voting in the election of directors is prohibited by Article VI of the
Certificate of Incorporation. Directors may be removed only with cause at a duly
constituted meeting of stockholders called expressly for that purpose. Any
vacancy occurring in the Board of Directors for any reason (including an
increase in the number of authorized directors) may be filled by the concurring
vote of a majority of the Directors then in office, though less than a quorum of
the Board, and a director appointed to fill a vacancy shall serve for the
remainder of the term to which the director has been elected, and until his
successor has been elected and qualified.
The Bylaws govern nominations for election to the Board, and provide that
nominations for election to the Board of Directors may be made at a meeting of
stockholders by or at the direction of the Board of
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<PAGE>
Directors or by any stockholder eligible to vote at an annual meeting of
stockholders who has complied with specified notice requirements. Written notice
of a stockholder nomination must be delivered to, or mailed to and received at,
the Company's principal executive offices no later than (i) ninety days prior to
the anniversary date of the mailing of proxy materials by the Company in
connection with the immediately preceding annual meeting, provided, however,
that, with respect to the 1999 annual meeting, which is expected to be held on
the fourth Monday of April 1999, nominations by the stockholder must be so
delivered or received no later than the close of business on the fourth Monday
of January 1999, notwithstanding a determination by the Company to schedule such
annual meeting at a date later than the fourth Monday of April 1999 and (ii)
with respect to an election to be held at a special meeting of stockholders for
the election of directors, the close of business on the tenth day following the
date on which notice of such meeting is first given to stockholders. Each such
notice shall set forth: (a) the name and address of the stockholder who intends
to make the nomination and of the person or persons to be nominated; (b) a
representation that the stockholder is a holder of record of stock of the
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(c) a description of all arrangements or understandings between the stockholder
and each nominee and any arrangements or understandings between the stockholder
and each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by such
stockholders; (d) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission (the
"Commission"); and (e) the consent of each nominee to serve as a director of the
Company if so elected.
LIMITATION OF LIABILITY. Article VIII of the Company's Certificate of
Incorporation provides that the personal liability of the directors and officers
of the Company for monetary damages shall be eliminated to the fullest extent
permitted by the Delaware General Corporation Law ("DGCL") as it exists on the
effective date of the Certificate of Incorporation or as such law may be
thereafter in effect. Section 102(b)(7) of the DGCL currently provides that
directors (but not officers) of corporations that have adopted such a provision
will not be so liable, except (i) for any breach of the director's duty of
loyalty to the corporation or its shareholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) for the payment of certain unlawful dividends and the making of
certain stock purchases or redemptions, or (iv) for any transaction from which
the director derived an improper personal benefit.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. Article IX of
the Company's Certificate of Incorporation provides that the Company 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, 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 Company or
any predecessor of the Company, or is or was serving at the request of the
Company or any predecessor of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding to the fullest extent authorized
by Section 145 of the DGCL, provided that the Company shall not be liable for
any amounts which may be due 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 thereunder without
its prior written consent.
The Company's Certificate of Incorporation also provides that reasonable
expenses (including attorneys' fees) incurred by a director, officer, employee
or agent of the Company in defending any civil, criminal, administrative or
investigative action, suit or proceeding described above shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
as authorized by the Board
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of Directors upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that the person is not
entitled to be indemnified by the Company.
SPECIAL MEETINGS OF STOCKHOLDERS AND STOCKHOLDER PROPOSALS. The Company's
Bylaws provide that special meetings of the Company's stockholders, for any
purpose or purposes, may only be called by the affirmative vote of a majority of
the Board of Directors then in office.
The Company's Bylaws provide that only such business as shall have been
properly brought before an annual meeting of stockholders shall be conducted at
the annual meeting. In order to be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors or (b) otherwise
properly brought before the meeting by a stockholder who has given timely notice
thereof in writing to the Company. For stockholder proposals to be included in
the Company's proxy materials, the stockholder must comply with all the timing
and informational requirements of Rule 14a-8 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). With respect to stockholder proposals to
be considered at the annual meeting of stockholders but not included in the
Company's proxy materials, the stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Company not less
than 90 days prior to the anniversary date of the mailing of proxy materials by
the Company in connection with the immediately preceding annual meeting;
provided, however, that with respect to the 1999 annual meeting, which is
expected to be held on the fourth Monday of April 1999, such written notice must
be received by the Company not later than the close of business on the fourth
Monday of January 1999, notwithstanding a determination by the Company to
schedule such annual meeting at a date later than the fourth Monday of April
1999. A stockholder's notice shall set forth as to each matter the stockholder
proposes to bring before the annual meeting (a) a brief description of the
business desired to be brought before the annual meeting, (b) the name and
address, as they appear on the Company's books, of the stockholder proposing
such business, (c) the class and number of shares of the Company which are
beneficially owned by the stockholder, and (d) any material interest of the
stockholder in such business. The presiding officer of an annual meeting shall
determine and declare to the meeting whether the business was properly brought
before the meeting in accordance with the provisions of the Bylaws and any such
business not properly brought before the meeting shall not be transacted.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Article X of the
Company's Certificate of Incorporation generally provides that any amendment of
the Certificate of Incorporation must be first approved by a majority of the
Board of Directors and, to the extent required by law, then by the holders of a
majority of the shares of the Company entitled to vote in an election of
directors, except that the approval of 75% of the shares of the Company entitled
to vote in an election of directors is required for any amendment to Articles VI
(directors), VII (meetings of stockholders and bylaws), VIII (limitation on
liability of directors and officers), IX (indemnification) and X (amendment),
unless any such proposed amendment is approved by a vote of 80% of the Board of
Directors then in office.
The Bylaws of the Company may be amended by a majority of the Board of
Directors or by the affirmative vote of a majority of the total shares entitled
to vote in an election of directors, except that the affirmative vote of at
least 75% of the total shares entitled to vote in an election of directors shall
be required to amend, adopt, alter, change or repeal any provision inconsistent
with certain specified provisions of the Bylaws, unless any such proposed
amendment is approved by a vote of 80% of the Board of Directors then in office.
OTHER RESTRICTIONS ON ACQUISITION OF THE COMPANY. Several provisions of the
DGCL could affect the acquisition of Common Stock or control of the Company.
Section 203 of the DGCL generally provides that a Delaware corporation shall not
engage in any "business combination" with an "interested stockholder" for a
period of three years following the date that such stockholder became an
interested stockholder unless (1) prior to such date the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; or
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(2) upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for this purpose, shares owned by persons who
are directors and also officers and shares owned by employee stock ownership
plans in which employee participants do not have the right to determine
confidentially whether the shares held subject to the plan will be tendered in a
tender offer or exchange offer; or (3) on or subsequent to such date, the
business combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. The three-year prohibition on business combinations with an
interested stockholder does not apply under certain circumstances, including
business combinations with a corporation which does not have a class of voting
stock that is (i) listed on a national securities exchange, (ii) authorized for
quotation on an inter-dealer quotation system of a registered national
securities association, or (iii) held of record by more than 2,000 stockholders,
unless in each case this result was directly or indirectly caused by the
interested stockholder.
An "interested stockholder" generally means any person that (i) is the owner
of 15% of more of the outstanding voting stock of the corporation or (ii) is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder; and the affiliates
and associates of such a person. The term "business combination" is broadly
defined to include a wide variety of transactions, including mergers,
consolidations, sales of 10% or more of a corporation's assets and various other
transactions which may benefit an interested stockholder.
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings association unless the OTS has been given 60 days' prior
written notice. The HOLA provides that no company may acquire "control" of a
savings association without the prior approval of the OTS. Any company that
acquires such control becomes a savings and loan holding company subject to
registration, examination and regulation by the OTS. See "Regulation--Regulation
of Savings and Loan Holding Companies--Holding Company Acquisitions."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Registrar
and Transfer Company.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company, the Bank, the Selling Stockholders and Sandler O'Neill &
Partners, L.P., as Representative of the underwriters named herein (the
"Underwriters"), the Company and the Selling Stockholders have agreed to sell to
the Underwriters, and the Underwriters have severally agreed to purchase from
the Company and the Selling Stockholders, the number of shares of Common Stock
set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- -------------------------------------------------------------------------------------------------- --------------
<S> <C>
Sandler O'Neill & Partners, L.P...................................................................
--------------
Total......................................................................................... 12,666,667
--------------
--------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the shares of Common Stock
offered hereby, if any are taken.
The Underwriters propose initially to offer the Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus, and to certain securities dealers at such price less a concession of
$ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain brokers and dealers.
After the Common Stock is released for sale to the public, the offering price
and other selling terms may from time to time be varied by the Representative.
The Company and the Selling Stockholders have granted the Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase up
to an aggregate of 1,900,000 additional shares of Common Stock solely to cover
over-allotments, if any.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price was determined by negotiations between the
Company and the Representative. Among the factors considered in determining the
initial public offering price of the Common Stock, in addition to prevailing
market conditions, were the estimate of the business potential and earnings
prospects of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market valuation of companies
in related businesses and other factors deemed to be relevant.
The Company has applied to have the Common Stock quoted on the Nasdaq
National Market. The Representative has advised the Company that it intends to
make a market in the Common Stock, but is not obligated to do so and may
discontinue any such market making at any time without notice. See "Market for
Common Stock."
The Company, the Bank and the Selling Stockholders have agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act.
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In connection with the Offering, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the shares of Common Stock; and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Common Stock than they are required to purchase from the
Company in the Offering. The Underwriters also may impose a penalty bid, whereby
selling concessions allowed to syndicate members or other broker-dealers in
respect of the securities sold in the Offering for their account may be
reclaimed by the syndicate if such shares of Common Stock are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the shares of Common
Stock, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
Neither the Company 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 Common Stock. In addition, neither
the Company 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 Underwriters may reserve for sale shares of Common Stock which may be
sold at the initial public offering price to directors, officers and employees
of the Company. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares of Common Stock not to be purchased will be offered
by the Underwriters on the same basis as the other shares of Common Stock
offered in the Offering.
The Representative has provided from time to time, and expects to provide in
the future, investment banking services to the Company and its affiliates, for
which the Representative has received or will receive customary fees and
commissions.
The Company and the Selling Stockholders have agreed not to, and, the
Company has further agreed, not to allow its directors and executive officers
to, offer, sell, contract to sell or otherwise dispose of, except as provided in
the Underwriting Agreement, any securities of the Company that are substantially
similar to the Common Stock, including but not limited to any securities that
are convertible into or exchangeable for, or that represent the right to
receive, Common Stock or any substantially similar securities, for a period of
180 days after the date of this Prospectus without the prior written consent of
the Representative.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 20,546,204 shares of
Common Stock outstanding (22,446,204 shares if the Underwriters' over-allotment
option is exercised in full). All shares of Common Stock sold in the Offering
will be freely tradable without restriction or further registration under the
Securities Act, except that any shares purchased by affiliates of the Company,
as that term is defined in Rule 144 under the Securities Act, may generally only
be resold in compliance with applicable provisions of Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including affiliates of the Company, who has
beneficially owned restricted shares for at least one year is entitled to sell,
within any three-month period, a number of such shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding the date of the notice filed pursuant to Rule 144. Sales under Rule
144 are also subject to certain manner of sale restrictions and notice
requirements and to the availability of current public information about the
Company. In addition, a person who is deemed an "affiliate" of the Company must
comply with Rule 144 in any sale of shares of Common Stock not covered
105
<PAGE>
by a registration statement (except, in the case of registered shares acquired
by the affiliate on the open market, for the holding period requirement). A
person (or person whose shares are aggregated) who is not deemed an "affiliate"
of the Company and who has beneficially owned restricted shares for at least two
years is entitled to sell such shares under Rule 144(k) without regard to the
volume, notice and other limitations of Rule 144. In meeting the one and two
year holding periods described above, a holder of restricted shares can include
the holding periods of a prior owner who was not an affiliate. Substantially all
of the shares of Common Stock outstanding prior to the Offering (including those
issued upon conversion of the Outstanding Preferred Stock) are eligible for sale
under Rule 144 subject to lock-up arrangements with the Underwriters described
above. See "Underwriting."
EXPERTS
The Consolidated Financial Statements of PBOC Holdings, Inc. (formerly SoCal
Holdings, Inc.) as of December 31, 1997 and 1996, and for each of the years in
the three year period ended December 31, 1997, have been included herein and in
the registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent auditors, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for the
Company by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C. The validity
of the Common Stock offered hereby will be passed upon for the Underwriters by
Sullivan & Cromwell, Los Angeles, California.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of which
this Prospectus is a part) on Form S-1 (the "Registration Statement") under the
Securities Act, with respect to the Common Stock 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. The terms of all material contracts or other
documents with respect to the Company are discussed in all material respects
herein. Readers are entitled to rely upon such discussion for information with
respect to such matters. In each instance, however, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement. For further information regarding the Company and the Common Stock
offered hereby, reference is made to the Registration Statement and the exhibits
thereto.
As a result of the Offering, the Company will become subject to the
reporting requirements of the Exchange Act, and in accordance therewith, will
file reports and other information with the Commission. The Registration
Statement and the exhibits forming a part thereof filed by the Company with the
Commission, and reports and other information filed by the Company with the
Commission, can be inspected without charge at, and copies can be obtained from
the Commission, at prescribed rates, at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400,
Chicago, Illinois 60661. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov.
106
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report............................................................................... F-2
Consolidated Statements of Financial Condition at December 31,
1997 and 1996.............................................................................................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995........................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995........................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995........................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
When the stock split referred to in Note 23 to the consolidated financial
statements has been consummated, we will be in a position to render the
following report.
/S/ KMPG PEAT MARWICK LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PBOC Holdings, Inc.:
We have audited the accompanying consolidated statements of financial
condition of PBOC Holdings, Inc. (formerly SoCal Holdings, Inc.) (a Delaware
Corporation) and subsidiaries (the Company) as of December 31, 1997 and 1996 and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company'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 PBOC
Holdings, Inc. and subsidiaries as of December 31, 1997 and 1996 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Los Angeles, California
February 20, 1998, except as to
note 23 to the consolidated financial
statements, which is as of May , 1998.
F-2
<PAGE>
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PROFORMA 1997
(NOTES 22 AND
23) 1997 1996
---------------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash and cash equivalents........................................... $ 14,113 $ 14,113 $ 14,720
Federal funds sold.................................................. 7,004 7,004 7,200
Securities available-for-sale, at estimated market values (notes 3,
12 and 16)........................................................ 571,160 571,160 502,301
Mortgage-backed securities held-to-maturity, estimated market values
$9,743 and $10,899 at December 31, 1997 and 1996 (notes 5 and
12)............................................................... 9,671 9,671 10,971
Loans receivable, net (notes 6, 7 and 12)........................... 1,533,212 1,533,212 1,141,707
Real estate held for investment and sale, net (note 8).............. 15,191 15,191 22,561
Premises and equipment, net (note 9)................................ 6,676 6,676 6,262
Federal Home Loan Bank stock, at cost (note 12)..................... 23,634 23,634 15,380
Accrued interest receivable......................................... 13,216 13,216 11,611
Other assets........................................................ 19,177 19,177 15,205
---------------- ----------- -----------
Total assets.................................................... $ 2,213,054 $ 2,213,054 $ 1,747,918
---------------- ----------- -----------
---------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 10).................................................. $ 1,266,615 $ 1,266,615 $ 1,371,243
Securities sold under agreements to repurchase (note 11)............ 340,788 340,788 192,433
Advances from the Federal Home Loan Bank (note 12).................. 472,000 472,000 80,000
Senior debt (note 13)............................................... 11,113 11,113 11,398
Accrued expenses and other liabilities.............................. 9,686 9,686 28,022
---------------- ----------- -----------
Total liabilities............................................... 2,100,202 2,100,202 1,683,096
---------------- ----------- -----------
Commitments and contingencies (notes 6, 9 and 18)
Minority interest (note 1).......................................... 33,250 33,250 --
Stockholders' equity (notes 1, 15 and 20):
Preferred stock, $.01 par value. Authorized 1,000,000 shares; none
issued or outstanding
Preferred stock Series C, voting issued and outstanding 85,000
shares; liquidation value $8,500.............................. $ -- $ 1 $ 1
Preferred stock Series D, voting, issued and outstanding 68,000
shares; liquidation value $6,800.............................. -- 1 1
Preferred stock Series E, nonvoting, issued and outstanding
332,000 shares; liquidation value $33,200..................... -- 3 3
Common stock, par value $.01 per share. Authorized 75,000,000 and
500,000 shares; issued and outstanding 11,679,537 and 98,502
shares.......................................................... 12 1 1
Additional paid-in capital........................................ 129,816 129,814 129,793
Unrealized losses on securities available-for-sale................ (1,974) (1,974) (6,084)
Minimum pension liability, net of tax............................. (293) (293) --
Accumulated deficit............................................... (47,959) (47,951) (58,893)
---------------- ----------- -----------
Total stockholders' equity...................................... 79,602 79,602 64,822
---------------- ----------- -----------
Total liabilities and stockholders' equity...................... $ 2,213,054 $ 2,213,054 $ 1,747,918
---------------- ----------- -----------
---------------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest, fees and dividend income:
Short term investments........................................................ $ 1,038 $ 1,195 $ 2,498
Securities purchased under agreements to resell............................... 2,328 3,257 3,157
Investment securities......................................................... 3,980 2,374 180
Mortgage-backed securities.................................................... 32,672 26,136 21,836
Loans receivable.............................................................. 89,938 89,020 94,473
Federal Home Loan Bank stock.................................................. 1,023 914 782
--------- --------- ---------
Total interest, fees and dividend income.................................... 130,979 122,896 122,926
--------- --------- ---------
Interest expense:
Deposits (note 10)............................................................ 67,247 75,136 74,866
Advances from the Federal Home Loan Bank...................................... 8,785 3,207 11,376
Securities sold under agreements to repurchase................................ 19,635 10,901 7,067
Senior debt................................................................... 1,271 1,160 2,983
Hedging costs, net (note 16).................................................. 267 387 1,685
--------- --------- ---------
Total interest expense...................................................... 97,205 90,791 97,977
--------- --------- ---------
Net interest income............................................................. 33,774 32,105 24,949
Provision for loan losses (note 7).............................................. 2,046 2,884 8,823
--------- --------- ---------
Net interest income after provision for loan losses......................... 31,728 29,221 16,126
--------- --------- ---------
Other income:
Loan service and loan related fees............................................ 481 1,378 1,582
Gain on mortgage-backed securities sales, net................................. 1,275 3,638 641
Gain (loss) on loan and loan servicing sales, net (note 4).................... 3,413 (53) (166)
(Loss) income from real estate operations, net (note 8)....................... (1,805) 1,946 (2,067)
Other income.................................................................. 1,753 1,215 513
--------- --------- ---------
Total other income.......................................................... 5,117 8,124 503
--------- --------- ---------
Operating expenses:
Personnel and benefits........................................................ 11,787 10,763 12,108
Occupancy..................................................................... 7,109 6,389 7,022
FDIC insurance................................................................ 4,899 4,415 4,290
Professional services......................................................... 528 771 2,050
Office related expenses....................................................... 3,913 3,992 3,958
Other......................................................................... 1,307 1,486 1,323
--------- --------- ---------
Total operating expenses.................................................... 29,543 27,816 30,751
--------- --------- ---------
Earnings (loss) before income tax benefit and minority interest................. 7,302 9,529 (14,122)
Income tax benefit (note 14).................................................... (4,499) (3,015) (2,644)
--------- --------- ---------
Earnings (loss) before minority interest........................................ 11,801 12,544 (11,478)
Minority interest............................................................... 859 -- --
--------- --------- ---------
Net earnings (loss)......................................................... 10,942 12,544 (11,478)
Preferred dividends undeclared, but accumulated................................. (7,340) (6,555) (3,385)
--------- --------- ---------
Net earnings (loss) available to common stockholders........................ $ 3,602 $ 5,989 $ (14,863)
--------- --------- ---------
--------- --------- ---------
Earnings per share, basic and diluted........................................... $ 1.14 $ 1.90 $ (3.41)
--------- --------- ---------
--------- --------- ---------
Weighted average shares outstanding............................................. 3,152,064 3,152,064 4,361,280
--------- --------- ---------
--------- --------- ---------
Proforma earnings per share (unaudited)......................................... $ 0.94
---------
---------
Proforma weighted average shares outstanding (unaudited)........................ 11,679,537
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Preferred stock:
Balance at beginning of year............................................... $ 5 $ 5 $ 2
Retirement of preferred stock Series A and Series B........................ -- -- (2)
Issuance of preferred stock series C....................................... -- -- 1
Issuance of preferred stock series D....................................... -- -- 1
Issuance of preferred stock series E....................................... -- -- 3
---------- ---------- ----------
Balance at end of year..................................................... 5 5 5
---------- ---------- ----------
Common stock:
Balance at beginning of year............................................... 1 1 2
Retirement of common stock class A and class B............................. -- -- (2)
Issuance of common stock................................................... -- -- 1
---------- ---------- ----------
Balance at end of year..................................................... 1 1 1
---------- ---------- ----------
Additional paid-in capital:
Balance at beginning of year............................................... 129,793 129,691 30,828
Capital contribution, net.................................................. 21 102 98,863
---------- ---------- ----------
Balance at end of year..................................................... 129,814 129,793 129,691
---------- ---------- ----------
Unrealized gains (losses) on securities for-sale:
Balance at beginning of year............................................... (6,084) (1,647) (32)
Change in unrealized gains (losses) on securities available-for-sale....... 4,110 (4,437) (1,615)
---------- ---------- ----------
Balance at end of year..................................................... (1,974) (6,084) (1,647)
---------- ---------- ----------
Minimum pension liability net of tax:
Balance at beginning of year............................................... -- -- --
Change during year......................................................... (293) -- --
---------- ---------- ----------
Balance at end of year..................................................... (293) -- --
---------- ---------- ----------
Accumulated deficit:
Balance at beginning of year............................................... (58,893) (71,437) (83,263)
Net earnings (loss)........................................................ 10,942 12,544 (11,478)
Capital contribution, net.................................................. -- -- 23,304
---------- ---------- ----------
Balance at end of year..................................................... (47,951) (58,893) (71,437)
---------- ---------- ----------
Total stockholders' equity............................................. $ 79,602 $ 64,822 $ 56,613
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................................................ $ 10,942 $ 12,544 $ (11,478)
Adjustments to reconcile net earnings (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization............................................ 1,234 1,837 1,770
Provisions for loan and real estate losses............................... 4,800 3,650 10,834
Decrease (increase) in valuation allowance on net deferred tax asset..... 8,159 8,106 (5,230)
(Amortization) write-down for discontinued lease operations.............. (265) (150) (309)
(Decrease) increase in net deferred tax asset............................ (3,434) (5,069) 7,880
Amortization and accretion of premiums, discounts and deferred fees...... 2,270 515 423
Amortization of purchase accounting intangible assets, premiums and
discounts, net......................................................... (90) (185) (234)
Gain on sale of investment and mortgage-backed securities................ (1,275) (3,638) (641)
Loss (gain) on sale of loans and loan servicing.......................... (3,413) 53 166
Gain on real estate sales................................................ (2,214) (3,346) (392)
Federal Home Loan Bank stock dividend.................................... (952) (853) (803)
Increase in accrued interest receivable.................................. (1,605) (2,173) (176)
Increase (decrease) in accrued interest payable.......................... (1,000) 5,539 (771)
Decrease in other assets................................................. (8,697) (10,317) (1,795)
Interest deferred on Senior Debt......................................... -- 1,165 --
Increase (decrease) in accrued expenses.................................. (17,364) 15,419 1,883
--------- --------- -----------
Net cash provided by (used in) operating activities.................... (12,904) 23,097 1,127
--------- --------- -----------
Cash flows from investing activities:
Increase (decrease) in securities purchased under agreements to resell..... -- 35,000 (35,000)
Proceeds from sales of investment and mortgage-backed securities
available-for-sale....................................................... 235,612 162,087 184,877
Proceeds from sales of investment and mortgage-backed securities
held-to-maturity......................................................... -- -- 38,713
Proceeds from sale of loans and servicing rights........................... 93,081 -- 27,541
Investment and mortgage-backed security principal repayments and
maturities............................................................... 108,022 52,380 58,020
Loan originations, net of repayments....................................... 17,607 41,610 50,391
Purchases of investments and mortgage-backed securities
available-for-sale....................................................... (408,780) (476,748) (212,155)
Purchase of mortgage-backed securities held-to-maturity.................... -- (10,971) --
Purchases of loans......................................................... (515,053) -- --
Costs capitalized on real estate........................................... (1,424) (2,228) (262)
Proceeds from sale of real estate.......................................... 23,458 40,217 20,299
Additions to premises and equipment........................................ (1,833) (1,081) (886)
Sales of premises and equipment............................................ -- 785 1,058
Purchase of FHLB stock..................................................... (8,475) -- --
Redemption of FHLB stock................................................... 1,173 -- 2,914
--------- --------- -----------
Net cash (used in) provided by investing activities.................... (456,612) (158,949) 135,510
--------- --------- -----------
Cash flows from financing activities:
Proceeds from subsidiary preferred stock offering.......................... 33,250 -- --
Proceeds from capital infusion, net........................................ 21 -- 48,500
Proceeds from issuance of senior debt...................................... -- -- 10,000
Payment of principal holdback.............................................. -- -- 1,920
Cash contributions to additional paid-in capital........................... -- 102 442
Expenses related to the issuance of stock.................................. -- -- (201)
Repayment on senior debt................................................... (285) -- --
Redemption of preferred stock.............................................. -- -- (57)
Net increase (decrease) in deposits........................................ (104,628) (102,075) 89,100
Net increase in securities sold under agreements to repurchase............. 148,355 192,433 --
Issuance of FHLB advances.................................................. 1,137,684 113,900 12,188,746
Repayment of FHLB advances................................................. (745,684) (65,646) (12,467,000)
--------- --------- -----------
Net cash provided by (used in) financing activities.................... 468,713 138,714 (128,550)
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents......................... (803) 2,862 8,087
Cash and cash equivalents at beginning of year............................... 21,920 19,058 10,971
--------- --------- -----------
Cash and cash equivalents at end of year..................................... $ 21,117 $ 21,920 $ 19,058
--------- --------- -----------
--------- --------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................................. $ 96,667 $ 83,691 $ 95,698
Income taxes............................................................. 200 247 6
--------- --------- -----------
--------- --------- -----------
Supplemental schedule of non cash investing and financing activities:
Foreclosed real estate..................................................... $ 31,349 $ 42,518 $ 20,431
Loans originated in connection with sale of foreclosed real estate......... 16,145 12,608 6,412
Contribution of debt to equity............................................. $ -- $ -- $ 50,160
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
On May 22, 1995, a plan of reorganization of PBOC Holdings, Inc. (formerly
SoCal Holdings, Inc.) (the Company), was adopted by the stockholders of the
Company, under which existing stockholders of the Company agreed to invest an
aggregate of $58.5 million in new debt and equity securities of the Company.
Under an existing commitment, one of the stockholders agreed to purchase from
the Company for $1.9 million a Senior Note due 2002 which was also contributed
to the capital of the Company. The stockholders also contributed the Company
Senior Notes due 2002 (including all accrued and unpaid interest thereon)
acquired by them in 1992 to the capital of the Company.
The gross proceeds from the sale of such debt and equity securities less
$36,572 used by the Company to redeem all of the Series A and Series B Preferred
Stock of the Company, or $60.4 million, was contributed by the Company to the
capital of People's Bank Of California (formerly Southern California Federal
Savings and Loan Association) (the Bank) on June 1, 1995. Pursuant to a related
Plan of Reorganization of the Bank adopted on May 16, 1995 by the stockholders
of the Bank, the Bank redeemed all outstanding shares of the Bank Series A and
Series B Preferred Stock for an aggregate of $19,688. The remaining net proceeds
totaling $60.4 million were utilized to increase the Bank's capital level. Upon
consummation of the recapitalization of the Company and the Bank, the Bank was
"adequately capitalized."
On May 31, 1995, the Office of Thrift Supervision (OTS) and the Federal
Deposit Insurance Corporation (FDIC) had approved the recapitalization of the
Company and the Bank in accordance with the plans of reorganizations of the
Company and the Bank. Upon written submission to the OTS that the Bank became
adequately capitalized upon consummation of the recapitalization, effective June
1, 1995, certain regulatory sanctions against the Bank were removed and the Bank
was deemed not subject to 12 C.F.R. Section 565.5 relating to the filing of and
compliance with capital restoration plans.
The following is a description of significant accounting and reporting
policies which the Company follows in preparing and presenting its consolidated
financial statements.
BASIS OF ACCOUNTING
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles which conform to general practice
within the savings and loan industry. The preparation of these consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from these estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned, except for People's
Preferred Capital Corporation (PPCC) in which the Company owns all of the common
stock. All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-7
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On June 19, 1997, the Bank created People's Preferred Capital Corporation, a
real estate investment trust (REIT), for the purpose of acquiring, holding, and
managing real estate mortgage assets. All of PPCC's common stock is owned by the
Bank. The Bank services a portion of the mortgage assets pursuant to a servicing
agreement with the Bank. On October 3, 1997, PPCC consummated a public offering
of $35.6 million of its 9.75% Noncumulative Exchangeable Preferred Stock, which,
net of issue costs, is reflected in the Bank's 1997 consolidated statement of
financial condition as a minority interest. PPCC used the proceeds from such
offering to acquire mortgage assets from the Bank.
FEES ON LOANS AND MORTGAGE-BACKED AND INVESTMENT SECURITIES
The Company 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 Company 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 Company 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 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 years ended December 31, 1997, 1996 and 1995. 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.
F-8
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES AVAILABLE-FOR-SALE--Securities to be held for indefinite periods
of time and not intended to be held-to-maturity are classified as
available-for-sale. Assets included in this category are those assets that
management intends to use as part of its asset/liability management strategy and
that may be sold in response to changes in interest rates, resultant prepayment
risk and other factors related to interest rate and resultant prepayment risk
changes. Securities available-for-sale are recorded at fair value. Both
unrealized gains and losses on securities available-for-sale, net of taxes, are
included as a separate component of stockholders' equity in the consolidated
statements of financial condition until these gains or losses are realized.
Gains or losses on sales of securities 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.
LOANS HELD-FOR-SALE--Loans held-for-sale in connection with the Bank's
secondary marketing activities are recorded at the lower of amortized cost or
fair value. Unrealized losses are included in the consolidated statements of
operations.
FEDERAL HOME LOAN BANK (FHLB) STOCK--This asset is owned due to regulatory
requirements and is carried at cost. This stock is pledged as collateral to
secure FHLB advances.
IMPAIRED LOANS
A loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. The measurement of impairment may be
based on (1) the present value of the expected future cash flows of the impaired
loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized by
recording a valuation allowance.
Interest income on impaired loans is recognized on a cash basis if it is
determined that collection of principal is probable. Loans that are 90 days or
more past due, or when full collection of principal and interest is not
probable, are placed on nonaccrual status and interest income that has been
earned but not collected is reversed. Loans are returned to accrual status when
the borrower has had a period of sustained repayment performance. Management
considers all loans formally treated as troubled debt restructurings to be
impaired loans in the year of restructuring.
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
F-9
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Company 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 in limited
partnerships which were acquired for development and sale. Real estate
held-for-sale consists of property acquired in settlement of loans. Real estate
held for investment and for sale is carried at 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.
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 Company 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 Company 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 Company'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 Company
for the purpose of capitalization
F-10
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Company 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.
TAXES ON INCOME
The Company uses the asset and liability method for measurement and
recognition of income taxes. The balance sheet amounts of net deferred tax
assets or liabilities are recognized on the temporary differences between the
basis of assets and liabilities as measured by tax laws and their financial
statement basis, plus available tax operating loss carryforwards and tax credit
carryforwards, reduced by a valuation allowance for that portion of tax assets
not considered more likely than not to be realized. Deferred income tax benefit
is recognized for the change in net deferred tax assets or liabilities, plus the
valuation allowance change. Current income tax is the amount of total taxes
currently payable.
DERIVATIVE AND HEDGING ACTIVITIES
The Company 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 Company
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.
EARNINGS PER SHARE
At December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share"
(SFAS 128). Under SFAS 128 basic earnings per share excludes dilution and is
computed by dividing income available
F-11
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted from issuance of
common stock that then shared in earnings.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of SFAS No. 130 will not have a
material impact on the Bank.
In June 1997, the FASB issued SFAS No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that selected information
about those operating segments be reported in interim financial statements. This
Statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segment of a Business Enterprise." SFAS 131 requires
that all public enterprises report financial and descriptive information about
its reportable operating segments. Operating segments are defined as components
of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This Statement is effective for
fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years should be restated. This
Statement need not be applied to interim financial statements in the year of
application, but comparative information for interim periods in the initial year
of application shall be reported in financial statements for interim periods in
the second year of application. Early application is encouraged. Management
believes that the adoption of SFAS 131 will not have a material impact on the
company's operation.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employers' Disclosures about Pension and Other
Postretirement Benefits." SFAS 132 amends the disclosure requirements of SFAS
No. 87, "Employers' Accounting for Pensions, SFAS No. 88, "Employer's Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
termination Benefits," and SFAS 106, "Employer's Accounting for Retirement
Benefits Other than Pensions." SFAS 132 standardizes the disclosure requirements
of SFAS Nos. 87 and 106 to the extent practicable and recommends a parallel
format for presenting information about pensions and other retirement benefits.
SFAS 132 is effective for fiscal years beginning after December 15, 1997. SFAS
132 will result in disclosure changes only.
F-12
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEAR 2000
The Company 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 Company by third-party
vendors. A significant portion of the Company's data processing and loan
servicing is performed by third-party vendors from which the Company has
requested (and received) confirmation that they expect to be compliant with Year
2000 issues.
The Company has not incurred significant expenses to-date, but expects to
incur total expenses of $200,000 through 1999 to address Year 2000 issues.
RECLASSIFICATION
Certain amounts in prior years' financial statements have been reclassified
to conform to the current financial statement presentation.
(2) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank purchases securities under agreements to resell at a later date at
set prices, generally collateralized by AA or higher rated mortgage-backed
securities. The average outstanding balance was approximately $41,225,000 and
$58,919,000 during each of the years ended December 31, 1997 and 1996,
respectively. The maximum outstanding balance at any month-end was $25,000,000
during 1996. There was no balance outstanding at any month-end during 1997. The
weighted average interest rate on such agreements was approximately 5.65%, 5.53%
and 6.17% during the years ended December 31, 1997, 1996 and 1995, respectively.
The securities pledged are held by a third-party institution.
F-13
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SECURITIES AVAILABLE-FOR-SALE
The Bank holds certain securities available-for-sale. The amortized cost,
unrealized gains and losses, and estimated fair value of securities
available-for-sale at December 31, 1997 and 1996 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1997
--------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
1996
--------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Debt securities issued by government agencies:
Due after five year through ten years.......................... $ 40,023 $ -- $ (1,309) $ 38,714
Mortgage-backed securities..................................... 468,362 170 (4,945) 463,587
---------- ----- ----------- ----------
Total securities available-for-sale.......................... $ 508,385 $ 170 $ (6,254) $ 502,301
---------- ----- ----------- ----------
---------- ----- ----------- ----------
</TABLE>
Proceeds from sales of investments and mortgage-backed securities
available-for-sale were approximately $235,612,000, $162,087,000 and
$184,877,000 in each of the years ended December 31, 1997, 1996 and 1995,
respectively, and resulted in gross realized gains of approximately $1,714,000,
$3,860,000 and $551,000, respectively, and gross realized losses of
approximately $439,000, $222,000 and $18,000 in the years ended December 31,
1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, the amortized cost and estimated fair value
of mortgage-backed securities available-for-sale pledged to secure borrowings
and swap agreements are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
<S> <C> <C> <C> <C>
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ----------- ----------- ----------
Pledged against:
Securities sold under agreements to repurchase................. $ 366,827 $ 365,822 $ 209,328 $ 206,264
Advances from Federal Home Loan Bank........................... 47,542 46,779 94,824 93,795
Swap and corridor agreements................................... 1,970 1,943 8,442 8,259
Treasury tax and loan account.................................. 4,577 4,546 5,056 4,874
Loan servicing custodial deposit accounts...................... -- -- 4,614 4,554
---------- ----------- ----------- ----------
$ 420,916 $ 419,090 $ 322,264 $ 317,746
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
F-14
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LOANS HELD-FOR-SALE
Proceeds from sales of loans held-for-sale and servicing rights were
approximately $93,081,000 and $27,541,000 in each of the years ended December
31, 1997 and 1995, respectively, and resulted in gross realized gains of
approximately $165,000 and $170,000 and gross realized losses of approximately
$0 and $296,000 in each of the years ended December 31, 1997 and 1995,
respectively. There were no loans sold in 1996. Gains from sales of servicing
rights, including flow through and bulk sales of servicing, were approximately
$3,248,000 for the year ended December 31, 1997. For 1997, gains of $5,291,000
on sales of servicing rights to loans owned by the Bank were deferred. The
remaining unamortized balance for this deferred gain was $4,131,000 at December
31, 1997. There were no sales of servicing during the years ended December 31,
1996 and 1995.
In the years ended December 31, 1997, 1996 and 1995, write-offs of servicing
assets totaled approximately $0, $18,000 and $40,000, respectively, and are
included in gain (loss) on loan and loan servicing sales in the accompanying
consolidated statements of operations.
(5) MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
The amortized cost, unrealized gains and losses, and estimated fair value of
mortgage-backed securities at December 31, 1997 and 1996 are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
1997.............................................................. $ 9,671 $ 72 $ -- $ 9,743
----------- --- --- -----------
----------- --- --- -----------
1996.............................................................. $ 10,971 $ -- $ (72) $ 10,899
----------- --- --- -----------
----------- --- --- -----------
</TABLE>
Substantially all mortgage-backed securities are collateralized by
single-family residence secured loans.
There was no sales of mortgage-backed securities in 1997 and 1996. Proceeds
from sales of mortgage-backed securities totaled approximately $38,713,000 in
the year ended December 31, 1995. Such sales resulted in gross realized gains of
approximately $405,000 and gross realized losses of $297,000 in the year ended
December 31, 1995.
F-15
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LOANS RECEIVABLE
A summary of loans receivable at December 31, 1997 and 1996 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Real estate loans
Single-family residential:
Fixed rate........................................................................ $ 212,552 $ 134,971
Variable rate..................................................................... 741,149 460,944
Multifamily, primarily variable rate................................................ 426,254 453,064
Commercial and industrial, primary variable rate.................................... 135,407 110,931
Land, primarily fixed rate.......................................................... 5,896 1,639
------------ ------------
Real estate loans............................................................... 1,521,258 1,161,549
Commercial loans...................................................................... 22,484 3,523
Consumer loans........................................................................ 8,485 988
Secured by deposits................................................................... 2,287 2,132
------------ ------------
All loans....................................................................... 1,554,514 1,168,192
Less:
Undistributed loan proceeds......................................................... 6,206 473
Unamortized net loan (premiums)/discounts and deferred origination fees............. (6,859) 2,732
Deferred gain on servicing sold..................................................... 4,131 --
Allowance for loan losses (note 7).................................................. 17,824 23,280
------------ ------------
$ 1,533,212 $ 1,141,707
------------ ------------
------------ ------------
</TABLE>
Nonaccrual loans were $9,904,000, $18,238,000 and $35,592,000 at December
31, 1997, 1996 and 1995, respectively. If loans which were on nonaccrual at
December 31, 1997, 1996 and 1995 had performed in accordance with their terms
for the year or since origination, if shorter, interest income from these loans
would have been $644,000, $1,405,000 and $3,154,000, respectively. Interest
collected on these loans for these years was $67,000, $846,000 and $1,046,000,
respectively.
The Company's variable rate loans are indexed primarily to the Federal Home
Loan Bank Eleventh District Cost of Funds Index (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 December 31, 1997, the Company had loan applications pending to originate
loans of approximately $42,859,000. Other than pending loan applications at
year-end, the Bank had no outstanding commitments to originate or purchase
loans.
F-16
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses for each of the
years ended December 31, 1997, 1996 and 1995 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Balance at beginning of year.................................................... $ 23,280 $ 31,572 $ 29,801
Provision for loan losses....................................................... 2,046 2,884 8,823
Recoveries credited to the allowance............................................ 106 925 34
--------- ---------- ---------
25,432 35,381 38,658
Losses charged to the allowance................................................. (7,608) (12,101) (7,086)
--------- ---------- ---------
Balance at end of year.......................................................... $ 17,824 $ 23,280 $ 31,572
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The Bank's gross impaired loans were $11,361,000 and $31,149,000 as of
December 31, 1997 and 1996, respectively. The average impaired loans for the
years then ended were $20,600,000 and $36,897,000. Gross impaired loans with a
valuation allowance totaled $6,280,000 and gross impaired loans without a
valuation allowance totaled $5,081,000 at December 31, 1997. Interest income
recognized related to these loans was $67,000 and $1,752,000 for 1997 and 1996,
respectively.
The valuation allowance related to impaired loans was $1,772,000 and
$6,652,000 at December 31, 1997 and 1996, respectively, and is included in the
schedule of the allowance for loan losses described above.
Troubled debt restructurings totaled $11,000,000 and $11,430,000 as of
December 31, 1997 and 1996, respectively. The Bank has no commitments to lend
additional funds to borrowers whose loans were classified as troubled debt
restructurings at December 31, 1997.
F-17
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) REAL ESTATE HELD FOR INVESTMENT AND FOR SALE
Real estate at December 31, 1997 and 1996, consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Acquired for sale or development........................................ $ 8,054 $ 8,641
Less allowance for losses............................................. (6,146) (6,516)
--------- ---------
Acquired for sale or development.................................... 1,908 2,125
--------- ---------
Acquired in settlement of loans:
Single-family residential............................................. 750 3,309
Multifamily........................................................... 6,481 8,341
Commercial and industrial............................................. 7,268 8,614
Land.................................................................. 202 244
--------- ---------
14,701 20,508
Less allowance for losses............................................. (1,418) (72)
--------- ---------
Acquired in settlement of loans..................................... 13,283 20,436
--------- ---------
$ 15,191 $ 22,561
--------- ---------
--------- ---------
</TABLE>
A summary of the components of the income from real estate operations in
each of the years ended December 31, 1997, 1996 and 1995 is as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Gross income from real estate operations....................... $ 3,372 $ 4,761 $ 2,536
Operating expenses............................................. 4,637 5,395 2,984
--------- --------- ---------
Loss from operations....................................... (1,265) (634) (448)
Gain on real estate sales...................................... 2,214 3,346 392
--------- --------- ---------
Gain (loss) from real estate operations.................... 949 2,712 (56)
Provisions for losses.......................................... (2,754) (766) (2,011)
--------- --------- ---------
Total income (loss) from real estate operations............ $ (1,805) $ 1,946 $ (2,067)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) REAL ESTATE HELD FOR INVESTMENT AND FOR SALE (CONTINUED)
An analysis of the activity in the allowance for losses for real estate
acquired and direct real estate investments for each of the years ended December
31, 1997, 1996 and 1995, respectively, is as follows (dollars in thousands):
<TABLE>
<CAPTION>
DIRECT
REAL ESTATE REAL ESTATE
ACQUIRED INVESTMENTS TOTAL
----------- ----------- ----------
<S> <C> <C> <C>
Balance, December 31, 1994............................... $ 4,226 $ 13,260 $ 17,486
Provision for losses..................................... 1,387 624 2,011
Charge-offs.............................................. (4,153) (7,358) (11,511)
----------- ----------- ----------
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
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
(9) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996, consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land.................................................................. $ 521 $ 521
Buildings............................................................. 837 837
Furniture, fixtures and equipment..................................... 12,434 11,405
Leasehold improvements................................................ 5,525 4,906
---------- ----------
19,317 17,669
Less accumulated depreciation and amortization........................ (12,641) (11,407)
---------- ----------
$ 6,676 $ 6,262
---------- ----------
---------- ----------
</TABLE>
The Bank is committed to operating leases on certain premises. Certain of
these leases require the Bank to pay property taxes and insurance. Some are
subject to annual inflation adjustments, and have renewal options of various
periods at various rates. Lease expense on all property totaled approximately
$2,197,000, $2,144,000 and $3,515,000, net of sublease income of approximately
$353,000, $452,000 and $331,000, in each of the years ended December 31, 1997,
1996 and 1995, respectively. Included in 1995 lease expense was a charge of
$730,000 for early termination of the lease for the Van Nuys facilities.
F-19
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) PREMISES AND EQUIPMENT (CONTINUED)
Approximate minimum lease commitments before consideration of the charge for
unused lease property referred to above under noncancelable operating leases at
December 31, 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR GROSS SUBLEASE NET
- -------------------------------------------------------------- --------- ----------- ---------
<S> <C> <C> <C>
1998.......................................................... $ 2,363 $ 152 $ 2,211
1999.......................................................... 2,351 152 2,199
2000.......................................................... 2,168 152 2,016
2001.......................................................... 1,386 89 1,297
2002.......................................................... 894 -- 894
Thereafter.................................................... 3,030 -- 3,030
--------- ----- ---------
$ 12,192 $ 545 $ 11,647
--------- ----- ---------
--------- ----- ---------
</TABLE>
(10) DEPOSITS
Deposits at December 31, 1997 and 1996 consisted of the following (dollars
in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Transaction accounts:
NOW accounts......................... $ 98,550 2.38% $ 63,776 0.80%
Passbook accounts.................... 182,690 4.16 281,907 4.52
Money market accounts................ 52,550 5.07 24,518 2.62
------------ ------------
Transaction accounts............... 333,790 3.78 370,201 3.75
------------ ------------
Term certificates:
3-month.............................. 5,135 4.20 5,428 4.05
6-month.............................. 58,055 5.18 75,479 5.02
12-month............................. 476,251 5.73 384,211 5.51
18-month............................. 146,605 5.75 205,659 5.62
24-month............................. 73,226 5.71 108,359 5.99
36-month............................. 12,126 6.04 11,409 5.93
48-month............................. 1,099 5.95 1,924 5.54
60-month............................. 20,149 5.77 44,183 6.23
Public funds......................... 2,006 5.79 5,704 6.07
$100,000 and over.................... 138,173 5.90 158,686 5.70
------------ ------------
Term certificates.................. 932,825 5.72 1,001,042 5.61
------------ ------------
$ 1,266,615 5.21% $ 1,371,243 5.11%
------------ --- ------------ ---
------------ --- ------------ ---
</TABLE>
F-20
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) DEPOSITS (CONTINUED)
Term certificates of deposit outstanding by scheduled maturity date at
December 31, 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
---------- ---------------
<S> <C> <C>
Due within 3 months................................................. $ 178,131 5.50%
Due within 3 to 6 months............................................ 257,064 5.74
Due within 6 to 9 months............................................ 138,372 5.75
Due within 9 to 12 months........................................... 236,014 5.81
Due within 12 to 24 months.......................................... 107,771 5.76
Due within 24 to 36 months.......................................... 6,993 6.09
Due after 36 months................................................. 8,480 5.96
---------- ---
Total........................................................... $ 932,825 5.72%
---------- ---
---------- ---
</TABLE>
The components of deposit interest expense in each of the years ended
December 31, 1997, 1996 and 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NOW accounts................................................. $ 1,635 $ 449 $ 461
Passbook and money market accounts........................... 10,841 12,288 4,826
Term certificates -- under $100,000.......................... 44,852 52,556 57,657
Term certificates -- $100,000 and over....................... 10,124 10,030 12,156
--------- --------- ---------
67,452 75,323 75,100
Interest forfeitures on early withdrawals.................... (205) (187) (234)
--------- --------- ---------
$ 67,247 $ 75,136 $ 74,866
--------- --------- ---------
--------- --------- ---------
</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 $340,788,000 and
$192,433,000 outstanding reverse repurchase lease agreements at December 31,
1997 and 1996, respectively.
The maximum repurchase liability balances outstanding at any month-end
during the years ended December 31, 1997 and 1996 were approximately
$415,676,000 and $219,229,000, respectively. The average balances outstanding
during each of the years ended December 31, 1997 and 1996 were approximately
$357,396,000 and $179,002,000, 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-21
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (CONTINUED)
The scheduled maturities and weighted average interest rates of securities
sold under agreements to repurchase at December 31, 1997 and 1996 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
YEAR OF MATURITY AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
- -------------------------------------------------------------- ---------- --------------- ---------- ---------------
1997.......................................................... $ -- --% $ 115,645 5.74%
1998.......................................................... 76,788 5.79 76,788 5.22
2000.......................................................... 129,000 5.71 -- --
2002.......................................................... 135,000 5.79 -- --
---------- ----------
$ 340,788 5.76% $ 192,433 5.53%
---------- --- ---------- ---
---------- --- ---------- ---
</TABLE>
(12) ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of San Francisco at December 31,
1997 and 1996 are collateralized by mortgage-backed agency securities and
mortgage loans with a current principal balance of approximately $913,897,000
and $93,795,000, respectively, and by the investment in the stock of the Federal
Home Loan Bank of San Francisco with a carrying value at December 31, 1997 and
1996 of approximately $23,634,000 and $15,380,000, respectively.
At December 31, 1997, the Bank had a collateralized available line of credit
of approximately $31,000,000 with the Federal Home Loan Bank of San Francisco.
The scheduled maturities and weighted average interest rates of advances at
December 31, 1997 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
WEIGHTED WEIGHTED
YEAR OF MATURITY AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
- ---------------------------------------------------------------- ---------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
1997............................................................ $ -- --% $ 31,000 5.76%
1998............................................................ 357,000 5.97 49,000 6.01
2002............................................................ 115,000 5.58 -- --
---------- ---------
$ 472,000 5.87% $ 80,000 5.91%
---------- --- --------- ---
---------- --- --------- ---
</TABLE>
F-22
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) SENIOR DEBT
On June 1, 1995, the Company issued $10,000,000 par of unsecured Senior
Notes (the Notes) in conjunction with the Plan of Reorganization of the Company.
See further discussion in Note 1. The Notes contain an initial pay rate and
accrual rate of 7% and 10.75%, respectively, and the accrual rate increased to
11.15% on June 30, 1996. The difference between the pay rate and accrual rate is
deferred and compounded annually at the accrual rate commencing on June 30,
1996. Included in the balance of the senior note is $1,113,000 of accrued
interest, as of December 31, 1997. Interest of approximately $1.8 million,
calculated at the pay rate of 7%, was paid September 30, 1997 for the period
from issuance of the Notes to that date. Quarterly interest of approximately
$192,000, at the pay rate, was paid on December 31, 1997.
Assuming the continued deferral and compounding of interest, the principal
and deferred interest payments on the Notes will be due as follows (in
thousands):
<TABLE>
<CAPTION>
DEFERRED
DUE PRINCIPAL INTEREST TOTAL
- -------------------------------------------------------------- --------- ----------- ---------
<S> <C> <C> <C>
June 30, 2001................................................. $ 2,000 $ 561 $ 2,561
June 30, 2002................................................. 2,000 668 2,668
June 30, 2003................................................. 2,000 751 2,751
June 30, 2004................................................. 2,000 908 2,908
June 30, 2005................................................. 2,000 1,029 3,029
--------- ----------- ---------
$ 10,000 $ 3,917 $ 13,917
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
The Company may repay all or part of the outstanding balance of the Notes at
any time without penalty. Payments are applied proportionately to principal and
deferred interest.
The ability of the Company to make interest and principal payments on the
Notes is primarily dependent upon dividends from the Bank. As further discussed
in Note 20, the Bank may make dividend payments only if it is adequately
capitalized and generating earnings from operations.
In 1992, the Company issued $48,000,000 par of unsecured Senior Notes which
was recorded at a discount from par of $19,249,000. These Notes, which totaled
$38,199,000 at December 31, 1994, were contributed to capital in connection with
the Plan of Reorganization of the Company on June 1, 1995.
(14) INCOME TAXES
The Company, including the Bank and its subsidiaries (except for People's
Preferred Capital Corporation (PPCC)), file a Federal consolidated tax return.
The Company entered into a tax sharing agreement with the Bank, whereby the Bank
computes and pays taxes based upon the Bank's tax position assuming that a
separate tax return was filed. However, while the Notes are outstanding at the
Company, the payment by the Bank is limited to the amount of consolidated taxes.
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
stockholders 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
F-23
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) INCOME TAXES (CONTINUED)
provision for income taxes is included for the earnings of PPCC that will be
distributed to outside stockholders.
The income tax benefit for the years ended December 31, 1997, 1996 and 1995
consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal..................................................... $ 154 $ 16 $ --
State....................................................... 62 6 6
--------- --------- ---------
Total current............................................. 216 22 6
Deferred--Federal............................................. (4,715) (3,037) (2,650)
--------- --------- ---------
Total tax benefit......................................... $ (4,499) $ (3,015) $ (2,644)
--------- --------- ---------
--------- --------- ---------
</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 net 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 Company's projected taxable earnings, management
believes it is more likely than not that the Company will realize the benefit of
the existing net deferred tax asset at December 31, 1997.
Below is a reconciliation of the expected Federal income taxes (benefit) to
the consolidated effective income tax expense (benefit) for the noted periods:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Statutory Federal income tax rate............................. 35% 35% 35%
--------- --------- ---------
--------- --------- ---------
Expected Federal income taxes expense (benefit)............... $ 2,556 $ 3,335 $ (4,943)
Increases (reductions) in income taxes resulting from:
State franchise tax, net of Federal benefit................. 40 4 4
Adjustments to deferred taxes fully offset by valuation
allowance................................................. 475 696 (1,041)
Change in the valuation allowance........................... (7,481) (6,949) 2,466
Interest expense on Senior Debt............................. -- -- 996
PPCC nontaxable earnings.................................... (301) -- --
Other....................................................... 212 (101) (126)
--------- --------- ---------
$ (4,499) $ (3,015) $ (2,644)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) INCOME TAXES (CONTINUED)
The Company 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:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets:
Provision for losses on loans and real estate....................... $ 14,927 $ 19,057
Tax gains on sales of loans, net of deferred gains.................. 2,206 1,924
Recognition of interest on nonperforming loans for tax.............. 5,747 3,192
Accrued interest on deposits recognized for book but deferred for
tax............................................................... 1,424 1,661
REMIC Income........................................................ 5,451 4,168
Miscellaneous temporary deductible differences...................... 2,500 1,446
Available NOL carryforwards......................................... 53,027 56,480
AMT tax credit carryforwards........................................ 1,417 1,201
---------- ----------
Total deferred tax assets......................................... 86,699 89,129
Deferred tax liabilities:
Stock dividends from FHLB........................................... (3,082) (2,614)
Real estate partnership tax losses.................................. (259) (259)
Miscellaneous temporary taxable differences......................... (1,029) (1,029)
Federal tax effect of state temporary differences................... (3,806) (3,743)
---------- ----------
Total deferred tax liabilities.................................... (8,176) (7,645)
---------- ----------
Deferred tax assets, net of deferred tax liabilities.................. 78,523 81,484
Less deferred tax asset valuation allowances.......................... (68,316) (75,797)
---------- ----------
Net deferred tax assets........................................... $ 10,207 $ 5,687
---------- ----------
---------- ----------
</TABLE>
The Federal tax net operating loss carryforwards expire as follows (dollars
in thousands):
<TABLE>
<CAPTION>
YEAR TOTAL
- ---------------------------------------------------------------------------------- ----------
<S> <C>
2001.............................................................................. $ 18,792
2002.............................................................................. 2
2003.............................................................................. 24,444
2004.............................................................................. 26
----------
Pre-1992 originated net operating losses.................................. 43,264....
2008.............................................................................. 5,917
2009.............................................................................. 14,706
2010.............................................................................. 78,436
2011.............................................................................. 9,182
----------
Post-1991 originated net operating losses................................. 108,241
----------
Total..................................................................... $ 151,505
----------
----------
</TABLE>
F-25
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) INCOME TAXES (CONTINUED)
The Company had Federal and California alternative minimum tax credit
carryforwards of approximately $1,355,000 and $62,000, respectively. These
carryforwards are available to reduce future regular Federal and California
income taxes, if any, over an indefinite period.
In 1992, issuance of preferred stock resulted in a change of control as
defined under IRC 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. Any unused limitation is available in subsequent years until
expiration. The amount of the unused limitation that is available in 1998 and
thereafter is approximately $38.7 million. The net operating loss carryforwards
that are limited by the section 382 limitation that is available for 1998 and
thereafter is approximately $43.3 million. The net operating loss carryforwards
that are not limited by the section 382 limitation that is available for 1998
and thereafter is approximately $108.2 million.
The Company is subject to examination by Federal and state taxing
authorities for tax returns filed in previous periods. The results and effects
of these examinations on individual assets and liabilities may require
adjustment to the tax assets and liabilities based on the results of their
examinations. Management does not anticipate that the examinations will result
in any material adverse effect on its financial condition or results of
operations.
(15) STOCKHOLDER'S EQUITY
In connection with its Plan of Reorganization effective June 1, 1995, the
Company issued additional stock as follows (dollars in thousands, except per
share data):
<TABLE>
<CAPTION>
LIQUIDATION
VALUE PER NUMBER OF AMOUNT OF
CLASS PAR VALUE SHARE SHARES PROCEEDS
- ----------------------------------------------------------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Common stock..................................................... $ 0.01 $ -- 6,158 $ --
Preferred stock, Series C, voting, cumulative and non-
convertible.................................................... 0.01 100 85,000 8,500
Preferred stock, Series D, voting, cumulative and non-
convertible.................................................... 0.01 100 68,000 6,800
Preferred stock, Series E, non-voting, cumulative and non-
convertible.................................................... 0.01 100 332,000 33,200
</TABLE>
Dividends are payable if and when the Board of Directors of the Company
declare such dividends out of the assets of the Company, which by law are
available. Cash dividends are payable on the last day of each quarter commencing
on June 30, 1995 at the following per share quarterly rates for each class:
Series C--$2.95, Series D--$3.00 and Series E--$3.00. To the extent a quarterly
dividend is not paid in full, it shall accrue and compound additional dividends
on an annual basis commencing on June 30, 1996 at the rate for that class of
stock. As long as any Series C stock remains outstanding, no dividends may be
declared or paid on the Company common stock, or the Series D or Series E
preferred stock. The Series D and Series E preferred stock rank on parity with
each other in terms of rights to dividends. No dividends have been declared or
paid.
At December 31, 1997, cumulative unpaid dividends on the Company's preferred
stock totaled $17.3 million.
F-26
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) STOCKHOLDER'S EQUITY (CONTINUED)
In connection with their contribution of the Company's Senior Notes due 2002
to the capital of the Company, 6,158 additional shares of common stock were
issued to the Company's stockholders for no compensation. The previously
outstanding Series A and Series B preferred stock were redeemed for a cost of
$36,000.
There are certain restrictions on the ability of the common stockholders to
transfer their ownership in the common stock of the Company, under the terms of
a stockholders' agreement entered into in connection with the issuance of the
Senior Notes in 1995. Additionally, the stockholders have a right of first
refusal with respect to any capital stock issued by the Bank.
(16) DERIVATIVES AND HEDGING ACTIVITIES
Hedging costs, net, for each of the years ended December 31, 1997, 1996 and
1995 consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest paid on swaps, net of interest received..................... $ 2 $ 35 $ 1,217
Amortization of cost of caps, floors and corridors, net of interest
received........................................................... 265 352 468
--------- --------- ---------
$ 267 $ 387 $ 1,685
--------- --------- ---------
--------- --------- ---------
</TABLE>
Interest rate swaps are contracts where the parties agree to exchange fixed
rate for floating rate interest payments, or to exchange floating rate interest
payments upon two different rate indices (basis swap), for a specified period of
time on a specified (notional) amount. The notional amount is used only to
calculate the amount of interest payments to be exchanged and does not represent
credit risk. The notional amount and weighted average pay and receive rates are
shown below in accordance with their contractual dates. The variable repricing
indexes associated with the contracts are three-month London Inter-Bank Offered
Rate (LIBOR), one-month LIBOR and COFI which were 5.81%, 5.72% and 4.95%,
respectively, at December 31, 1997.
A summary of the swap contract, scheduled maturity date and weighted average
rate received and paid at December 31, 1997 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR OF NOTIONAL AVERAGE AVERAGE
MATURITY AMOUNT RATE PAID RATE RECEIVED
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Pay floating and receive fixed...................................... 1999 $ 4,709 5.63% 5.69%
----- ----------- --- ---
----- ----------- --- ---
</TABLE>
Swap contracts were entered into to limit the interest rate risk related to
the relative repricing characteristics of the Bank's interest-bearing deposits.
The floating rate on swap contracts re-prices at intervals of one to three
months based on the current index in effect at that time. If all contracts were
repriced at the current index in effect at each year-end, the weighted average
rate paid and received would be 5.61% and 5.69%, respectively, at December 31,
1997.
The notional amount of the swap amortizes monthly based upon the performance
of a specific index. The swap is used to reduce interest rate risk associated
with fixed rate term liabilities. The performance of the swap is based upon
interest rates in general. The above table does not include anticipated
amortization
F-27
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
relating to the swap. Excluding this transaction, the Bank does not have any
other positions in complex derivative transactions.
Mortgage-backed securities with book values of approximately $1,970,000 and
$8,442,000 and market values of approximately $1,943,000 and $8,259,000 at
December 31, 1997 and 1996, respectively, are pledged as collateral for certain
swap agreements.
The Bank has only limited involvement in derivative financial instruments
and does not use them for trading purposes. The instruments are used to manage
interest rate risk. The Bank has entered into corridor contracts to artificially
raise the interest rate cap on certain loans. The corridor contracts provide for
the payment of interest on the outstanding principal contract amount. Under such
contracts, the Bank receives interest if an interest rate that varies according
to a specified index exceeds a pre-set level (the strike rate) up to an upper
limit (the limit) beyond which additional interest is not received if the rate
increases. The index on the Bank's corridors is COFI or three-month LIBOR. A
summary of corridor contracts and average interest rate ranges at December 31,
1997 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
CONTRACT AVERAGE AVERAGE
YEAR OF MATURITY AMOUNT STRIKE PRICE LIMIT RATE
- ------------------------------------------------------ --------- ------------- -----------
<S> <C> <C> <C>
1998.................................................. $ 5,000 6.38% 8.13%
1999.................................................. 20,000 6.64 8.24
2000.................................................. 12,000 6.38 8.13
2001.................................................. 20,000 6.64 8.24
--------- --- ---
$ 57,000 6.56% 8.20%
--------- --- ---
--------- --- ---
</TABLE>
F-28
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) BENEFIT PLANS
The Bank has had a noncontributory defined benefit pension plan covering
substantially all of its employees (the Plan) hired before 1990. The benefits
are based on years of service and the employee's highest compensation during the
last five consecutive years of employment prior to 1991. The Plan was frozen
effective December 31, 1990, and consequently, employees will no longer earn
additional defined benefits for future services; however, future service may be
counted toward vesting of benefits accumulated based on past service. The Bank's
funding policy has been to contribute annually the minimum amount that can be
deducted for Federal income tax purposes.
The following table sets forth the funded status of the Plan and amounts
recognized in the Bank's consolidated statements of financial condition at
December 31, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits........................................................ $ (5,639) $ (4,804)
Nonvested benefits..................................................... (88) (255)
--------- ---------
Accumulated benefit obligations...................................... $ (5,727) $ (5,059)
--------- ---------
--------- ---------
Projected benefit obligation for services rendered to date............... $ (5,727) $ (5,059)
Plan assets at fair value, primarily cash and cash equivalents, listed
stocks and U.S. bonds.................................................. 5,082 4,492
--------- ---------
Projected benefit obligation (in excess of) or less than plan
assets............................................................. (645) (567)
Prior service cost not yet recognized in net periodic cost............... -- --
Additional minimum liability............................................. (1,221) (1,117)
Unrecognized net loss.................................................... 1,221 1,117
--------- ---------
Pension liability recognized in the consolidated statement of
financial condition................................................ $ (645) $ (567)
--------- ---------
--------- ---------
</TABLE>
Net periodic cost included the following components (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest cost on projected benefit obligation................ $ 372 $ 367 $ 332
Actual return on plan assets................................. (663) (203) (293)
Net amortization and deferral................................ 290 (155) (75)
--------- --------- ---------
Net periodic pension cost (income)........................... $ (1) $ 9 $ (36)
--------- --------- ---------
--------- --------- ---------
Assumptions used:
Discount rate.............................................. 7.00% 7.50% 7.25%
Expected long-term rate of return.......................... 9.00% 9.00% 9.00%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company 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
F-29
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) BENEFIT PLANS (CONTINUED)
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 $144,000, $155,000 and $159,000 of expense related to the 401(k)
plan, with no discretionary contributions in each of the years ended December
31, 1997, 1996 and 1995, respectively.
(18) COMMITMENTS AND CONTINGENCIES
The Company 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 Company.
(19) 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 Company.
The carrying amounts and fair values of the Bank's financial instruments
consisted of the following at December 31, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents.............................. $ 21,117 $ 21,117 $ 21,920 $ 21,920
Securities available-for-sale.......................... 571,160 571,160 502,301 502,301
Mortgage-backed securities held-to-maturity............ 9,671 9,743 10,971 10,899
Loans receivable....................................... 1,533,212 1,516,827 1,141,707 1,130,593
Federal Home Loan Bank stock........................... 23,634 23,634 15,380 15,380
Financial liabilities:
Deposits............................................... 1,266,615 1,264,143 1,371,243 1,387,867
Securities sold under agreements to repurchase......... 340,788 340,788 192,433 192,433
Advances from the Federal Home Loan Bank............... 472,000 473,523 80,000 80,000
Senior debt............................................ 11,113 11,113 11,398 11,398
Financial instruments:
Interest rate swaps.................................... -- (7) -- (5)
Interest rate floors................................... -- -- 26 (2)
Interest rate corridors................................ 481 138 719 458
</TABLE>
F-30
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each type of financial instrument:
- Cash and Cash Equivalents--The carrying amount approximates the fair value
for cash and short-term investments.
- Securities Available-for-Sale--Fair value is based on quoted market prices
or dealer quotes.
- Mortgage-Backed Securities--Fair value is based on quoted market prices or
dealer quotes.
- Loans Receivable--For residential real estate loans, fair value is
estimated by discounting projected future cash flows at the current market
interest rates for mortgage-backed securities collateralized by loans of
similar coupon, duration and credit risk, adjusted for differences in
market interest rates between loans and securities. The fair value of
multifamily and commercial real estate loans is estimated by discounting
the future cash flows using the current interest rates at which loans with
similar terms would be made on property and to borrowers with similar
credit and other characteristics and with similar remaining terms to
maturity. Impaired loans are valued based upon the fair value of
underlying collateral, if collateral dependent or alternatively, the
present value of expected cash flows using the loan's original implicit
loan interest rate.
- Federal Home Loan Bank Stock--The carrying amount of Federal Home Loan
Bank Stock approximates its fair value.
- Deposit--The fair values of NOW accounts, passbook accounts and money
market accounts withdrawable on demand without penalty are, by definition,
equal to the amount withdrawable on demand at the reporting date, which is
their carrying amount. The fair value of term certificates of deposit, all
of which are fixed maturity bearing a fixed rate of interest, is estimated
by discounting future projected cash flows at interest rates approximating
interest rates currently offered by the Bank for similar types of
certificates of deposit for similar remaining terms to maturity.
- Securities Sold under Agreements to Repurchase--The carrying amount of
securities sold under agreements to repurchase approximates their fair
value.
- Advances From the Federal Home Loan Bank--The fair value is estimated by
discounting projected future cash flows at the current advance interest
rates available to the Bank for Federal Home Loan Bank advances with
similar terms for similar remaining terms to maturity.
- Interest Rate Swaps, Caps, Floors and Corridors--The fair value of
interest rate swaps is based upon dealer quotes or are estimated by
discounting projected future cash flows at the current market interest
rates for interest rate swaps of similar terms and counter party credit
risk for the same remaining terms to maturity. The fair values of interest
rate caps, floors and corridors are also based upon dealer quotes or
estimated using option pricing models utilizing current market consensus
assumptions for interest rate caps, floors and corridors of similar terms
and strike or floor prices for the same remaining term to maturity.
F-31
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the Federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and tangible capital (as defined in the regulations) to adjusted
tangible assets (as defined) and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I leverage capital (as
defined) to adjusted tangible assets (as defined). Management believes, as of
December 31, 1997, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997, the most recent notification from the Office of
Thrift Supervision (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 I risk-based ratio of 6% and Tier I 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 Federal Savings and Loan Insurance
Corporation (FSLIC) as part of the Company's purchase of the Bank in 1987, and
which provides for an additional $124,300,000 of regulatory capital at December
31, 1997. Until the passage of the Financial Institution Reform Recovery and
Enforcement Act (FIRREA), the Bank met all capital requirements by including the
additional Assistance Agreement capital amount in regulatory capital.
The position of the OTS was and continues to be that under FIRREA,
Assistance Agreements which provide additional regulatory capital, and/or
capital forbearances are no longer in effect as of December 7, 1989. The OTS
notified the Bank in 1990 that the additional Assistance Agreement capital
amounts cannot be included in meeting the FIRREA capital requirements, and as a
result thereof the OTS believed the Bank did not meet minimum FIRREA capital
requirements. Management disagreed, and still disagrees, with the OTS, and
attempted to preserve all of its rights and remedies under the Assistance
Agreements. At December 31, 1997, 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 1994 the Company
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-32
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The ability of the Company 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 December 31, 1997, and 1996, the Bank's regulatory capital calculations,
computed by management both with and without inclusion of the additional capital
provided for in the Bank's Assistance Agreements were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
REGULATORY CAPITAL/STANDARD AS OF DECEMBER 31,
1997
-------------------------------------------------
TOTAL RISK-
WITHOUT ADDITIONAL ASSISTANCE TANGIBLE TIER I TIER I BASED
AGREEMENT CAPITAL CAPITAL LEVERAGE RISK- BASED CAPITAL
- -------------------------------------------------------------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Stockholders' 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 other intangible assets......................... (529) (529) (529) (529)
Minority interest in subsidiary............................... 30,033 30,033 30,033 30,033
---------- ---------- ----------- ------------
Total Tier I 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%
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
WITH ADDITIONAL ASSISTANCE
AGREEMENT CAPITAL
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
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>
F-33
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
REGULATORY CAPITAL/STANDARD AS OF DECEMBER 31,
1996
-------------------------------------------------
TOTAL RISK-
WITHOUT ADDITIONAL ASSISTANCE TANGIBLE TIER I TIER I BASED
AGREEMENT CAPITAL CAPITAL LEVERAGE RISK- BASED CAPITAL
- -------------------------------------------------------------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Stockholders' equity/GAAP capital............................. $ 76,610 $ 76,610 $ 76,610 $ 76,610
Adjustment for unrealized losses on securities
available-for-sale.......................................... 6,084 6,084 6,084 6,084
Deduction for direct real estate investments.................. (1,908) (1,908) (1,908) (1,908)
Deduction for other intangible assets......................... (714) (714) (714) (714)
---------- ---------- ----------- ------------
Total Tier I capital...................................... 80,072 80,072 80,072 80,072
Includable allowance for loan losses.......................... -- -- -- 10,986
Deduction for real estate held for investment................. -- -- -- (217)
---------- ---------- ----------- ------------
Total capital............................................. 80,072 80,072 80,072 90,841
Minimum capital requirement................................... 26,270 70,053 35,017 70,034
---------- ---------- ----------- ------------
Regulatory capital excess................................. $ 53,802 $ 10,019 $ 45,055 $ 20,807
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
Capital ratios:
Regulatory as reported...................................... 4.57% 4.57% 9.15% 10.38%
Minimum capital ratio....................................... 1.50 4.00 4.00 8.00
---------- ---------- ----------- ------------
Regulatory capital excess................................. 3.07% 0.57% 5.15% 2.38%
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
WITH ADDITIONAL ASSISTANCE
AGREEMENT CAPITAL
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Regulatory capital as adjusted................................ $ 213,472 $ 213,472 $ 213,472 $ 224,241
Minimum capital requirement (per above)....................... 26,270 70,053 35,017 70,034
---------- ---------- ----------- ------------
Regulatory capital excess................................. $ 187,202 $ 143,419 $ 178,455 $ 154,207
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
</TABLE>
Refer to Note 1 for a discussion of the recapitalization of the Company.
F-34
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) CONDENSED FINANCIAL INFORMATION OF PBOC HOLDINGS, INC.:
The condensed unconsolidated balance sheets of the Company at December 31,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
ASSETS
Cash.................................................................... $ 155 $ 47
Investment in subsidiary................................................ 90,571 76,610
--------- ---------
Total assets........................................................ $ 90,726 $ 76,657
--------- ---------
--------- ---------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Accrued expenses and other liabilities................................ $ 11 $ 44
Interest payable senior debt.......................................... 393
Senior debt, net...................................................... 11,113 11,398
--------- ---------
Total liabilities................................................... 11,124 11,835
Total stockholders' equity.............................................. 79,602 64,822
--------- ---------
Total liabilities and stockholders' equity.......................... $ 90,726 $ 76,657
--------- ---------
--------- ---------
</TABLE>
The condensed unconsolidated statements of operations of the Company for the
years ended December 31, 1997, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Income:
Cash dividends from subsidiary................................................ $ 2,100 $ -- $ --
Service fee income............................................................ -- 1,118 1,521
--------- --------- ----------
2,100 1,118 1,521
Expense:
Interest on senior debt....................................................... 1,272 1,160 2,983
General and administrative expenses........................................... 30 1,012 1,368
--------- --------- ----------
1,302 2,172 4,351
Earnings (loss) before undistributed (loss) of subsidiary....................... 798 (1,054) (2,830)
Earnings in undistributed earnings (loss) of subsidiary......................... 10,144 13,598 (8,648)
--------- --------- ----------
Net earnings (loss)......................................................... $ 10,942 $ 12,544 $ (11,478)
--------- --------- ----------
--------- --------- ----------
</TABLE>
The Company relies upon the Bank for dividends to support its operations.
Absent these dividends, the Company must rely upon its shareholders to support
its activities. The ability of the Bank to pay dividends is dependent upon its
ability to maintain minimum capital requirements and profitability.
F-35
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) CONDENSED FINANCIAL INFORMATION OF PBOC HOLDINGS, INC.: (CONTINUED)
The condensed unconsolidated statements of cash flows of the Company for the
years ended December 31, 1997, 1996 and 1995 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operations activities:
Net earnings (loss)......................................................... $ 10,942 $ 12,544 $ (11,478)
Adjustment to reconcile net loss to net cash used in operating activities:
Decrease in other assets.................................................. -- -- 1
Increase in accrued expenses.............................................. (33) (175) 2,290
Decrease in accrued interest payable...................................... (393) -- --
Amortization of discount on notes......................................... -- -- 265
Interest deferred and added to senior debt................................ -- 1,165 --
Equity in undistributed (income) loss of subsidiary....................... (10,144) (13,598) 8,648
---------- ---------- ----------
Net cash provided by (used) in operating activities................... 372 (64) (274)
---------- ---------- ----------
Cash flows from investing activities:
Investment in stock of subsidiary........................................... -- -- (60,383)
Deletions of equipment...................................................... -- -- 31
---------- ---------- ----------
Net cash (used) in investing activities............................... -- -- (60,352)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from capital infusion.............................................. -- -- 48,500
Proceeds from senior debt................................................... -- -- 10,000
Payment of principal holdback............................................... -- -- 1,920
Retirement of preferred stock............................................... -- -- (37)
Expenses related to issuance of stock....................................... -- -- (201)
Cash contributions to paid in capital....................................... 21 102 442
Payment on senior debt...................................................... (285) -- --
---------- ---------- ----------
Net cash provided by financing activities............................. (264) 102 60,624
---------- ---------- ----------
Net decrease (increase) in cash and cash equivalents.......................... 108 38 (2)
Cash and cash equivalents at beginning of period.............................. 47 9 11
---------- ---------- ----------
Cash and cash equivalents at end of period.................................... $ 155 $ 47 $ 9
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information--Cash paid during the period
for interest................................................................ $ 1,665 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
Supplemental schedule of non-cash investing and financing activities:
Contribution of debt to equity.............................................. $ -- $ -- $ 50,160
Contribution of minority interest........................................... -- -- 5,341
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(22) UNAUDITED PRO FORMA FINANCIAL INFORMATION
(a) Pro Forma Statement of Financial Condition Information. The proforma
information presented in the accompanying consolidated statement of
financial condition as of December 31, 1997 reflects the exchange of the
preferred stock into common stock by taking the initial amount of
F-36
<PAGE>
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(22) UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
proceeds contributed by the preferred stockholders divided by an exchange
value of $182. The calculated shares are as follows:
<TABLE>
<CAPTION>
INITIAL
PREFERRED AMOUNT OF EXCHANGE COMMON
STOCK SERIES PROCEEDS VALUE SHARES
- --------------------------------------------------------- ------------- ----------- ---------
<S> <C> <C> <C>
Series C................................................. $ 8,500,000 $ 182 46,703
Series D................................................. $ 6,800,000 $ 182 37,363
Series E................................................. $ 33,200,000 $ 182 182,418
</TABLE>
(b) Pro Forma Earnings Per Share Data
The proforma earnings per share data is calculated by taking the net
earnings available to the common stockholders and dividing by the
weighted average number of common stock outstanding of 11,679,537. The
weighted average number of common stock reflects the exchange of the
preferred stock to common stock and the 32 to 1 stock split on all
outstanding and exchanged common stock.
(23) SUBSEQUENT EVENT
On March 20, 1998 and April 20, 1998, the Board of Directors of the Company
approved an amendment to the Company's Certificate of Incorporation to (i)
increase the number of authorized shares of common stock from 500,000 to
75,000,000 and (ii) effect a 32 for 1 stock split of the issued common stock of
the Company prior to the commencement of the Offering, respectively. The
accompanying consolidated financial statements have been restated for all
periods presented to reflect the impact of the change in the authorized number
of shares of common stock and the stock split.
F-37
<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 ANY 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>
Summary.......................................... 1
Selected Consolidated Financial and Other Data of
the Company.................................... 8
Recent Developments.............................. 10
Risk Factors..................................... 14
Dividends........................................ 22
Market for Common Stock.......................... 22
Use of Proceeds.................................. 22
Capitalization................................... 24
Regulatory Capital............................... 25
Dilution......................................... 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 27
Business......................................... 44
Regulation....................................... 67
Taxation......................................... 75
Management....................................... 78
The Stockholders' Agreement...................... 87
Agreement With Respect to Potential Goodwill
Lawsuit Recovery............................... 90
Principal and Selling Stockholders............... 98
Description of Capital Stock..................... 99
Underwriting..................................... 104
Shares Eligible for Future Sale.................. 105
Experts.......................................... 106
Validity of Common Stock......................... 106
Additional Information........................... 106
Index to Consolidated Financial Statements....... F-1
</TABLE>
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
12,666,667 SHARES
[LOGO]
PBOC HOLDINGS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1998
SANDLER O'NEILL & PARTNERS, L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following statement sets forth the estimated amount of expenses (other
than underwriting discounts and commissions) to be incurred in connection with
the issuance and distribution of the securities being registered. Except as
specifically indicated, all of such expenses are being borne by the Registrant.
<TABLE>
<S> <C>
SEC filing fees............................................... $ 64,457.50
NASDAQ filing fees............................................ 50,000.00
NASD filing fees.............................................. 22,350.00
Printing and distribution..................................... 350,000.00
Legal fees and expenses....................................... 700,000.00
Accounting fees and expenses.................................. 160,000.00
Miscellaneous fees and expenses............................... 153,192.50
------------
TOTAL......................................................... $1,500,000.00
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IX of the Registrant's Amended and Restated Certificate of
Incorporation provides as follows:
A. INDEMNIFICATION. 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, 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 is or was serving at the request of the Corporation or any
predecessor of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding to the fullest extent authorized by Section 145
of the General Corporation Law of the State of Delaware, provided that the
Corporation shall not be liable for any amounts 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 without its prior written consent.
B. ADVANCEMENT OF EXPENSES. Reasonable expenses (including attorneys' fees)
incurred by a director, officer or employee of the Corporation in defending any
civil, criminal, administrative or investigative action, suit or proceeding
described hereunder 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 of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that the person is not
entitled to be indemnified by the Corporation.
C. OTHER RIGHTS AND REMEDIES. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article IX shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any agreement, vote of
stockholders or disinterested directors or otherwise, 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 or employee and shall inure to the benefit of the heirs, executors and
administrators of such person.
II-1
<PAGE>
D. 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 is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him or incurred by him in any
such capacity or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of its Certificate of Incorporation or this Article IX.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(A) LIST OF EXHIBITS
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of SoCal Holdings, Inc.
("Registrant")
3.1.1* Certificate of Amendment to Amended and Restated Certificate of Incorporation of
the Registrant
3.1.2* Proposed Amended and Restated Certificate of Incorporation of Registrant (to be
effective upon consummation of the Offering)
3.2* Bylaws of the Registrant
3.2.1* Proposed Bylaws of the Registrant (to be effective upon consummation of the
Offering)
4.1 Form of Common Stock certificate of Registrant
5.0* Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: legality
8.0 Opinion of KPMG Peat Marwick as to certain tax consequences
10.1 Employment Agreement between Registrant, People's Bank of California (the "Bank")
and Rudolf P. Guenzel (to be effective upon consummation of the Offering)
10.2 Employment Agreement between Registrant, the Bank and J. Michael Holmes (to be
effective upon consummation of the Offering)
10.3 Employment Agreement between Registrant, the Bank and William W. Flader (to be
effective upon consummation of the Offering)
10.4* Employment Agreement between the Bank and Doreen J. Blauschild, dated April 11,
1995
10.5 Form of Deferred Compensation Plan
10.6 Form of Form of Trust Agreement
10.7 Shareholder Rights Agreement, dated as of April 20, 1998
10.8 Stockholders' Agreement, dated as of April 20, 1998
21.0 Subsidiaries of the Registrant (see "Business--Subsidiaries" in the Prospectus)
</TABLE>
- ------------------------
* Previously filed.
II-2
<PAGE>
<TABLE>
<S> <C>
23.1* Consent of Elias, Matz, Tiernan & Herrick L.L.P. (included in Exhibit 5)
23.2** Consent of KPMG Peat Marwick LLP
24.0 Power of Attorney (included in Signature Page of this Registration Statement)
27.0* Financial Data Schedule
99.1* Consent of Robert M. MacDonald to be named as prospective director
99.2* Consent of John F. Davis to be named as prospective director
99.3* Consent of J. Michael Holmes to be named as prospective director
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, 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 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 being
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 of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to the Form S-1 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Los Angeles, California April 24, 1998.
PBOC HOLDINGS, INC.
By: /s/ RUDOLF P. GUENZEL
-----------------------------------------
Rudolf P. Guenzel
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
President and Chief
/s/ RUDOLF P. GUENZEL Executive Officer and
- ------------------------------ Director (principal April 24, 1998
Rudolf P. Guenzel executive officer)
/s/ HENRY PETERS * Chairman of the Board
- ------------------------------ April 24, 1998
Henry Peters
Executive Vice President
/s/ J. MICHAEL HOLMES * and Chief Financial
- ------------------------------ Officer (Principal April 24, 1998
J. Michael Holmes accounting officer)
/s/ GERARD JERVIS * Director
- ------------------------------ April 24, 1998
Gerard Jervis
- ------------------------------
* By Rudolf P. Guenzel
pursuant to a Power of
Attorney
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___________ SHARES
PBOC HOLDINGS, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
UNDERWRITING AGREEMENT
_________, 1998
SANDLER O'NEILL & PARTNERS, L.P.,
As representative of the several underwriters
named in Schedule I hereto,
2 World Trade Center,
New York, New York 10048.
Ladies and Gentlemen:
PBOC Holdings, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
________ shares and, at the election of the Underwriters, up to __________
additional shares of common stock, par value $0.01 per share, ("Stock") of the
Company, and the stockholders of the Company named in Schedule II hereto (the
"Selling Stockholders") propose, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of _____ shares and, at the
election of the Underwriters, up to ________ additional shares of Stock. The
aggregate of _____ shares to be sold by the Company and the Selling Stockholders
is herein called the "Firm Shares" and the aggregate of _____ additional shares
to be sold by the Company and the Selling Stockholders is herein called the
"Optional Shares". The Firm Shares and the Optional Shares that the
Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 33-_____) (the
"Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in
the form heretofore delivered to you, and, excluding exhibits thereto, to
you for each of the other Underwriters, have been declared effective by the
Commission in such form; other than a registration statement, if any,
increasing the size of the offering (a "Rule 462(b) Registration
Statement"), filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended (the "Act"), which became effective upon filing, no other
document with respect to the Initial Registration Statement has heretofore
been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has
been issued and no proceeding for that purpose has been initiated,
threatened
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or, to the knowledge of the Company, is contemplated by the Commission
(any preliminary prospectus included in the Initial Registration
Statement or filed with the Commission pursuant to Rule 424(a) of the rules
and regulations of the Commission under the Act, being hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including the information contained in the form of
final prospectus filed with the Commission pursuant to Rule 424(b) under
the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule
430A under the Act to be part of the Initial Registration Statement at the
time it was declared effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, each as amended
at the time such part of the Initial Registration Statement became
effective, being hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus");
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission; any request on the part of
the Commission for additional information has been complied with; and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Sandler O'Neill & Partners, L.P. expressly for use therein (it being
acknowledged that the only information so furnished by the Underwriters is
as described in Section 8b hereof), or by a selling stockholder expressly
for use in the preparation of the answers therein to Items 7 and 11(l) of
Form S-1;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder, and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; PROVIDED, HOWEVER, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through Sandler O'Neill & Partners, L.P. expressly for
use therein (it being acknowledged that the only information so furnished
by the Underwriters is as described in Section 8b hereof), or by a Selling
Stockholder expressly for use in the preparation of answers therein to
Items 7 and 11(l) of Form S-1;
(iv) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
therein, (i) there has been no material adverse change, or any development
or developments involving a prospective material adverse change, in or
affecting the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, in each case whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (ii) there have
been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered as
one enterprise, and (iii) there has been no change in the capital stock or
long-term debt of the Company or any of its subsidiaries;
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(v) The Company and its subsidiaries have good and marketable title
in fee simple to all real property owned by each of them and good title to
all other properties owned by them, in each case free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except such as could not reasonably be expected to
have, in the aggregate, a Material Adverse Effect on the Company and its
subsidiaries, considered as one enterprise; all of the leases and subleases
material to the business of the Company and its subsidiaries, considered as
one enterprise, and under which the Company or any of its subsidiaries
holds properties described in the Prospectus are in full force and effect,
and neither the Company nor any subsidiary has any notice of any material
claim of any sort that has been asserted by anyone adverse to the rights of
the Company or any subsidiary under any of the leases or subleases
mentioned above, or affecting or questioning the rights of the Company or
such subsidiary to the continued possession or the leased or subleased
premises under any such lease or sublease, except such as could not
reasonably be expected to have, in the aggregate, a Material Adverse Effect
on the Company and its subsidiaries, considered as one enterprise;
(vi) The Company is a registered savings and loan holding company
under the Home Owners' Loan Act ("HOLA") and has been duly incorporated
and is validly existing as a corporation in good standing under the laws of
the State of Delaware, with corporate power and authority to own, lease and
operate its properties and conduct its business as described in the
Prospectus and to enter into and perform its obligations under this
Agreement, and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, except where the failure so
to qualify or to be in good standing could not reasonably be expected to
result in a Material Adverse Effect on the Company;
(vii) Each subsidiary of the Company that is a significant subsidiary
(as defined in Rule 1-02 of Regulation S-X of the Commission) has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own, lease and operate its properties and conduct
its business as described in the Prospectus (or, if not so described, as
presently conducted), and is duly qualified as a foreign corporation to
transact business and is in good standing in all places where such
qualification or good standing is necessary or to the extent not so
qualified or not in good standing, where the failure to obtain such
qualification or to be in good standing could not reasonably be expected to
have a Material Adverse Effect on the Company and its subsidiaries,
considered as one enterprise; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit
or curtail, such power and authority or qualification; the activities of
the subsidiaries of People's Bank of California, a federally chartered and
insured stock savings bank (the "Bank"), are permitted to subsidiaries of a
federally chartered savings bank under applicable law and the rules and
regulations of the Office of Thrift Supervision (the "OTS") set forth in
Chapter V of Title 12 of the Code of Federal Regulations; all of the issued
and outstanding capital stock of each subsidiary of the Company has been
duly authorized and validly issued and is fully paid and nonassessable and
is owned, directly or through other subsidiaries of the Company, by the
Company; and all of the capital stock of each subsidiary of the Company
that is owned by the Company, directly or through other subsidiaries of the
Company, is owned free and clear of any pledge, lien, encumbrance, claim or
equity;
(viii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and nonassessable, are owned as indicated in the Prospectus and conform to
the description of the capital stock contained in the Prospectus;
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(ix) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and nonassessable and will conform
to the description of the Stock contained in the Prospectus; and the
holders of outstanding capital stock of the Company are not entitled to
preemptive or other rights afforded by the Company to subscribe for the
Shares;
(x) Except as described in the Prospectus, there are no outstanding
rights, warrants or options to acquire, or instruments convertible into or
exchangeable for, or agreements or understandings with respect to the sale
or issuance of, any shares of capital stock of or other equity interest in
the Company.
(xi) Neither the Company nor any of its subsidiaries is in violation
of its Certificate of Incorporation, By-laws or other charter documents or
in default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of them may be bound, or to which any of the property of
the Company or any of its subsidiaries is subject (collectively, the
"Agreements and Instruments"), except for such defaults that could not
reasonably be expected to result, singly or in the aggregate, in a Material
Adverse Effect on the Company and its subsidiaries, considered as one
enterprise; and the issue and sale of the Shares to be sold by the Company,
the execution, delivery and performance of this Agreement and the
compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions contemplated herein and in the
Registration Statement (including the use of proceeds from the sale of the
Shares by the Company as described in the Prospectus under the caption "Use
of Proceeds") do not and will not, whether with or without the giving of
notice or passage of time or both, conflict with or constitute a breach of,
or default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any subsidiary pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not result in a Material Adverse Effect
on the Company), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary or
any applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any of its assets,
properties or operations (as used herein, a "Repayment Event" means, with
respect to a particular company or its affiliates, any event or condition
which gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder's behalf) the right to
require the repurchase, redemption or repayment of all or a portion of such
indebtedness by such company or its affiliates); and no filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Shares to be sold by the Company hereunder or the consummation of the
transactions contemplated by this Agreement and the use of proceeds from
the sale of the Shares as contemplated by the Prospectus, except such as
have been already obtained or as may be required under the Act or the rules
and regulations thereunder or state securities laws;
(xii) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the capital stock of the Company, and under the
captions "Risk Factors", "Business", "Regulation", "Taxation", "The
Stockholders' Agreement", "Agreements With Respect to Potential Goodwill
Lawsuit Recovery" and
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"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair;
(xiii) Except as disclosed in the Prospectus, the Company and its
subsidiaries are conducting their respective businesses in compliance in
all material respects with all laws, rules, regulations, decisions,
directives and orders (including, without limitation, all regulations and
orders of, or agreements with, the OTS and the Federal Deposit Insurance
Corporation (the "FDIC")) applicable to them; there is no action, suit,
investigation or proceeding before or by any government, governmental
instrumentality or court, domestic or foreign, now pending or, to the
knowledge of the Company, threatened against or affecting the Company or
any of its subsidiaries (A) that is required to be disclosed in the
Registration Statement and not disclosed therein, (B) that could result in
any Material Adverse Effect on the Company and its subsidiaries, considered
as one enterprise, (C) that could materially and adversely affect the
properties, assets or leasehold interests of the Company and its
subsidiaries, considered as one enterprise, or (D) that could adversely
affect the consummation of the transactions contemplated in this Agreement;
all pending legal or governmental proceedings to which the Company or any
of its subsidiaries is a party or of which any of their property is the
subject, which are not described in the Registration Statement, including
ordinary routine litigation incidental to their respective businesses,
could not reasonably be expected to have a Material Adverse Effect on the
Company and its subsidiaries, considered as one enterprise; and there are
no contracts or documents of the Company or any of its subsidiaries which
would be required to be described in the Registration Statement or to be
filed as exhibits thereto by the Act or by the rules and regulations of the
Commission thereunder which have not been so described and filed;
(xiv) The Company and its subsidiaries possess such permits,
licenses, approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate federal, state, local or
foreign regulatory agencies or bodies necessary to conduct the business now
operated by the Company or its subsidiaries; the Company and its
subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply could not
reasonably be expected to have, singly or in the aggregate, a Material
Adverse Effect on the Company; all of the Governmental Licenses are valid
and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be in
full force and effect could not reasonably be expected to have a Material
Adverse Effect on the Company; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, could reasonably be expected to result in a Material Adverse
Effect on the Company;
(xv) Each of the Company and its subsidiaries is in compliance in all
material respects with all applicable federal, state and local
environmental laws and regulations, including, without limitation, those
applicable to emissions to the environment, waste management, and waste
disposal (collectively, the "Environmental Laws"), except where such
noncompliance could not be reasonably likely to have a Material Adverse
Effect on the Company, or except as disclosed in the Prospectus, and to the
knowledge of the Company, there are no circumstances that would prevent,
interfere with or materially increase the cost of such compliance in the
future;
(xvi) Except as disclosed in the Prospectus, there is no claim under
any Environmental Law, including common law, pending or, to the best
knowledge of the Company, threatened against the Company (an
"Environmental Claim"), which would be reasonably likely to have a Material
Adverse Effect on the Company and its subsidiaries, considered as one
enterprise, and, to the knowledge of the Company, under applicable law,
there are no past or present actions, activities, circumstances, events or
incidents, including, without limitation, releases of any material into the
environment, that
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are reasonably likely to form the basis of any Environmental Claim against
the Company or its subsidiaries which would be reasonably likely to have a
Material Adverse Effect on the Company and its subsidiaries, considered as
one enterprise;
(xvii) The Company is not and, after giving effect to the offering
and sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(xviii) The consolidated financial statements and the notes thereto
of the Company and its subsidiaries included in the Registration Statement
and the Prospectus fairly present the financial condition of the Company
and its subsidiaries as of the dates indicated and the results of
operations, changes in stockholders' equity and cash flows for the periods
therein specified; such statements and related notes have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved; and the tables included
in the Registration Statement and the Prospectus present fairly the
information purported to be shown thereby at the dates indicated and for
the periods therein specified and conform in all material respects with the
Act and the rules and regulations thereunder;
(xix) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to require
the Company to include such securities in the securities registered
pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act; and
(xx) KPMG Peat Marwick LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.
(b) Each of the Selling Stockholders severally represents and
warrants to, and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Stockholder of this Agreement
and the Power-of-Attorney and the Custody Agreement hereinafter referred
to, and for the sale and delivery of the Shares to be sold by such Selling
Stockholder hereunder, have been obtained; and such Selling Stockholder has
full right, power and authority to enter into this Agreement, the
Power-of-Attorney and the Custody Agreement and to sell, assign, transfer
and deliver the Shares to be sold by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling Stockholder
hereunder and the compliance by such Selling Stockholder with all of the
provisions of this Agreement, the Power-of- Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
statute, indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder is bound or to which any of the property or
assets of such Selling Stockholder is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of such Selling Stockholder if such Selling Stockholder is a
corporation, the Trust Agreement or Declaration of Trust or other similar
document of such Selling Stockholder if such Selling Stockholder is a
trust, the Partnership Agreement of such Selling Stockholder if such
Selling Stockholder is a partnership or any statute or any order, rule or
regulation of any court or
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governmental agency or body having jurisdiction over such Selling
Stockholder or the property of such Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to each
Time of Delivery (as defined in Section 4 hereof) such Selling Stockholder
will have, good and valid title to the Shares to be sold by such Selling
Stockholder hereunder, free and clear of all liens, encumbrances, equities
or claims; and, upon delivery of such Shares and payment therefor pursuant
hereto, good and valid title to such Shares, free and clear of all liens,
encumbrances, equities or claims, will pass to the several Underwriters;
(iv) During the period beginning from the date hereof and continuing
to and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder, any securities of the Company that are substantially similar to
the Shares, including but not limited to any securities that are
convertible into or exchangeable for, or that represent the right to
receive, Stock or any such substantially similar securities, without your
prior written consent;
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by such Selling
Stockholder expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further amendments
or supplements to the Registration Statement and the Prospectus, when they
become effective or are filed with the Commission, as the case may be, will
conform in all material respects to the requirements of the Act and the
rules and regulations of the Commission thereunder and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder will deliver to you prior to or at
the First Time of Delivery (as hereinafter defined) a properly completed
and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations
in lieu thereof);
(viii) Certificates in negotiable form representing all of the Shares
to be sold by such Selling Stockholder hereunder have been placed in
custody under a Custody Agreement, in the form heretofore furnished to you
(the "Custody Agreement"), duly executed and delivered by such Selling
Stockholder to [NAME OF CUSTODIAN], as custodian (the "Custodian"), and
such Selling Stockholder has duly executed and delivered a Power of
Attorney, in the form heretofore furnished to you (the "Power of
Attorney"), appointing the persons indicated in Schedule II hereto, and
each of them, as such Selling Stockholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this Agreement
on behalf of such Selling Stockholder, to determine the purchase price to
be paid by the Underwriters to the Selling Stockholders as provided in
Section 2 hereof, to authorize the delivery of the Shares to be sold by
such Selling Stockholder hereunder and otherwise to act on behalf
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of such Selling Stockholder in connection with the transactions
contemplated by this Agreement and the Custody Agreement; and
(ix) The Shares represented by the certificates held in custody for
such Selling Stockholder under the Custody Agreement are subject to the
interests of the Underwriters hereunder; the arrangements made by such
Selling Stockholder for such custody, and the appointment by such Selling
Stockholder of the Attorneys-in-Fact by the Power-of-Attorney, are to that
extent irrevocable; the obligations of the Selling Stockholders hereunder
shall not be terminated by operation of law, whether by the death or
incapacity of any individual Selling Stockholder or, in the case of an
estate or trust, by the death or incapacity of any executor or trustee or
the termination of such estate or trust, or in the case of a partnership or
corporation, by the dissolution of such partnership or corporation, or by
the occurrence of any other event; if any individual Selling Stockholder or
any such executor or trustee should die or become incapacitated, or if any
such estate or trust should be terminated, or if any such partnership or
corporation should be dissolved, or if any other such event should occur,
before the delivery of the Shares hereunder, certificates representing the
Shares shall be delivered by or on behalf of the Selling Stockholders in
accordance with the terms and conditions of this Agreement and of the
Custody Agreements; and actions taken by the Attorneys-in-Fact pursuant to
the Powers-of-Attorney shall be as valid as if such death, incapacity,
termination, dissolution or other event had not occurred, regardless of
whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall
have received notice of such death, incapacity, termination, dissolution or
other event.
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Stockholders agree, severally and not jointly,
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and each of the Selling
Stockholders, at a purchase price per share of $__________, the number of Firm
Shares (to be adjusted by you so as to eliminate fractional shares) determined
by multiplying the aggregate number of Shares to be sold by the Company and each
of the Selling Stockholders as set forth opposite their respective names in
Schedule II hereto by a fraction, the numerator of which is the aggregate number
of Firm Shares to be purchased by such Underwriter as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the aggregate number of Firm Shares to be purchased by all of the Underwriters
from the Company and all of the Selling Stockholders hereunder and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company and each of the Selling
Stockholders agree, severally and not jointly, to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company and each of the Selling Stockholders, at the purchase
price per share set forth in clause (a) of this Section 2, that portion of the
number of Optional Shares as to which such election shall have been exercised
(to be adjusted by you so as to eliminate fractional shares) determined by
multiplying such number of Optional Shares by a fraction the numerator of which
is the maximum number of Optional Shares which such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I hereto
and the denominator of which is the maximum number of Optional Shares that all
of the Underwriters are entitled to purchase hereunder.
The Company and the Selling Stockholders, as and to the extent
indicated in Schedule II hereto, hereby grant, severally and not jointly, to the
Underwriters the right to purchase at their election up to ___________ Optional
Shares, at the purchase price per share set forth in the paragraph above, for
the sole purpose of covering overallotments in the sale of the Firm Shares. Any
such election to purchase Optional Shares shall be made in proportion to the
maximum number of Optional Shares to be sold by the Company and each Selling
Stockholder as set forth in Schedule II hereto [initially with respect to the
Optional Shares to be sold by the Company] and then among the Selling
Stockholders in proportion to the maximum number of Optional Shares to be sold
by each Selling Stockholder as set forth in Schedule II hereto. Any such
election to purchase Optional Shares may be exercised only by written notice
from you to the Company and the Attorneys-in-Fact, given within a period of 30
calendar days after the date of this Agreement and setting forth
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the aggregate number of Optional Shares to be purchased and the date on which
such Optional Shares are to be delivered, as determined by you but in no
event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company and the Attorneys-in-Fact otherwise
agree in writing, earlier than two or later than ten business days after the
date of such notice.
3. Upon authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) Certificates in definitive form for the Shares, to be
purchased by each Underwriter hereunder, and in such denominations and
registered in such names as the Underwriters may request upon at least
forty-eight hours' prior notice to the Company and the Selling Stockholders,
shall be delivered by or on behalf of the Company and the Selling
Stockholders to Sandler O'Neill & Partners, L.P. [through the facilities
of the Depository Trust Company ("DTC")] for the account of such Underwriter,
against payment by such Underwriter or on its behalf of the purchase price
therefor by wire transfer of Federal (same-day) funds to the accounts
specified by the Company and each of the Selling Stockholders, as their
interests may appear. The time and date of such delivery and payment shall
be, with respect to the Firm Shares, 9:30 a.m., New York time, on
___________, 1998, or at such other time and date as Sandler O'Neill &
Partners L.P. and the Company and the Selling Stockholders may agree upon in
writing, and, with respect to the Optional Shares, 9:30 a.m., New York time,
on the date specified by Sandler O'Neill & Partners L.P. in the written
notice given by Sandler O'Neill & Partners L.P. of the Underwriters' election
to purchase such Optional Shares, or at such other time and date as Sandler
O'Neill & Partners L.P. and the Company may agree upon in writing. Such time
and date for delivery of the Firm Shares is herein called the "First Time of
Delivery," such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery," and
each such time and date for delivery is herein called a "Time of Delivery."
Such certificates will be made available for checking and packaging at least
twenty-four hours prior to each Time of Delivery at the office of Sandler
O'Neill & Partners, L.P., 2 World Trade Center, New York, New York 10048 (the
"Designated Office").
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross-receipt for the Shares and any additional documents reasonably
requested by the Underwriters pursuant to Section 7(j) hereof, will be
delivered at the offices of Sullivan & Cromwell, 444 South Flower Street, Los
Angeles, California 90071 (the "Closing Location"), and the Shares will be
delivered at the Designated Office, all at the Time of Delivery. A meeting
will be held at the Closing Location at 12:00 noon, New York City time, on
the New York Business Day next preceding such Time of Delivery, at which
meeting the final drafts of the documents to be delivered pursuant to the
preceding sentence will be available for review by the parties hereto. For
the purposes of this Section 4, "New York Business Day" shall mean each
Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law
or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form reasonably approved by you
and to file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement or, if applicable,
such earlier time as may be required by Rule 430A(a)(3); to make no further
amendment or supplement to the Registration Statement or the Prospectus
which shall be disapproved by you, promptly after reasonable notice
thereof; to advise you promptly after it receives notice thereof of the
time, when any amendment to the Registration Statement has been filed or
becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to advise
you, promptly after it receives notice thereof, of the issuance by the
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Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or Prospectus relating to the Shares, of
the suspension of the qualification of such Shares for offering or sale in
any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any such stop order or of
any such order preventing or suspending the use of any Preliminary
Prospectus or Prospectus relating to the Shares or suspending any such
qualification, promptly to use its best efforts to obtain its withdrawal;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions (other than foreign countries) as you
may request and to comply with such laws so as to permit the continuance of
sales and dealings therein in such jurisdictions for as long as may be
necessary to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or dealer in securities, to subject itself to taxation
as doing business in any jurisdiction or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business
Day next succeeding the date of this Agreement and otherwise from time to
time to furnish the Underwriters in New York City with copies of the
Prospectus in such quantities as you may reasonably request, and, if the
delivery of a prospectus is required in connection with the offering or
sale of the Shares and if at such time any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when such Prospectus
is delivered, not misleading, or, if for any other reason it shall be
necessary to amend or supplement the Prospectus in order to comply with the
Act, to notify you and upon your request to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies
as you may from time to time reasonably request of an amended Prospectus or
a supplement to the Prospectus which will correct such statement or
omission or effect such compliance;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Act and the
rules and regulations of the Commission thereunder (including, at the
option of the Company, Rule 158);
(e) During the period commencing on the date hereof and ending on the
180th day following the date hereof, without your prior written consent,
not to, and not to allow its directors and executive officers to, offer,
sell, contract to sell or otherwise dispose of, except as provided
hereunder, any securities of the Company that are substantially similar to
the Shares, including but not limited to any securities that are
convertible into or exchangeable for, or that represent the right to
receive, Stock or any such substantially similar securities;
(f) To furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company
and its consolidated subsidiaries certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
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(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a consolidated
basis to the extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its stockholders generally or to the
Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement substantially in the manner specified in
the Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National
Market System ("NASDAQ");
(j) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) by 10:00 p.m., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or
give irrevocable instructions for the payment of such fee pursuant to
Rule 111(b) under the Act; and
(k) During the period beginning on the date hereof and ending on the
later of the third anniversary of the First Time of Delivery or the date on
which the Underwriters receive full payment in satisfaction of any claim
for indemnification or contribution to which they may be entitled pursuant
to Section 8 of this Agreement, neither the Company nor the Bank shall,
without the prior written consent of the Representative, take or permit to
be taken any action that could result in the Bank's common stock becoming
subject to any security interest, mortgage, pledge, lien or encumbrance;
PROVIDED, HOWEVER, that this covenant shall be null and void if the OTS, or
any other federal agency having jurisdiction over the Bank, by regulation,
policy statement or interpretive release or by written order or written
advice addressed to the Bank or the specifically addressing the provisions
of Section 8 hereof, permits indemnification of the Underwriters by the
Bank as contemplated by such provisions.
6. The Company covenants and agrees with the several Underwriters
that (a) the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all reasonable expenses in connection with the qualification of the Shares
for offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on the NASDAQ;
(v) the filing fees incident to, and the fees and disbursements of counsel for
the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
Shares; (vi) the cost of preparing stock certificates; (vii) the cost and
charges of any transfer agent or registrar; (viii) all other costs and expenses
incident to the performance of its obligations hereunder which are not otherwise
specifically provided for in
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this Section; and (b) each Selling Stockholder will pay or cause to be paid
all costs and expenses incident to the performance of such Selling
Stockholder's obligations hereunder which are not otherwise specifically
provided for in this Section, including (i) any fees and expenses of counsel
for such Selling Stockholder, (ii) such Selling Stockholder's pro rata share
of the fees and expenses of the Attorneys-in-Fact and the Custodian, and
(iii) all expenses and taxes incident to the sale and delivery of the Shares
to be sold by such Selling Stockholder to the Underwriters hereunder. It is
understood, however, that the Company shall bear, and the Selling
Stockholders shall not be required to pay or to reimburse the Company for,
the cost of any other matters not directly relating to the sale and purchase
of the Shares pursuant to this Agreement, and that, except as provided in
this Section and Sections 8 and 11 hereof, the Underwriters will pay all of
their own costs and expenses, including the fees of their counsel, stock
transfer taxes on resale of any of the Shares by them, and any advertising
expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in the discretion of
the Underwriters, to the condition that all representations and warranties and
other statements of the Company and of the Selling Stockholders herein are as of
the date hereof and, at and as of such Time of Delivery, true and correct, the
condition that the Company and the Selling Stockholders shall have performed all
of its and their obligations hereunder theretofore to be performed, and the
following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing
by the rules and regulations under the Act and in accordance with Section
5(a) hereof; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding for
that purpose shall have been initiated or threatened by the Commission; and
all requests for additional information on the part of the Commission shall
have been complied with to your reasonable satisfaction;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall have
furnished to the Underwriters such opinion or opinions, dated such Time of
Delivery, with respect to such matters as the Underwriters may reasonably
request, and such counsel shall have received such papers and information
as they may reasonably request to enable them to pass upon such matters;
(c) Elias, Matz, Tiernan & Herrick L.L.P., counsel for the Company,
shall have furnished to the Underwriters their written opinion, dated such
Time of Delivery, in form and substance reasonably satisfactory to the
Underwriters, to the effect that:
(i) The Company is a registered savings and loan holding
company under HOLA and has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own, lease and
operate its properties and conduct its business as described in the
Prospectus and to enter into and perform its obligations under this
Agreement;
(ii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification, except where the failure so to qualify or to be in good
standing could not reasonably be expected to result in a Material
Adverse Effect on the Company (such counsel being entitled to rely in
respect of the opinion in this clause upon opinions of local counsel
and in respect of matters of fact upon certificates of officers of the
Company, provided that such counsel shall state that they believe that
both you and they are justified in relying upon such opinions and
certificates);
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(iii) Each subsidiary of the Company that is a significant
subsidiary (as defined in Section 1-02 of Regulation S-X of the
Commission) has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own, lease
and operate its properties and conduct its business as described in
the Prospectus (or, if not so described, as presently conducted), and
is duly qualified as a foreign corporation to transact business and is
in good standing in all places where such qualification or good
standing is necessary or to the extent not so qualified or not in good
standing, where the failure to obtain such qualification or to be in
good standing could not reasonably be expected to have a Material
Adverse Effect on the Company and its subsidiaries, considered as one
enterprise; the activities of the subsidiaries of the Bank are
permitted to subsidiaries of a federally chartered savings bank under
applicable law and the rules and regulations of the OTS set forth in
Chapter V of Title 12 of the Code of Federal Regulations; all of the
issued and outstanding capital stock of each subsidiary of the Company
has been duly authorized and validly issued and is fully paid and
nonassessable and is owned, directly or through other subsidiaries of
the Company, by the Company; and all of the capital stock of each
subsidiary of the Company that is owned by the Company, directly or
through other subsidiaries of the Company, is owned free and clear of
any pledge, lien, encumbrance, claim or equity;
(iv) The Company and its subsidiaries have good and marketable
title in fee simple to all real property owned by each of them and
good title to all other properties owned by them, in each case free
and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as could
not reasonably be expected to have, singly or in the aggregate, a
Material Adverse Effect on the Company and its subsidiaries,
considered as one enterprise; all of the leases and subleases material
to the business of the Company and its subsidiaries, considered as one
enterprise, and under which the Company or any of its subsidiaries
holds properties described in the Prospectus are in full force and
effect, and neither the Company nor any subsidiary has any notice of
any material claim of any sort that has been asserted by anyone
adverse to the rights of the Company or any subsidiary under any of
the leases or subleases mentioned above, or affecting or questioning
the rights of the Company or such subsidiary to the continued
possession of the leased or subleased premises under any such lease or
sublease (in giving the opinion in this clause, such counsel may state
that no examination of record titles for the purpose of such opinion
has been made, and that they are relying upon a general review of the
titles of the Company and its subsidiaries, upon opinions of local
counsel and abstracts, reports and policies of title companies
rendered or issued at or subsequent to the time of acquisition of such
property by the Company or its subsidiaries, upon opinions of counsel
to the lessors of such property and, in respect of matters of fact,
upon certificates of officers of the Company or its subsidiaries,
provided that such counsel shall state that they believe that both you
and they are justified in relying upon such opinions, abstracts,
reports, policies and certificates);
(v) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of
the Company have been duly and validly authorized and issued and are
fully paid and non-assessable and conform to the description of the
Capital Stock contained in the Prospectus; the Shares have been duly
and validly authorized, and when issued and delivered against payment
therefor as provided herein, will be duly and validly issued and fully
paid and non-assessable and will conform to the description thereof
contained in the Prospectus; and the holders of outstanding capital
stock of the Company are not entitled to preemptive or other rights
afforded by the Company to subscribe for the Shares;
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(vi) To the best of such counsel's knowledge, except as
disclosed in the Prospectus, the Company and its subsidiaries are
conducting their respective businesses in compliance in all material
respects with all laws, rules, regulations, decisions, directives and
orders (including, without limitation, all regulations and orders of,
or agreements with, the OTS and the FDIC applicable to them); there is
no action, suit, investigation or proceeding before or by any
government, governmental instrumentality or court, domestic or
foreign, now pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its subsidiaries (A) that
is required to be disclosed in the Registration Statement and not
disclosed therein, (B) that could result in any Material Adverse
Effect on the Company and its subsidiaries, considered as one
enterprise, (C) that could materially and adversely affect the
properties, assets or leasehold interests of the Company and its
subsidiaries, considered as one enterprise, or (D) that could
adversely affect the consummation of the transactions contemplated in
this Agreement; all pending legal or governmental proceedings to which
the Company or any of its subsidiaries is a party or of which any of
their property is the subject, which are not described in the
Registration Statement, including ordinary routine litigation
incidental to their respective businesses, could not reasonably be
expected to have a Material Adverse Effect on the Company and its
subsidiaries, considered as one enterprise;
(vii) This Agreement has been duly authorized, executed and
delivered by the Company;
(viii) The issue and sale of the Shares being delivered at such
Time of Delivery to be sold by the Company, the execution, delivery
and performance of this Agreement and the compliance by the Company
with all of the provisions of this Agreement and the consummation of
the transactions contemplated herein and in the Registration Statement
(including the use of proceeds from the sale of the Shares by the
Company as described in the Prospectus under the caption "Use of
Proceeds") do not and will not, whether with or without the giving of
notice or passage of time or both, conflict with or constitute a
breach of, or default or Repayment Event under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any subsidiary pursuant to, the
Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect on the Company), nor will such action result
in any violation of the provisions of the charter or by-laws of the
Company or any subsidiary or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any of its assets, properties or
operations;
(ix) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency is necessary or required for the
performance by the Company of its obligations hereunder, in connection
with the offering, issuance or sale of the Shares to be sold by the
Company hereunder or the consummation of the transactions contemplated
by this Agreement and the use of proceeds from the sale of the Shares
as contemplated by the Prospectus, except such as have been already
obtained or as may be required under the Act or the rules and
regulations thereunder or state securities laws;
(x) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation, By-laws or other
charter documents or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any of
the
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Agreements and Instruments, except for such defaults that could not
reasonably be expected to result, singly or in the aggregate, in a
Material Adverse Effect on the Company and its subsidiaries,
considered as one enterprise;
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Capital Stock of the Company,
and under the captions "Risk Factors", "Business", "Regulation",
"Taxation", "The Stockholders' Agreement", "Agreements With Respect to
Potential Goodwill Lawsuit Recovery" and "Underwriting", insofar as
they purport to describe the provisions of the laws and documents
referred to therein, are accurate, complete and fair;
(xii) The Company is not, and after giving effect to the
offering and sale of the Shares, will not be an "investment company"
or an entity "controlled" by an "investment company", as such terms
are defined in the Investment Company Act; and
(xiii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules and other financial data therein, as to which such
counsel need express no opinion) comply as to form in all material
respects with the requirements of the Act and the rules and
regulations thereunder; such counsel has no reason to believe that, as
of its effective date, the Registration Statement or any further
amendment thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules and other
financial data therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that, as of its date,
the Prospectus as amended or supplemented or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules and other
financial data therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted
to state a material fact necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading or
that, as of such Time of Delivery, either the Registration Statement
or the Prospectus or any further amendment or supplement thereto made
by the Company prior to such Time of Delivery (other than the
financial statements and related schedules and other financial data
therein, as to which such counsel need express no opinion) contains an
untrue statement of a material fact or omits to state a material fact
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; the statements
in the Prospectus or any further amendment or supplement thereto made
by the Company prior to such Time of Delivery with respect to
statutes, administrative orders and regulations and legal and
governmental proceedings fairly and accurately present in all material
respects the information required to be set forth therein and there
are no statutes, administrative orders or regulations required to be
described in the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery which are
not described as required, and such counsel does not know of any
amendment to the Registration Statement required to be filed or any
contracts or other documents of a character required to be filed as an
exhibit to the Registration Statement into the Prospectus or any
further amendment or supplement thereto made by the Company prior to
such Time of Delivery or required to be described in the Registration
Statement or the Prospectus which are not filed or described as
required.
(d) The respective counsel for each of the Selling Stockholders, as
indicated in Schedule II hereto, each shall have furnished to you their
written opinion with respect to each of the Selling
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Stockholders for whom they are acting as counsel, dated such Time of
Delivery, in form and substance satisfactory to you, to the effect that:
(i) A Power-of-Attorney and a Custody Agreement have been duly
authorized, executed and delivered by such Selling Stockholder and
constitute valid and binding agreements of such Selling Stockholder in
accordance with their terms;
(ii) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder; and the sale of
the Shares to be sold by such Selling Stockholder hereunder and the
compliance by such Selling Stockholder with all of the provisions of
this Agreement, the Power-of-Attorney and the Custody Agreement and
the consummation of the transactions herein and therein contemplated
will not conflict with or result in a breach or violation of any terms
or provisions of, or constitute a default under, any statute,
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument known to such counsel to which such Selling Stockholder
is a party or by which such Selling Stockholder is bound or to which
any of the property or assets of such Selling Stockholder is subject,
nor will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of such Selling Stockholder if
such Selling Stockholder is a corporation, the Trust Agreement of such
Selling Stockholder if such Selling Stockholder is a trust or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over such Selling
Stockholder or the property of such Selling Stockholder;
(iii) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the
Shares to be sold by such Selling Stockholder hereunder, except [name
any such consent, approval, authorization or order] which [has]
[have]been duly obtained and [is] [are] in full force and effect, such
as have been obtained under the Act and such as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of such Shares by the Underwriters;
(iv) Immediately prior to such Time of Delivery, such Selling
Stockholder had good and valid title to the Shares to be sold at such
Time of Delivery by such Selling Stockholder under this Agreement,
free and clear of all liens, encumbrances, equities or claims, and
full right, power and authority to sell, assign, transfer and deliver
the Shares to be sold by such Selling Stockholder hereunder; and
(v) Good and valid title to such Shares, free and clear of all
liens, encumbrances, equities or claims, has been transferred to each
of the several Underwriters who have purchased such Shares in good
faith and without notice of any such lien, encumbrance, equity or
claim or any other adverse claim within the meaning of the Uniform
Commercial Code.
In rendering the opinion in paragraph (iv), such counsel may rely upon
a certificate of such Selling Stockholder in respect of matters of fact as
to ownership of, and liens, encumbrances, equities or claims on, the Shares
sold by such Selling Stockholder, provided that such counsel shall state
that they believe that both you and they are justified in relying upon such
certificate;
(e) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent
to the date of this Agreement and also at each Time of Delivery, KPMG
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Peat Marwick LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance satisfactory to
you, to the effect set forth in Annex I hereto;
(f) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall not have been
any material adverse change, or any development or developments involving
a prospective material adverse change, in or affecting the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects, in each case whether or not arising in the ordinary course of
business of the Company, (ii) there shall not have been any transactions
entered into by the Company or any of its subsidiaries other than those in
the ordinary course of business, which are material with respect to the
Company or such subsidiary, and (iii) there shall have been no change in
the capital stock or long-term debt of the Company or any of its
subsidiaries, the effect of which, in any such case described in
clause (i), (ii) or (iii), is in your judgment so material and adverse as
to make it impracticable or inadvisable to proceed with the public offering
or the delivery of the Shares being delivered at such Time of Delivery on
the terms and in the manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any of
the following: (i) trading in the Company's Stock shall have been suspended
or materially limited by the Commission or NASDAQ or trading in securities
generally on the New York Stock Exchange or NASDAQ shall have been
suspended or materially limited or minimum prices shall have been
established on such exchanges; (ii) a general moratorium on commercial
banking activities in California or New York declared by Federal or
California or New York State authorities; or (iii) any outbreak or
escalation of hostilities or other calamity or crisis the effect of which
is such as to make it, in your reasonable judgment, impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated by the Prospectus;
(h) The Shares at such Time of Delivery shall have been duly listed
for quotation on NASDAQ;
(i) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(j) The Company and the Selling Stockholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of
officers of the Company and of the Selling Stockholders, satisfactory to
you as to the accuracy of the representations and warranties of the Company
and the Selling Stockholders, respectively, herein at and as of such Time
of Delivery, as to the performance by the Company and the Selling
Stockholders of all of their respective obligations hereunder to be
performed at or prior to such Time of Delivery, as to the matters set forth
in subsections (a) and (f) of this Section and as to such other matters as
you may reasonably request.
8. (a) The Company, the Bank and each of the Selling Stockholders,
jointly and severally, will indemnify and hold harmless each Underwriter against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim
-17-
<PAGE>
as such expenses are incurred; PROVIDED, HOWEVER, that the Company, the Bank
and the Selling Stockholders shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance
upon and in conformity with written information furnished to the Company by
any Underwriter through Sandler O'Neill & Partners L.P. expressly for use
therein, it being acknowledged that the only information so furnished by the
Underwriters is as described in Section 8(b) hereof. Notwithstanding the
foregoing, the indemnification provided for in this paragraph (a) shall not
apply to the Bank to the extent that such indemnification by the Bank is
found in a final judgment by a court of competent jurisdiction to constitute
a covered transaction under Section 23A of the Federal Reserve Act.
(b) Each Underwriter will indemnify and hold harmless the Company and
each Selling Stockholder against any losses, claims, damages or liabilities to
which the Company or such Selling Stockholder may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement, the Prospectus, or any such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by the Underwriters through Sandler O'Neill & Partners,
L.P. expressly for use therein; and will reimburse the Company and each Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such action or claim as such
expenses are incurred. The Company and each Selling Stockholder acknowledges
for all purposes of this Agreement that the statements set forth in the first
sentence of the last paragraph of text on the cover page of the Prospectus
concerning the terms of the offering by the Underwriters, in the first paragraph
on page 2 of the Prospectus concerning over-allotment and stabilization by the
Underwriters and in the third and fifth paragraphs under the caption
"Underwriting" in the Prospectus concerning the terms of the offering by the
Underwriters and over-allotment and stabilization by the Underwriters constitute
the only information that is to be furnished in writing by or behalf of the
several Underwriters for inclusion in any Preliminary Prospectus, the
Registration Statement or the Prospectus, each as amended or supplemented or any
amendment or supplement thereto.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless
-18-
<PAGE>
such settlement, compromise or judgment (i) includes an unconditional release
of the indemnified party from all liability arising out of such action or
claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Stockholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from such offering (before deducting
expenses) received by the Company or the Selling Stockholders bear to the total
gross underwriting discounts and commissions received by the Underwriters with
respect to the Shares purchased under this Agreement, in each case as set forth
in the table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Selling
Stockholders on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, each of the Selling
Stockholders and the Underwriters agree that it would not be just and equitable
if contribution pursuant to this subsection (d) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) The obligations of the Company and the Selling Stockholders under
this Section 8 shall be in addition to any liability which the Company and the
Selling Stockholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section 8
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company (including any person who, with his or her
consent, is named in the Registration Statement as about to become a director of
the Company) and to each person, if any, who controls the Company or any Selling
Stockholder within the meaning of the Act.
-19-
<PAGE>
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or
other parties to purchase such Shares on the terms contained herein. If
within thirty-six hours after such default by any Underwriter, you do not
arrange for the purchase of such Shares, then the Company and the Selling
Stockholders shall be entitled to a further period of thirty-six hours within
which to procure another party or other parties satisfactory to you to
purchase such Shares on such terms. In the event that, within the respective
prescribed period, you notify the Company and the Selling Stockholders that
you have so arranged for the purchase of such Shares, or the Company and the
Selling Stockholders notify you that they have so arranged for the purchase
of such shares, you or the Selling Stockholders and the Company shall have
the right to postpone such Time of Delivery for a period of not more than
seven days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments or
supplements to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary. The term "Underwriter" as used in this
Agreement shall include any person substituted under this Section with like
effect as if such person had originally been a party to this Agreement with
respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase
of Shares of a defaulting Underwriter by you and the Company and the Selling
Stockholders as provided in subsection (a) above, the aggregate number of
such Shares which remains unpurchased does not exceed one-tenth of the
aggregate number of Shares to be purchased at such Time of Delivery, then the
Company and the Selling Stockholders shall have the right to require each
non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to
purchase hereunder) of the Shares of the defaulting Underwriter for which
such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase
of Shares of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Stockholders as provided in subsection (a) above, the
aggregate number of such Shares which remains unpurchased exceeds one-tenth
of the aggregate number of Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Stockholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this
Agreement (or, with respect to the Second Time of Delivery, the obligations
of the Underwriters to purchase and of the Company and the Selling
Stockholders to sell the Optional Shares) may be terminated by the Company
and the Selling Stockholders or by you, without liability on the part of any
non-defaulting Underwriter or the Company and the Selling Stockholders,
except for the expenses to be borne by the Company and the Selling
Stockholders and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and
the several Underwriters, as set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement, shall remain in
full force and effect, regardless of any investigation (or any statement as
to the results thereof) made by or on behalf of any Underwriter or any
controlling person of any Underwriter, or the Company, or any of the Selling
Stockholders, or any officer or director or controlling person of the
Company, or any controlling person of any Selling Stockholder, and shall
survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter, except as provided in Section 6 and Section 8
hereof; but, if for any other reason, any Shares are not delivered by or on
behalf of the
-20-
<PAGE>
Company and the Selling Stockholders as provided herein, the Company will
reimburse the Underwriters through you for all out-of-pocket expenses,
including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of
the Shares not so delivered, but the Company and the Selling Stockholders
shall then be under no further liability to any Underwriter in respect of the
Shares not so delivered except as provided, or referred to, in Section 6 and
Section 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives at your address as set
forth in the Agreement; if to any Selling Stockholder shall be delivered or sent
by mail, telex or facsimile transmission to counsel for such Selling Stockholder
at its address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Secretary; provided,
however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
or the Selling Stockholders by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Stockholders and, to
the extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, any Selling Stockholder or
any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein,
"business day" shall mean any day when the Commission's office in Washington,
D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto and thereto in any number of counterparts, each of which shall be deemed
to be an original, but all such respective counterparts shall together
constitute one and the same instrument.
-21-
<PAGE>
If the foregoing is in accordance with your understanding, please
sign and return to us five counterparts hereof, and upon the acceptance
hereof by you this letter and such acceptance hereof shall constitute a
binding agreement among each of the Underwriters, the Company, the Bank and
the Selling Stockholders.
Very truly yours,
PBOC HOLDINGS, INC.
By:
---------------------------------
NAME:
TITLE:
PEOPLE'S BANK OF CALIFORNIA
By:
---------------------------------
NAME:
TITLE:
TRUSTEES OF THE ESTATE OF
BERNICE PAUAHI BISHOP
BIL SECURITIES (OFFSHORE) LIMITED
ARBUR, INC.
By:
---------------------------------
NAME:
TITLE:
As Attorney-in-Fact acting on behalf of each of
the Selling Stockholders named in Schedule II to
this Agreement.
Accepted as of the date hereof:
SANDLER O'NEILL & PARTNERS, L.P.
As Representative of the Underwriters
By: SANDLER O'NEILL & PARTNERS CORP.,
the sole general partner
By:
-------------------------------
NAME: Christopher Quackenbush
TITLE: Vice President
-22-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
OPTIONAL
SHARES TO
TOTAL NUMBER BE PURCHASED IF
OF FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- --------------
<S> <C> <C>
Sandler O'Neill & Partners, L.P. . . . . . . . . .
----------- -----------
Total . . . . . . . . . . . . . . . . . .
----------- -----------
----------- -----------
</TABLE>
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF
OPTIONAL
SHARES TO BE
TOTAL NUMBER OF SOLD IF
FIRM SHARES MAXIMUM OPTION
TO BE SOLD EXERCISED
--------------- --------------
<S> <C> <C>
The Company.
The Selling Stockholder(s):
Trustees of the Estate of Bernice Pauahi Bishop(a)
BIL Securities (Offshore) Limited(b)
Arbur, Inc.(c)
Total
</TABLE>
- --------------------
(a) This Selling Stockholder is represented by ______________________________
[AND ADDRESS OF COUNSEL] and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS
THAN TWO)], and each of them, as the Attorneys-in-Fact for such Selling
Stockholder.
(b) This Selling Stockholder is represented by ________________________________
[AND ADDRESS OF COUNSEL] and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS
THAN TWO)], and each of them, as the Attorneys-in-Fact for such Selling
Stockholder.
(c) This Selling Stockholder is represented by _______________________________
[AND ADDRESS OF COUNSEL] and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS
THAN TWO)], and each of them, as the Attorneys-in-Fact for such Selling
Stockholder.
<PAGE>
ANNEX I
FORM OF ANNEX I DESCRIPTION OF COMFORT LETTER
FOR REGISTRATION STATEMENTS ON FORM S-1
Pursuant to Section 7(d) of the Underwriting Agreement, the
accountants shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect
to the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of the
Act and the related published rules and regulations thereunder; and, if
applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited consolidated interim financial statements, selected financial
data, pro forma financial information, financial forecasts and/or condensed
financial statements derived from audited financial statements of the
Company for the periods specified in such letter, as indicated in their
reports thereon, copies of which have been separately furnished to the
representatives of the Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus as indicated in their reports thereon copies of which have been
separately furnished to the Representatives][are attached hereto and on the
basis of specified procedures including inquiries of officials of the
Company who have responsibility for financial and accounting matters
regarding whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations, nothing came to their attention
that caused them to believe that the unaudited condensed consolidated
financial statements do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the related published
rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus agrees
with the corresponding amounts (after restatements where applicable) in the
audited consolidated financial statements for such five fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of the
minute books of the Company and its subsidiaries since the date of the
latest audited financial statements included in the Prospectus, inquiries
of officials of the Company and its subsidiaries responsible for financial
and accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
<PAGE>
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited consolidated
financial statements included in the Prospectus;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived any unaudited condensed
financial statements referred to in Clause (A) and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not determined on a
basis substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder or the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise of
options and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each case
which were outstanding on the date of the latest financial statements
included in the Prospectus) or any increase in the consolidated
long-term debt of the Company and its subsidiaries, or any decreases
in consolidated net current assets or stockholders' equity or other
items specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are described
in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (E) there were any decreases in consolidated net revenues
or operating profit or the total or per share amounts of consolidated
net income or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case
as compared with the comparable period of the preceding year and with
any other period of corresponding length specified by the
Representatives, except in each case for decreases or increases which
the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records
<PAGE>
of the Company and its subsidiaries, which appear in the Prospectus, or
in Part II of, or in exhibits and schedules to, the Registration Statement
specified by the Representatives, and have compared certain of such
amounts, percentages and financial information with the accounting records
of the Company and its subsidiaries and have found them to be in agreement.
<PAGE>
(FORM OF STOCK CERTIFICATE - FRONT SIDE)
NUMBER SHARES
COMMON STOCK 69316G 10 8
See reverse for
certain definitions
PBOC HOLDINGS, INC.
INCORPORATED UNDER THE LAWS OF DELAWARE
This certifies that ___________________________________ is the registered
holder of _________________ fully paid and non-assessable shares of the Common
Stock, par value $.01 per share, of PBOC Holdings, Inc., Los Angeles, California
(the "Corporation"), incorporated under the laws of the State of Delaware.
The shares evidenced by this Certificate are transferable only on the books
of the Corporation by the holder hereof, in person or by a duly authorized
attorney or legal representative, upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are subject to all
the provisions of the Certificate of Incorporation and Bylaws of the Corporation
and any and all amendments thereto. THE SHARES REPRESENTED BY THIS CERTIFICATE
ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED OR GUARANTEED. This
Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused its facsimile seal to be affixed hereto.
Dated:
(SEAL)
- ------------------------ -----------------------------
J. Michael Holmes Rudolf P. Guenzel
Corporate Secretary President and Chief Executive Officer
<PAGE>
(FORM OF STOCK CERTIFICATE - BACK SIDE)
The Corporation is authorized to issue more than one class of stock,
including a class of preferred stock which may be issued in one or more series.
The Corporation will furnish to any stockholder, upon written request and
without charge, a full statement of the designations, preferences, limitations
and relative rights of the shares of each class authorized to be issued and,
with respect to the issuance of any preferred stock to be issued in series, the
relative rights, preferences and limitations between the shares of each series
so far as the rights, preferences and limitations have been fixed and determined
and the authority of the Board of Directors to fix and determine the relative
rights, preferences and limitations of subsequent series.
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 ___________________ under
(Cust) (Minor)
Uniform Gifts to Minors Act ___________________________
(State)
Additional abbreviations may also be used though not in the above list.
<PAGE>
For value received, _________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------------
- ----------------------------------------------
_______________________________________________________________________________
(Please print or typewrite name and address including postal zip code of
assignee)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
__________________ shares of Common Stock represented by this Certificate, and
do hereby irrevocably constitute and appoint __________________ as Attorney, to
transfer the said shares on the books of the within named Corporation, with full
power of substitution.
Dated ______________ ___,_____
_________________________________
Signature
_________________________________
Signature
NOTICE: The signature(s) to this assignment must correspond with the name(s) as
written upon the face of this Certificate in every particular, without
alteration or enlargement, or any change whatever. The signature(s) should be
guaranteed by an eligible guarantor institution (bank, stockbroker, savings and
loan association or credit union) with membership in an approved signature
medallion program, pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
April 24, 1998
Mr. J. Michael Holmes
Executive Vice-President and
Chief Financial Officer
PBOC Holdings, Inc.
5900 Wilshire Boulevard
Los Angeles, CA 90036
Dear Mr. Holmes:
PBOC Holdings, Inc., has requested the opinion of KPMG Peat Marwick LLP
(KPMG) with respect to certain federal income tax effects to PBOC Holdings,
Inc. (the Company), and certain other parties, relating to a proposed capital
restructuring involving the entering into a Shareholder Rights Agreement, the
redemption of certain classes of preferred stock, and a public stock
offering. Capitalized terms not otherwise defined herein shall have the same
meaning set forth in the Shareholders Rights Agreement.
KPMG bases the opinions contained herein upon the facts, representations, and
assumptions set forth in copies of the Shareholder Rights Agreement and the
SEC Form S-1 registration statement to be filed with this Securities and
Exchange Commission on April 23, 1998, which the Company has provided to, and
upon which the Company has instructed KPMG to rely. KPMG has not
independently verified the completeness and accuracy of such facts,
representations, and assumptions. Because of the inherently factual nature of
the tax issues involved, the opinions expressed herein are not binding upon
any tax authority (e.g., the Internal Revenue Service) or any court and no
assurance can be given that a position contrary to that expressed herein will
not be asserted by a tax authority and upheld by a court.
We have reviewed the discussions in the TAXATION section of the SEC Form S-1
entitled "Impact of Ownership Change on Use of Net Operating Loss
Carryforwards," and "Risk that Rights are Treated as Debt on Use of Net
Operating Loss Carryforwards." We find the discussions to be in substantial
conformity with our opinion regarding certain federal income tax consequences
relating to the Shareholder Rights Agreement, in particular, it is the
opinion of KPMG that:
1. For federal income tax purposes, the Company's distribution of the
Rights described in the Shareholder Rights Agreement to its common
stockholders with respect to their Company common stock should be treated as
a distribution of "stock" within the meaning of sections 305(a) and 311(a) of
the Internal Revenue Code of 1986 (the Code). Accordingly, the Company
should recognize no gain or loss on the distribution of the Rights to its
common stockholders and the common stockholders should not include the fair
market value, if any, of the Rights in gross income.
PAGE 1
<PAGE>
2. Provided that the Litigation is not finally resolved in favor of
the Company and/or Bank prior to the date of an ownership change of the
Company as a result of the public stock offering, for federal income tax
purposes, the Rights should qualify as "stock" for valuation purposes under
section 382(e) of the Code. If the Company has an ownership change as a
result of the public stock offering, it should take into account the value of
the Rights in computing the annual section 382 limitation with respect to
such ownership change. Accordingly, the annual section 382 limitation with
respect to such ownership change should be equal to the product of the
applicable long-term federal tax-exempt rate times the sum of (i) fair market
value of the stock of the Company (not including the Rights) immediately
before the public stock offering and (ii) the fair market value of the Rights
immediately before the public stock offering.
The opinions expressed above are rendered only with respect to the specific
matters discussed herein, and KPMG expresses no opinion with respect to any
other federal or state income tax or legal aspect of the offering. If any of
the above-stated facts, circumstances, or assumptions (including those
contained in the Shareholder Rights Agreement and the SEC Form S-1
registration statement) are not entirely complete or accurate, it is
imperative that we be informed immediately, as the inaccuracy or
incompleteness could cause KPMG to change its opinions. In rendering our
opinion, we are relying upon the relevant provisions of the Code, the
regulations thereunder, and judicial and administrative interpretations
thereof, as of the date of this letter. The Code, regulations, and
interpretations are subject to change or modification by subsequent
legislative, regulatory, administrative, or judicial decisions. Any such
change or modification could also have an effect on the validity of our
opinion. We undertake no responsibility to update our opinions for any
subsequent change or modification.
Very truly yours,
KPMG Peat Marwick LLP
PAGE 2
<PAGE>
AGREEMENT
AGREEMENT, dated this _________ day of ____________ 1998, between PBOC
Holdings, Inc. (the "Corporation") and People's Bank of California (the "Bank"),
a federally chartered savings bank, and Rudolf P. Guenzel (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Corporation and the
Bank (together, the "Employers");
WHEREAS, the Executive entered into an employment agreement with the Bank
dated as of October 21, 1996 (the "Initial Employment Agreement");
WHEREAS, the Corporation and the Bank have, as of the date set forth above,
established a Trust for the benefit of Executive and funded such Trust with the
amount which the Bank has agreed to pay to Executive under the Initial
Employment Agreement;
WHEREAS, the Bank and the Executive desire to terminate the Initial
Employment Agreement effective with the date of execution of this Agreement;
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers;
WHEREAS, the Employers desire to enter into a new agreement with the
Executive with respect to his employment by each of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive by the Employers in the event that his
employment with the Employers is terminated under specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section
<PAGE>
4(a) hereof.
(b) CAUSE. Termination of the Executive's employment for "Cause" shall
mean 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 this Agreement.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean the occurrence of any of the following events
subsequent to the initial public offering of common stock of the Corporation:
(i) the acquisition of control of the Corporation as defined in 12 C.F.R.
Section 574.4, unless a presumption of control is successfully rebutted or
unless the transaction is exempted by 12 C.F.R. Section 574.3(c)(vii), or any
successor to such sections; (ii) an event that would be required to be
reported in response to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of
Regulation 14A pursuant to the Securities Exchange Act of 1934, as amended
("Exchange Act"), or any successor thereto, whether or not any class of
securities of the Corporation is registered under the Exchange Act; (iii) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Exchange
Act), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing 25% or more of the
combined voting power of the Corporation's then outstanding securities; or
(iv) during any period of three consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Corporation
cease for any reason to constitute at least a majority thereof unless the
election, or the nomination for election by stockholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period. For
purposes of this Agreement, no "Change in Control of the Corporation" shall
be deemed to occur with respect to purchases of additional shares of the
Corporation's Common Stock by the Trustees of the Estate of Bernice Pauahi
Bishop or by BIL Securities (Offshore) Limited.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(f) DISABILITY. Termination by the Employers of the Executive's
employment
2
<PAGE>
based on "Disability" shall mean termination because of any physical or
mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive within
twenty-four (24) months following a Change in Control of the Corporation based
on:
(i) Without the Executive's express written consent, the failure to
elect or to re-elect or to appoint or to re-appoint the Executive
to the office of President and Chief Executive Officer of the
Employers or a material adverse change made by the Employers in
the Executive's functions, duties or responsibilities as
President and Chief Executive Officer of the Employers;
(ii) Without the Executive's express written consent, a reduction by
either of the Employers in the Executive's Base Salary as the
same may be increased from time to time;
(iii) The principal executive office of either of the Employers is
relocated outside of the Los Angeles County, California area
or, without the Executive's express written consent, either
of the Employers require the Executive to be based anywhere
other than an area in which the Employers' principal
executive office is located, except for required travel on
business of the Employers to an extent substantially
consistent with the Executive's present business travel
obligations;
(iv) Any purported termination of the Executive's employment for
Disability or Retirement which is not effected pursuant to a
Notice of Termination satisfying the requirements of paragraph
(j) below; or
(v) The failure by the Employers to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 10 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Employers for any reason, including without
limitation for Cause,
3
<PAGE>
Disability or Retirement, or by the Executive for any reason, including
without limitation for Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated, (iii)
specifies a Date of Termination, which shall be not less than thirty (30) nor
more than ninety (90) days after such Notice of Termination is given, except in
the case of the Employers' termination of Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 11 hereof.
(j) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including early
retirement, generally applicable to their salaried employees.
2. TERMINATION OF INITIAL EMPLOYMENT AGREEMENT.
The Employers and the Executive hereby mutually understand and agree that
the Initial Employment Agreement, all obligations with respect thereto as well
as rights and entitlements inuring thereunder, shall be and with the execution
of this Agreement hereby is terminated, it being agreed that any provisions
regarding notice therein are hereby waived by the parties hereto. Subsequent to
the date hereof, the rights and obligations of the Employers and the Executive
with respect to the Executive's employment shall be as set forth in this
Agreement.
3. TERM OF EMPLOYMENT.
(a) The Employers hereby employ the Executive as President and Chief
Executive Officer of the Corporation and the Bank and the Executive hereby
accepts said employment and agrees to render such services to the Corporation
and the Bank on the terms and conditions set forth in this Agreement. The
term of employment under this Agreement shall be for three years, commencing
on the date of this Agreement. The term of this Agreement may be extended
for an additional year on the second annual anniversary of the date of this
Agreement, and on each annual anniversary thereafter, if the Boards of
Directors of the Employers so approve such extension, such that at any time
the remaining term of this Agreement shall be from one to two years. Prior
to the second annual anniversary of the date of this Agreement and each
annual anniversary thereafter, the Boards of Directors of the Employers shall
consider and review (after taking into account all relevant factors,
including the Executive's performance hereunder) an extension of the term of
this Agreement, and the term shall continue to extend each year if the Boards
of Directors approve such extension unless the Executive gives written notice
to the Employers of the Executive's election not to extend the term, with
such written notice to be given not less than thirty (30) days prior to any
such anniversary date. If the Boards of Directors of the Employers elect not
to
4
<PAGE>
extend the term, they shall give written notice of such decision to the
Executive not less than thirty (30) days prior to any such anniversary date.
If any party gives timely notice that the term will not be extended as of any
annual anniversary date, then this Agreement shall terminate at the
conclusion of its remaining term. References herein to the term of this
Agreement shall refer both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Employers as may be consistent with his titles and
from time to time assigned to him by the Employers' Boards of Directors.
4. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay the Executive for his services
during the term of this Agreement at a minimum base salary of $_______ per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Boards of Directors of the Employers and may not be
decreased without the Executive's express written consent. In addition to his
Base Salary, the Executive shall be entitled to receive during the term of this
Agreement such bonus payments as may be determined by the Boards of Directors of
the Employers.
(b) During the term of this Agreement, the Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. Nothing paid to the
Executive under any plan or arrangement presently in effect or made available in
the future shall be deemed to be in lieu of the salary payable to the Executive
pursuant to Section 4(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Boards of Directors of the Employers. The Executive shall not be
entitled to receive any additional compensation from the Employers for failure
to take a vacation, nor shall the Executive be able to accumulate unused
vacation time from one year to the next, except to the extent authorized by the
Boards of Directors of the Employers.
(d) In the event the Executive's employment is terminated due to
Disability or Retirement, the Employers shall provide continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Employers for the Executive immediately prior to his
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
(e) The Executive's compensation, benefits and expenses shall be paid
by the Corporation and the Bank in the same proportion as the time and
services actually
5
<PAGE>
expended by the Executive on behalf of each respective Employer.
5. EXPENSES. The Employers shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employers, including,
but not by way of limitation, automobile expenses and other traveling expenses,
subject to such reasonable documentation and other limitations as may be
established by the Boards of Directors of the Employers. If such expenses are
paid in the first instance by the Executive, the Employers shall reimburse the
Executive therefor.
6. TERMINATION.
(a) The Employers shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder for any reason,
including without limitation termination for Cause, Disability or Retirement,
and the Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason.
(b) In the event that (i) the Executive's employment is terminated by the
Employers for Cause or (ii) the Executive terminates his employment hereunder
other than for Disability, Retirement, death or Good Reason, the Executive shall
have no right pursuant to this Agreement to compensation or other benefits for
any period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as a result
of Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 4(d) hereof.
(d) In the event that (i) the Executive's employment is terminated by the
Employers for other than Cause, Disability, Retirement or the Executive's death
or (ii) such employment is terminated by the Executive (a) due to a material
breach of this Agreement by the Employers, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been given
by the Executive to the Employers, or (b) for Good Reason, then the Employers
shall, subject to the provisions of Section 7 hereof, if applicable:
(A) pay to the Executive, a cash severance amount equal to the
Executive's Base Salary as in effect immediately prior to the Date of
Termination, multiplied by the number of years or fraction thereof
remaining in the term of this Agreement at the Date of Termination up to a
maximum of two (2) years ("Severance Pay"). Such Severance Pay shall be
paid in monthly installments beginning with the first business day of the
month following the Date of
6
<PAGE>
Termination and continuing for such number of months or fraction thereof
representing the remaining term of this Agreement up to a maximum of two
(2) years. The Boards of Directors, at their sole discretion, may elect
to pay the Severance Pay to Executive on a more accelerated schedule
than that set forth in the immediately preceding sentence.
(B) maintain and provide for a period ending at the earlier of (i)
the first anniversary of the Date of Termination or (ii) the date of the
Executive's full-time employment by another employer, at no cost to the
Executive, the Executive's continued participation in all group insurance,
life insurance, health and accident, disability and other employee benefit
plans, programs and arrangements in which the Executive was entitled to
participate immediately prior to the Date of Termination (other than any
stock option or other stock compensation plans or bonus plans of the
Corporation), provided that in the event that Executive's participation in
any such plan, program or arrangement is barred, the Corporation shall
arrange to provide Executive with benefits substantially similar to those
Executive was entitled to receive under such plans, programs and
arrangements prior to the Date of Termination.
7. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments
and benefits pursuant to Section 6 hereof, either alone or together with other
payments and benefits which the Executive has the right to receive from the
Employers, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits payable by the Employers pursuant to Section 6
hereof shall be reduced, in the manner determined by the Executive, by the
amount, if any, which is the minimum necessary to result in no portion of the
payments and benefits payable by the Employers under Section 6 being
non-deductible to the Employers pursuant to Section 280G of the Code and subject
to the excise tax imposed under Section 4999 of the Code. The determination of
any reduction in the payments and benefits to be made pursuant to Section 6
shall be based upon the opinion of independent counsel selected by the
Employers' independent public accountants and paid by the Employers. Such
counsel shall be reasonably acceptable to the Employers and the Executive; shall
promptly prepare the foregoing opinion, but in no event later than thirty (30)
days from the Date of Termination; and may use such actuaries as such counsel
deems necessary or advisable for the purpose. Nothing contained herein shall
result in a reduction of any payments or benefits to which the Executive may be
entitled upon termination of employment under any circumstances other than as
specified in this Section 7, or a reduction in the payments and benefits
specified in Section 6 below zero.
8. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise except as provided
in Section
7
<PAGE>
6(d)(B) hereof, nor shall the amount of any such benefits be reduced by any
compensation earned by the Executive as a result of employment by another
employer after the Date of Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
9. WITHHOLDING. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
10. ASSIGNABILITY. The Employers may assign this Agreement and its rights
and obligations hereunder in whole, but not in part, to any corporation, bank or
other entity with or into which the Employers may hereafter merge or consolidate
or to which the Employers may transfer all or substantially all of its assets,
if in any such case said corporation, bank or other entity shall by operation of
law or expressly in writing assume all obligations of the Employers hereunder as
fully as if it had been originally made a party hereto, but may not otherwise
assign this Agreement or its rights and obligations hereunder. The Executive
may not assign or transfer this Agreement or any rights or obligations
hereunder.
11. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
The Corporation: Secretary
PBOC Holdings, Inc.
5900 Wilshire Boulevard
Los Angeles, California 90036
The Bank: Secretary
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
The Executive: Rudolf P. Guenzel
1210 Piedra Morada Drive
Pacific Palisades, California 90272
8
<PAGE>
12. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer or officers as may be
specifically designated by the Boards of Directors of the Employers to sign on
its behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of
California.
14. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Employers to create a trust of any kind to fund any benefits which
may be payable hereunder, and to the extent that the Executive acquires a right
to receive benefits from the Employers hereunder, such right shall be no greater
than the right of any unsecured general creditor of the Employers.
15. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
18. REGULATORY ACTIONS. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings association and its employees pursuant to Section
563.39(b) of the Regulations Applicable to All Savings Associations, 12 C.F.R.
Section 563.39(b), or any successor thereto, and shall be controlling in the
event of a conflict with any other provision of this Agreement, including
without limitation Section 6 hereof.
(a) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Employers' affairs
pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the
Federal Deposit Insurance Act ("FDIA") (12 U.S.C. Sections 1818(e)(3) and
1818(g)(1)), the Employers' obligations under this Agreement shall be
suspended as of the date of service, unless stayed by appropriate
9
<PAGE>
proceedings. If the charges in the notice are dismissed, the Employers may,
in their discretion: (i) pay the Executive all or part of the compensation
withheld while their obligations under this Agreement were suspended, and
(ii) reinstate (in whole or in part) any of their obligations which were
suspended.
(b) If the Executive is removed from office and/or permanently prohibited
from participating in the conduct of the Employers' affairs by an order issued
under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections
1818(e)(4) and (g)(1)), all obligations of the Employers under this Agreement
shall terminate as of the effective date of the order, but vested rights of the
Executive and the Employers as of the date of termination shall not be affected.
(c) If the Employers are in default, as defined in Section 3(x)(1) of the
FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Executive and the
Employers as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to
12 C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Employers is
necessary): (i) by the Director of the Office of Thrift Supervision ("OTS"), or
his/her designee, at the time the Federal Deposit Insurance Corporation ("FDIC")
enters into an agreement to provide assistance to or on behalf of the Employers
under the authority contained in Section 13(c) of the FDIA (12 U.S.C. Section
1823(c)); or (ii) by the Director of the OTS, or his/her designee, at the time
the Director or his/her designee approves a supervisory merger to resolve
problems related to operation of the Employers or when the Employers are
determined by the Director of the OTS to be in an unsafe or unsound condition,
but vested rights of the Executive and the Employers as of the date of
termination shall not be affected.
19. REGULATORY PROHIBITION. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and the regulations
promulgated thereunder, including 12 C.F.R. Part 359. In the event of the
Executive's termination of employment with the Employers for Cause, all
employment relationships and managerial duties with the Employers shall
immediately cease regardless of whether the Executive remains in the employ of
the Corporation following such termination. Furthermore, following such
termination for Cause, the Executive will not, directly or indirectly, influence
or participate in the affairs or the operations of the Employers.
20. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Employers and the Executive with respect to the matters agreed to
herein. All prior agreements between the Employers and the Executive with
respect to the
10
<PAGE>
matters agreed to herein are hereby superseded and shall have no force or
effect.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
PBOC HOLDINGS, INC.
By:
-------------------------------------
J. Michael Holmes
Executive Vice President and Chief
Financial Officer
Attest: PEOPLE'S BANK OF CALIFORNIA
By:
- ----------------------- -------------------------------------
J. Michael Holmes
Executive Vice President and Chief
Financial Officer
EXECUTIVE
By:
-------------------------------------
Rudolf P. Guenzel
11
<PAGE>
AGREEMENT
AGREEMENT, dated this _________ day of ____________ 1998, between PBOC
Holdings, Inc. (the "Corporation") and People's Bank of California (the "Bank"),
a federally chartered savings bank, and J. Michael Holmes (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Corporation and the
Bank (together, the "Employers");
WHEREAS, the Executive entered into an employment agreement with the Bank
dated as of October 21, 1996 (the "Initial Employment Agreement");
WHEREAS, the Corporation and the Bank have, as of the date set forth above,
established a Trust for the benefit of Executive and funded such Trust with the
amount which the Bank has agreed to pay to Executive under the Initial
Employment Agreement;
WHEREAS, the Bank and the Executive desire to terminate the Initial
Employment Agreement effective with the date of execution of this Agreement;
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers;
WHEREAS, the Employers desire to enter into a new agreement with the
Executive with respect to his employment by each of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive by the Employers in the event that his
employment with the Employers is terminated under specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section 4(a) hereof.
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(b) CAUSE. Termination of the Executive's employment for "Cause" shall
mean 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 this Agreement.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean the occurrence of any of the following events subsequent
to the initial public offering of common stock of the Corporation: (i) the
acquisition of control of the Corporation as defined in 12 C.F.R. Section 574.4,
unless a presumption of control is successfully rebutted or unless the
transaction is exempted by 12 C.F.R. Section 574.3(c)(vii), or any successor to
such sections; (ii) an event that would be required to be reported in response
to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant
to the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any
successor thereto, whether or not any class of securities of the Corporation is
registered under the Exchange Act; (iii) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Corporation,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of the Corporation's then
outstanding securities; or (iv) during any period of three consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Corporation cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election by
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period. For purposes of this Agreement, no "Change in Control of the
Corporation" shall be deemed to occur with respect to purchases of additional
shares of the Corporation's Common Stock by the Trustees of the Estate of
Bernice Pauahi Bishop or by BIL Securities (Offshore) Limited.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(f) DISABILITY. Termination by the Employers of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
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(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive within
twenty-four (24) months following a Change in Control of the Corporation based
on:
(i) Without the Executive's express written consent, the failure to
elect or to re-elect or to appoint or to re-appoint the
Executive to the office of Executive Vice President and Chief
Financial Officer of the Employers or a material adverse change
made by the Employers in the Executive's functions, duties or
responsibilities as Executive Vice President and Chief
Financial Officer of the Employers;
(ii) Without the Executive's express written consent, a reduction by
either of the Employers in the Executive's Base Salary as the
same may be increased from time to time;
(iii) The principal executive office of either of the Employers is
relocated outside of the Los Angeles County, California area
or, without the Executive's express written consent, either of
the Employers require the Executive to be based anywhere other
than an area in which the Employers' principal executive office
is located, except for required travel on business of the
Employers to an extent substantially consistent with the
Executive's present business travel obligations;
(iv) Any purported termination of the Executive's employment for
Disability or Retirement which is not effected pursuant to a
Notice of Termination satisfying the requirements of paragraph
(j) below; or
(v) The failure by the Employers to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 10 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the Executive's
employment by the Employers for any reason, including without limitation for
Cause, Disability or Retirement, or by the Executive for any reason, including
without limitation for Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated, (iii)
specifies a Date of Termination, which shall be not less than thirty (30) nor
more than ninety (90) days after such Notice of Termination is given, except in
the case of the Employers' termination
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of Executive's employment for Cause, which shall be effective immediately; and
(iv) is given in the manner specified in Section 11 hereof.
(j) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including early
retirement, generally applicable to their salaried employees.
2. TERMINATION OF INITIAL EMPLOYMENT AGREEMENT.
The Employers and the Executive hereby mutually understand and agree that
the Initial Employment Agreement, all obligations with respect thereto as well
as rights and entitlements inuring thereunder, shall be and with the execution
of this Agreement hereby is terminated, it being agreed that any provisions
regarding notice therein are hereby waived by the parties hereto. Subsequent to
the date hereof, the rights and obligations of the Employers and the Executive
with respect to the Executive's employment shall be as set forth in this
Agreement.
3. TERM OF EMPLOYMENT.
(a) The Employers hereby employ the Executive as Executive Vice President
and Chief Financial Officer of the Corporation and the Bank and the Executive
hereby accepts said employment and agrees to render such services to the
Corporation and the Bank on the terms and conditions set forth in this
Agreement. The term of employment under this Agreement shall be for three
years, commencing on the date of this Agreement. The term of this Agreement may
be extended for an additional year on the second annual anniversary of the date
of this Agreement, and on each annual anniversary thereafter, if the Boards of
Directors of the Employers so approve such extension, such that at any time the
remaining term of this Agreement shall be from one to two years. Prior to the
second annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Boards of Directors of the Employers shall consider
and review (after taking into account all relevant factors, including the
Executive's performance hereunder) an extension of the term of this Agreement,
and the term shall continue to extend each year if the Boards of Directors
approve such extension unless the Executive gives written notice to the
Employers of the Executive's election not to extend the term, with such written
notice to be given not less than thirty (30) days prior to any such anniversary
date. If the Boards of Directors of the Employers elect not to extend the term,
they shall give written notice of such decision to the Executive not less than
thirty (30) days prior to any such anniversary date. If any party gives timely
notice that the term will not be extended as of any annual anniversary date,
then this Agreement shall terminate at the conclusion of its remaining term.
References herein to the term of this Agreement shall refer both to the initial
term and successive terms.
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(b) During the term of this Agreement, the Executive shall perform such
executive services for the Employers as may be consistent with his titles and
from time to time assigned to him by the Employers' Boards of Directors.
4. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay the Executive for his services
during the term of this Agreement at a minimum base salary of $_______ per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Boards of Directors of the Employers and may not be
decreased without the Executive's express written consent. In addition to his
Base Salary, the Executive shall be entitled to receive during the term of this
Agreement such bonus payments as may be determined by the Boards of Directors of
the Employers.
(b) During the term of this Agreement, the Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. Nothing paid to the
Executive under any plan or arrangement presently in effect or made available in
the future shall be deemed to be in lieu of the salary payable to the Executive
pursuant to Section 4(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Boards of Directors of the Employers. The Executive shall not be
entitled to receive any additional compensation from the Employers for failure
to take a vacation, nor shall the Executive be able to accumulate unused
vacation time from one year to the next, except to the extent authorized by the
Boards of Directors of the Employers.
(d) In the event the Executive's employment is terminated due to
Disability or Retirement, the Employers shall provide continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Employers for the Executive immediately prior to his
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
(e) The Executive's compensation, benefits and expenses shall be paid by
the Corporation and the Bank in the same proportion as the time and services
actually expended by the Executive on behalf of each respective Employer.
5. EXPENSES. The Employers shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employers, including,
but not by way of limitation, automobile expenses and other traveling expenses,
subject to such reasonable documentation
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and other limitations as may be established by the Boards of Directors of the
Employers. If such expenses are paid in the first instance by the Executive,
the Employers shall reimburse the Executive therefor.
6. TERMINATION.
(a) The Employers shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder for any reason,
including without limitation termination for Cause, Disability or Retirement,
and the Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason.
(b) In the event that (i) the Executive's employment is terminated by the
Employers for Cause or (ii) the Executive terminates his employment hereunder
other than for Disability, Retirement, death or Good Reason, the Executive shall
have no right pursuant to this Agreement to compensation or other benefits for
any period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as a result
of Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 4(d) hereof.
(d) In the event that (i) the Executive's employment is terminated by the
Employers for other than Cause, Disability, Retirement or the Executive's death
or (ii) such employment is terminated by the Executive (a) due to a material
breach of this Agreement by the Employers, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been given
by the Executive to the Employers, or (b) for Good Reason, then the Employers
shall, subject to the provisions of Section 7 hereof, if applicable:
(A) pay to the Executive, a cash severance amount equal to the
Executive's Base Salary as in effect immediately prior to the Date of
Termination, multiplied by the number of years or fraction thereof
remaining in the term of this Agreement at the Date of Termination up to a
maximum of two (2) years ("Severance Pay"). Such Severance Pay shall be
paid in monthly installments beginning with the first business day of the
month following the Date of Termination and continuing for such number of
months or fraction thereof representing the remaining term of this
Agreement up to a maximum of two (2) years. The Boards of Directors, at
their sole discretion, may elect to pay the Severance Pay to Executive on a
more accelerated schedule than that set forth in the immediately preceding
sentence.
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(B) maintain and provide for a period ending at the earlier of (i)
the first anniversary of the Date of Termination or (ii) the date of the
Executive's full-time employment by another employer, at no cost to the
Executive, the Executive's continued participation in all group insurance,
life insurance, health and accident, disability and other employee benefit
plans, programs and arrangements in which the Executive was entitled to
participate immediately prior to the Date of Termination (other than any
stock option or other stock compensation plans or bonus plans of the
Corporation), provided that in the event that Executive's participation in
any such plan, program or arrangement is barred, the Corporation shall
arrange to provide Executive with benefits substantially similar to those
Executive was entitled to receive under such plans, programs and
arrangements prior to the Date of Termination.
7. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments
and benefits pursuant to Section 6 hereof, either alone or together with other
payments and benefits which the Executive has the right to receive from the
Employers, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits payable by the Employers pursuant to Section 6
hereof shall be reduced, in the manner determined by the Executive, by the
amount, if any, which is the minimum necessary to result in no portion of the
payments and benefits payable by the Employers under Section 6 being
non-deductible to the Employers pursuant to Section 280G of the Code and subject
to the excise tax imposed under Section 4999 of the Code. The determination of
any reduction in the payments and benefits to be made pursuant to Section 6
shall be based upon the opinion of independent counsel selected by the
Employers' independent public accountants and paid by the Employers. Such
counsel shall be reasonably acceptable to the Employers and the Executive; shall
promptly prepare the foregoing opinion, but in no event later than thirty (30)
days from the Date of Termination; and may use such actuaries as such counsel
deems necessary or advisable for the purpose. Nothing contained herein shall
result in a reduction of any payments or benefits to which the Executive may be
entitled upon termination of employment under any circumstances other than as
specified in this Section 7, or a reduction in the payments and benefits
specified in Section 6 below zero.
8. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise except as provided
in Section 6(d)(B) hereof, nor shall the amount of any such benefits be reduced
by any compensation earned by the Executive as a result of employment by another
employer after the Date of Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
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9. WITHHOLDING. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
10. ASSIGNABILITY. The Employers may assign this Agreement and its rights
and obligations hereunder in whole, but not in part, to any corporation, bank or
other entity with or into which the Employers may hereafter merge or consolidate
or to which the Employers may transfer all or substantially all of its assets,
if in any such case said corporation, bank or other entity shall by operation of
law or expressly in writing assume all obligations of the Employers hereunder as
fully as if it had been originally made a party hereto, but may not otherwise
assign this Agreement or its rights and obligations hereunder. The Executive
may not assign or transfer this Agreement or any rights or obligations
hereunder.
11. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
The Corporation: Secretary
PBOC Holdings, Inc.
5900 Wilshire Boulevard
Los Angeles, California 90036
The Bank: Secretary
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
The Executive: J. Michael Holmes
117 31st Street
Manhattan Beach, California 90266
12. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer or officers as may be
specifically designated by the Boards of Directors of the Employers to sign on
its behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
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13. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of
California.
14. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Employers to create a trust of any kind to fund any benefits which
may be payable hereunder, and to the extent that the Executive acquires a right
to receive benefits from the Employers hereunder, such right shall be no greater
than the right of any unsecured general creditor of the Employers.
15. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
18. REGULATORY ACTIONS. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings association and its employees pursuant to Section
563.39(b) of the Regulations Applicable to All Savings Associations, 12 C.F.R.
Section 563.39(b), or any successor thereto, and shall be controlling in the
event of a conflict with any other provision of this Agreement, including
without limitation Section 6 hereof.
(a) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Employers' affairs pursuant
to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA") (12 U.S.C. Sections 1818(e)(3) and 1818(g)(1)), the
Employers' obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Employers may, in their discretion: (i) pay the Executive
all or part of the compensation withheld while their obligations under this
Agreement were suspended, and (ii) reinstate (in whole or in part) any of their
obligations which were suspended.
(b) If the Executive is removed from office and/or permanently prohibited
from participating in the conduct of the Employers' affairs by an order issued
under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections
1818(e)(4) and (g)(1)), all obligations of the Employers under this Agreement
shall terminate as of the effective date of the order,
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but vested rights of the Executive and the Employers as of the date of
termination shall not be affected.
(c) If the Employers are in default, as defined in Section 3(x)(1) of the
FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Executive and the
Employers as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to
12 C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Employers is
necessary): (i) by the Director of the Office of Thrift Supervision ("OTS"), or
his/her designee, at the time the Federal Deposit Insurance Corporation ("FDIC")
enters into an agreement to provide assistance to or on behalf of the Employers
under the authority contained in Section 13(c) of the FDIA (12 U.S.C. Section
1823(c)); or (ii) by the Director of the OTS, or his/her designee, at the time
the Director or his/her designee approves a supervisory merger to resolve
problems related to operation of the Employers or when the Employers are
determined by the Director of the OTS to be in an unsafe or unsound condition,
but vested rights of the Executive and the Employers as of the date of
termination shall not be affected.
19. REGULATORY PROHIBITION. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and the regulations
promulgated thereunder, including 12 C.F.R. Part 359. In the event of the
Executive's termination of employment with the Employers for Cause, all
employment relationships and managerial duties with the Employers shall
immediately cease regardless of whether the Executive remains in the employ of
the Corporation following such termination. Furthermore, following such
termination for Cause, the Executive will not, directly or indirectly, influence
or participate in the affairs or the operations of the Employers.
20. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Employers and the Executive with respect to the matters agreed to
herein. All prior agreements between the Employers and the Executive with
respect to the matters agreed to herein are hereby superseded and shall have no
force or effect.
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IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
PBOC HOLDINGS, INC.
By:
-------------------------------------
Rudolf P. Guenzel
President and Chief Executive Officer
Attest: PEOPLE'S BANK OF CALIFORNIA
By:
- -------------------------------- -------------------------------------
Rudolf P. Guenzel
President and Chief Executive Officer
EXECUTIVE
By:
-------------------------------------
J. Michael Holmes
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AGREEMENT
AGREEMENT, dated this _________ day of ____________ 1998, between PBOC
Holdings, Inc. (the "Corporation") and People's Bank of California (the "Bank"),
a federally chartered savings bank, and William W. Flader (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Corporation and the
Bank (together, the "Employers");
WHEREAS, the Executive entered into an employment agreement with the Bank
dated as of October 21, 1996 (the "Initial Employment Agreement");
WHEREAS, the Corporation and the Bank have, as of the date set forth above,
established a Trust for the benefit of Executive and funded such Trust with the
amount which the Bank has agreed to pay to Executive under the Initial
Employment Agreement;
WHEREAS, the Bank and the Executive desire to terminate the Initial
Employment Agreement effective with the date of execution of this Agreement;
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers;
WHEREAS, the Employers desire to enter into a new agreement with the
Executive with respect to his employment by each of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive by the Employers in the event that his
employment with the Employers is terminated under specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section 4(a) hereof.
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(b) CAUSE. Termination of the Executive's employment for "Cause" shall
mean 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 this Agreement.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean the occurrence of any of the following events subsequent
to the initial public offering of common stock of the Corporation: (i) the
acquisition of control of the Corporation as defined in 12 C.F.R. Section 574.4,
unless a presumption of control is successfully rebutted or unless the
transaction is exempted by 12 C.F.R. Section 574.3(c)(vii), or any successor to
such sections; (ii) an event that would be required to be reported in response
to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant
to the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any
successor thereto, whether or not any class of securities of the Corporation is
registered under the Exchange Act; (iii) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Corporation,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of the Corporation's then
outstanding securities; or (iv) during any period of three consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Corporation cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election by
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period. For purposes of this Agreement, no "Change in Control of the
Corporation" shall be deemed to occur with respect to purchases of additional
shares of the Corporation's Common Stock by the Trustees of the Estate of
Bernice Pauahi Bishop or by BIL Securities (Offshore) Limited.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(f) DISABILITY. Termination by the Employers of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
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(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive within
twenty-four (24) months following a Change in Control of the Corporation based
on:
(i) Without the Executive's express written consent, the failure to
elect or to re-elect or to appoint or to re-appoint the
Executive to the office of Executive Vice President of the
Employers or a material adverse change made by the Employers in
the Executive's functions, duties or responsibilities as
Executive Vice President of the Employers;
(ii) Without the Executive's express written consent, a reduction by
either of the Employers in the Executive's Base Salary as the
same may be increased from time to time;
(iii) The principal executive office of either of the Employers is
relocated outside of the Los Angeles County, California area or,
without the Executive's express written consent, either of the
Employers require the Executive to be based anywhere other than
an area in which the Employers' principal executive office is
located, except for required travel on business of the Employers
to an extent substantially consistent with the Executive's
present business travel obligations;
(iv) Any purported termination of the Executive's employment for
Disability or Retirement which is not effected pursuant to a
Notice of Termination satisfying the requirements of paragraph
(j) below; or
(v) The failure by the Employers to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 10 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the Executive's
employment by the Employers for any reason, including without limitation for
Cause, Disability or Retirement, or by the Executive for any reason, including
without limitation for Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated, (iii)
specifies a Date of Termination, which shall be not less than thirty (30) nor
more than ninety (90) days after such Notice of Termination is given, except in
the case of the Employers' termination of Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 11 hereof.
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(j) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including early
retirement, generally applicable to their salaried employees.
2. TERMINATION OF INITIAL EMPLOYMENT AGREEMENT.
The Employers and the Executive hereby mutually understand and agree that
the Initial Employment Agreement, all obligations with respect thereto as well
as rights and entitlements inuring thereunder, shall be and with the execution
of this Agreement hereby is terminated, it being agreed that any provisions
regarding notice therein are hereby waived by the parties hereto. Subsequent to
the date hereof, the rights and obligations of the Employers and the Executive
with respect to the Executive's employment shall be as set forth in this
Agreement.
3. TERM OF EMPLOYMENT.
(a) The Employers hereby employ the Executive as Executive Vice President
of the Corporation and the Bank and the Executive hereby accepts said employment
and agrees to render such services to the Corporation and the Bank on the terms
and conditions set forth in this Agreement. The term of employment under this
Agreement shall be for three years, commencing on the date of this Agreement.
The term of this Agreement may be extended for an additional year on the second
annual anniversary of the date of this Agreement, and on each annual anniversary
thereafter, if the Boards of Directors of the Employers so approve such
extension, such that at any time the remaining term of this Agreement shall be
from one to two years. Prior to the second annual anniversary of the date of
this Agreement and each annual anniversary thereafter, the Boards of Directors
of the Employers shall consider and review (after taking into account all
relevant factors, including the Executive's performance hereunder) an extension
of the term of this Agreement, and the term shall continue to extend each year
if the Boards of Directors approve such extension unless the Executive gives
written notice to the Employers of the Executive's election not to extend the
term, with such written notice to be given not less than thirty (30) days prior
to any such anniversary date. If the Boards of Directors of the Employers elect
not to extend the term, they shall give written notice of such decision to the
Executive not less than thirty (30) days prior to any such anniversary date. If
any party gives timely notice that the term will not be extended as of any
annual anniversary date, then this Agreement shall terminate at the conclusion
of its remaining term. References herein to the term of this Agreement shall
refer both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Employers as may be consistent with his titles and
from time to time assigned to him by the Employers' Boards of Directors.
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4. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay the Executive for his services
during the term of this Agreement at a minimum base salary of $_______ per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Boards of Directors of the Employers and may not be
decreased without the Executive's express written consent. In addition to his
Base Salary, the Executive shall be entitled to receive during the term of this
Agreement such bonus payments as may be determined by the Boards of Directors of
the Employers.
(b) During the term of this Agreement, the Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. Nothing paid to the
Executive under any plan or arrangement presently in effect or made available in
the future shall be deemed to be in lieu of the salary payable to the Executive
pursuant to Section 4(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Boards of Directors of the Employers. The Executive shall not be
entitled to receive any additional compensation from the Employers for failure
to take a vacation, nor shall the Executive be able to accumulate unused
vacation time from one year to the next, except to the extent authorized by the
Boards of Directors of the Employers.
(d) In the event the Executive's employment is terminated due to
Disability or Retirement, the Employers shall provide continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Employers for the Executive immediately prior to his
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
(e) The Executive's compensation, benefits and expenses shall be paid by
the Corporation and the Bank in the same proportion as the time and services
actually expended by the Executive on behalf of each respective Employer.
5. EXPENSES. The Employers shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employers, including,
but not by way of limitation, automobile expenses and other traveling expenses,
subject to such reasonable documentation and other limitations as may be
established by the Boards of Directors of the Employers. If such expenses are
paid in the first instance by the Executive, the Employers shall reimburse the
Executive therefor.
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6. TERMINATION.
(a) The Employers shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder for any reason,
including without limitation termination for Cause, Disability or Retirement,
and the Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason.
(b) In the event that (i) the Executive's employment is terminated by the
Employers for Cause or (ii) the Executive terminates his employment hereunder
other than for Disability, Retirement, death or Good Reason, the Executive shall
have no right pursuant to this Agreement to compensation or other benefits for
any period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as a result
of Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 4(d) hereof.
(d) In the event that (i) the Executive's employment is terminated by the
Employers for other than Cause, Disability, Retirement or the Executive's death
or (ii) such employment is terminated by the Executive (a) due to a material
breach of this Agreement by the Employers, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been given
by the Executive to the Employers, or (b) for Good Reason, then the Employers
shall, subject to the provisions of Section 7 hereof, if applicable:
(A) pay to the Executive, a cash severance amount equal to the
Executive's Base Salary as in effect immediately prior to the Date of
Termination, multiplied by the number of years or fraction thereof
remaining in the term of this Agreement at the Date of Termination up to a
maximum of two (2) years ("Severance Pay"). Such Severance Pay shall be
paid in monthly installments beginning with the first business day of the
month following the Date of Termination and continuing for such number of
months or fraction thereof representing the remaining term of this
Agreement up to a maximum of two (2) years. The Boards of Directors, at
their sole discretion, may elect to pay the Severance Pay to Executive on a
more accelerated schedule than that set forth in the immediately preceding
sentence.
(B) maintain and provide for a period ending at the earlier of (i)
the first anniversary of the Date of Termination or (ii) the date of the
Executive's full-time employment by another employer, at no cost to the
Executive, the Executive's continued participation in all group insurance,
life insurance, health and accident, disability and other employee benefit
plans, programs and arrangements in which the
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Executive was entitled to participate immediately prior to the Date of
Termination (other than any stock option or other stock compensation plans
or bonus plans of the Corporation), provided that in the event that
Executive's participation in any such plan, program or arrangement is
barred, the Corporation shall arrange to provide Executive with benefits
substantially similar to those Executive was entitled to receive under such
plans, programs and arrangements prior to the Date of Termination.
7. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments
and benefits pursuant to Section 6 hereof, either alone or together with other
payments and benefits which the Executive has the right to receive from the
Employers, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits payable by the Employers pursuant to Section 6
hereof shall be reduced, in the manner determined by the Executive, by the
amount, if any, which is the minimum necessary to result in no portion of the
payments and benefits payable by the Employers under Section 6 being
non-deductible to the Employers pursuant to Section 280G of the Code and subject
to the excise tax imposed under Section 4999 of the Code. The determination of
any reduction in the payments and benefits to be made pursuant to Section 6
shall be based upon the opinion of independent counsel selected by the
Employers' independent public accountants and paid by the Employers. Such
counsel shall be reasonably acceptable to the Employers and the Executive; shall
promptly prepare the foregoing opinion, but in no event later than thirty (30)
days from the Date of Termination; and may use such actuaries as such counsel
deems necessary or advisable for the purpose. Nothing contained herein shall
result in a reduction of any payments or benefits to which the Executive may be
entitled upon termination of employment under any circumstances other than as
specified in this Section 7, or a reduction in the payments and benefits
specified in Section 6 below zero.
8. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise except as provided
in Section 6(d)(B) hereof, nor shall the amount of any such benefits be reduced
by any compensation earned by the Executive as a result of employment by another
employer after the Date of Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
9. WITHHOLDING. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
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10. ASSIGNABILITY. The Employers may assign this Agreement and its rights
and obligations hereunder in whole, but not in part, to any corporation, bank or
other entity with or into which the Employers may hereafter merge or consolidate
or to which the Employers may transfer all or substantially all of its assets,
if in any such case said corporation, bank or other entity shall by operation of
law or expressly in writing assume all obligations of the Employers hereunder as
fully as if it had been originally made a party hereto, but may not otherwise
assign this Agreement or its rights and obligations hereunder. The Executive
may not assign or transfer this Agreement or any rights or obligations
hereunder.
11. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
The Corporation: Secretary
PBOC Holdings, Inc.
5900 Wilshire Boulevard
Los Angeles, California 90036
The Bank: Secretary
People's Bank of California
5900 Wilshire Boulevard
Los Angeles, California 90036
The Executive: William W. Flader
656 Longfellow Avenue
Hermosa Beach, California 90254
12. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer or officers as may be
specifically designated by the Boards of Directors of the Employers to sign on
its behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of
California.
14. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Employers to create a trust of any kind to fund any benefits which
may be payable
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hereunder, and to the extent that the Executive acquires a right to receive
benefits from the Employers hereunder, such right shall be no greater than the
right of any unsecured general creditor of the Employers.
15. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
18. REGULATORY ACTIONS. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings association and its employees pursuant to Section
563.39(b) of the Regulations Applicable to All Savings Associations, 12 C.F.R.
Section 563.39(b), or any successor thereto, and shall be controlling in the
event of a conflict with any other provision of this Agreement, including
without limitation Section 6 hereof.
(a) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Employers' affairs pursuant
to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA") (12 U.S.C. Sections 1818(e)(3) and 1818(g)(1)), the
Employers' obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Employers may, in their discretion: (i) pay the Executive
all or part of the compensation withheld while their obligations under this
Agreement were suspended, and (ii) reinstate (in whole or in part) any of their
obligations which were suspended.
(b) If the Executive is removed from office and/or permanently prohibited
from participating in the conduct of the Employers' affairs by an order issued
under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections
1818(e)(4) and (g)(1)), all obligations of the Employers under this Agreement
shall terminate as of the effective date of the order, but vested rights of the
Executive and the Employers as of the date of termination shall not be affected.
(c) If the Employers are in default, as defined in Section 3(x)(1) of the
FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Executive and the
Employers as of the date of termination shall not be affected.
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(d) All obligations under this Agreement shall be terminated pursuant to
12 C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Employers is
necessary): (i) by the Director of the Office of Thrift Supervision ("OTS"), or
his/her designee, at the time the Federal Deposit Insurance Corporation ("FDIC")
enters into an agreement to provide assistance to or on behalf of the Employers
under the authority contained in Section 13(c) of the FDIA (12 U.S.C. Section
1823(c)); or (ii) by the Director of the OTS, or his/her designee, at the time
the Director or his/her designee approves a supervisory merger to resolve
problems related to operation of the Employers or when the Employers are
determined by the Director of the OTS to be in an unsafe or unsound condition,
but vested rights of the Executive and the Employers as of the date of
termination shall not be affected.
19. REGULATORY PROHIBITION. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and the regulations
promulgated thereunder, including 12 C.F.R. Part 359. In the event of the
Executive's termination of employment with the Employers for Cause, all
employment relationships and managerial duties with the Employers shall
immediately cease regardless of whether the Executive remains in the employ of
the Corporation following such termination. Furthermore, following such
termination for Cause, the Executive will not, directly or indirectly, influence
or participate in the affairs or the operations of the Employers.
20. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Employers and the Executive with respect to the matters agreed to
herein. All prior agreements between the Employers and the Executive with
respect to the matters agreed to herein are hereby superseded and shall have no
force or effect.
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IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
PBOC HOLDINGS, INC.
By: _______________________________________
Rudolf P. Guenzel
President and Chief Executive Officer
Attest: PEOPLE'S BANK OF CALIFORNIA
________________________________ By: _______________________________________
Rudolf P. Guenzel
President and Chief Executive Officer
EXECUTIVE
By: _______________________________________
William W. Flader
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PBOC HOLDINGS, INC.
DEFERRED COMPENSATION PLAN FOR
CERTAIN KEY EMPLOYEES
A. PARTICIPANTS. Any key employee ("Employee") of PBOC Holdings, Inc.
("Corporation"), or any wholly owned subsidiary of the Corporation
("Subsidiary"), including People's Bank of California (the "Bank") who
has been designated as eligible to participate under this plan
("Plan") by the Board of Directors of the Corporation ("Board"), may
elect to become a participant ("Participant") under the Plan by filing
written notice ("Notice") with the Corporation or a Subsidiary of the
Corporation for whom the Employee performs his services ("Employer"),
in the form prescribed by the Board.
B. DEFERRED COMPENSATION. Any Participant may elect, in accordance with
Section E of this Agreement, to defer annually the receipt of a
portion of the compensation otherwise payable to him by an Employer in
any calendar year, which portion shall be designated by him but shall
not exceed an amount, if any, previously approved by the Board in
writing. Any compensation deferred pursuant to this Section shall be
recorded by the Corporation in a deferred compensation account
("Account") maintained in the name of the Participant. The Corporation
shall furnish each Participant with an annual statement of his
Account.
C. INVESTMENT OF DEFERRED AMOUNTS. In connection with the adoption of
this Plan, the Corporation is adopting a trust pursuant to Section F.
All amounts credited to an Account shall be invested in accordance
with the terms of such trust. A Participant shall be entitled to the
value of the assets relating to a Participant's Account (including any
earnings and investment appreciation or depreciation thereon) which
are acquired with amounts deferred under this Plan as reflected in a
Participant's Account balance under such trust as of the date of any
distribution made pursuant to the terms of this Plan. All amounts
deferred under this Plan and distributed pursuant to Section D shall
be in the form of common stock of the Corporation or any successor
thereto.
D. DISTRIBUTION.
1. Unless otherwise agreed to by the Corporation and a Participant
in writing at the time a Participant makes an election to defer
compensation pursuant to Section E, the Corporation shall pay the
the Participant all amounts credited to the Participant's Account
as of the date of the Participant's termination of service or
employment with Corporation and all other Employers for reasons
other than death.
2. Upon termination of a Participant's service or employment with
the Corporation and all other Employers by reason of his death,
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Participant's designated beneficiary or beneficiaries will be
entitled to receive all other amounts credited to the Account of
the Participant as of the date of his death. Said amounts shall
be payable in a lump sum.
3. Upon the death of the Participant prior to complete distribution
to him of the entire balance of his Account (and after the date
of termination of his service or employment with the Corporation
and all other Employers), the balance of his Account on the date
of his death shall be payable to the Participant's designated
beneficiary or beneficiaries pursuant to paragraph (4) of this
Section.
4. Unless the otherwise agreed to by the Corporation and a
Participant in writing as contemplated by Section D(1)
hereinabove, the Corporation, shall direct distribution of the
amounts credited to a Participant's Account, including earnings
and investment return pursuant to Section C, to a Participant or
his beneficiary or beneficiaries pursuant to the preceding
paragraphs of this Section, in a lump sum. Distribution shall be
made on the first day of the month next following:
a. the date upon which the Participant's service or employment
with the Corporation terminates in the event of a
distribution pursuant to paragraphs (1) or (2) of this
Section; or
b. the date of the Participant's death in the event of a
distribution pursuant to paragraph (3) of this Section.
E. ELECTION TO DEFER COMPENSATION. The Notice by which a Participant
elects to defer compensation as provided in this Agreement shall be in
writing, signed by the Participant, and delivered to the Corporation
prior to January 1 of the calendar year in which the compensation to
be deferred is otherwise payable to the Participant; provided,
however, for the first year that this Plan is in effect, a Participant
may elect to defer compensation to which the Participant may become
entitled in the future under any employment agreement in effect with
the Corporation or the Bank as of the date of adoption of this Plan by
the Board by providing the Corporation written notice of such of the
Participant's intent to defer on or before April 30, 1998. Such
election (and any subsequent election) will continue until suspended
or modified in a writing delivered by the Participant to the
Corporation, which new election shall only apply to compensation
otherwise payable to the Participant after the end of the calendar
year in which such election is delivered to the Corporation. Any
deferral election made by the Participant shall be irrevocable with
respect to any compensation covered by such election, including the
compensation payable in the calendar year in which the election
suspending or modifying the prior election is delivered to the
Corporation.
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F. PARTICIPANT'S RIGHTS UNSECURED.
1. The right of the Participant or his designated beneficiary to
receive a distribution hereunder shall be an unsecured claim
against the general assets of the Corporation, and neither the
Participant nor his designated beneficiary shall have any rights
in or against any amount credited to his Account or any other
specific assets of the Corporation. All amounts credited to an
Account shall constitute general assets of the Corporation and
may be disposed of by the Corporation at such time and for such
purposes as it may deem appropriate. An Account may not be
encumbered or assigned by a Participant or any beneficiary.
2. To fund its obligations under the Plan, the Corporation may elect
to form a trust, or to utilize a preexisting trust to purchase
and hold the alternative forms of assets, including shares of
stock of the Corporation, subject to compliance with all
applicable securities laws. If the Corporation elects to use a
trust to fund its obligations under the Plan, a Participant shall
have no right to demand the transfer to him of stock or other
assets from the Corporation, or from such a trust formed or
utilized by the Corporation. Any assets held in a trust,
including shares of stock of the Corporation, may be distributed
to a Participant at the value thereof determined by the Board (or
the Executive Committee thereof) as aforesaid in payment of part
or all of the Corporation's obligations under the Plan. The
right of a Participant or his designated beneficiary to receive a
distribution hereunder shall be an unsecured claim against the
general assets of the Corporation or any assets of the Bank. All
amounts credited to the account of Participants, whether or not
held in a trust, shall constitute general assets of the
Corporation and may be disposed of by the Bank at such time and
for such purposes as it may deem appropriate.
G. AMENDMENTS TO THE PLAN. The Board may amend the Plan at any time,
without the consent of the Participants or their beneficiaries,
provided, however, that no amendment shall divest any Participant or
beneficiary of the credits to his Account, or of any rights to which
he would have been entitled if the Plan had been terminated
immediately prior to the effective date of such amendment.
H. TERMINATION OF THE PLAN. The Board may terminate the Plan at any
time. Upon termination of the Plan, distribution of the credits to a
Participant's Account shall be made in the manner and at the time
heretofore prescribed; provided that no additional credits shall be
made to the Account of a Participant following termination of the Plan
other than earnings, investment appreciation or depreciation thereon
credited pursuant to Section C.
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I. EXPENSES. Costs of administration of the Plan will be paid by the
Corporation and/or by such of its Subsidiaries with Employees
participating in the Plan as may be determined by the Board.
J. NOTICES. Any notice or election required or permitted to be given
hereunder shall be in writing and shall be deemed to be filed:
1. on the date it is personally delivered to the Secretary of the
Corporation or a Subsidiary, as the case may be; or
2. three business days after it is sent by registered or certified
mail, addressed to such Secretary at PBOC Holdings, Inc., 5900
Wilshire Boulevard, Los Angeles, California 90036.
K. NO GUARANTEE OF BENEFITS. Nothing contained in the Plan shall
constitute a guaranty by the Corporation or the Bank or any other
person or entity that the assets of the Corporation or the Bank will
be sufficient to pay any benefit hereunder.
L. NO ENLARGEMENT OF EMPLOYEE RIGHTS. No Participant shall have any
right to receive a distribution of contributions made under the Plan
except in accordance with the terms of the Plan. Establishment of the
Plan shall not be construed to give any Participant the right to be
retained in the service of the Corporation or the Bank.
M. SPENDTHRIFT PROVISION. No interest of any person or entity in, or
right to receive a distribution under, the Plan shall be subject in
any manner to sale, transfer, assignment, pledge, attachment,
garnishment, or other alienation or encumbrance of any kind; nor may
such interest or right to receive a distribution be taken, either
voluntarily or involuntarily, for the satisfaction of the debts of, or
other obligations or claims against, such person or entity, including
claims for alimony, support, separate maintenance and claims in
bankruptcy proceedings.
N. APPLICABLE LAW. The Plan shall be construed and administered under
the laws of the State of California.
O. INCAPACITY OF RECIPIENT. If any person entitled to a distribution
under the Plan is deemed by the Corporation or the Bank to be
incapable of personally receiving and giving a valid receipt for such
payment, then, unless and until claim therefor shall have been made by
a duly appointed guardian or other legal representative of such
person, the Corporation or the Bank may provide for such payment or
any part thereof to be made to any other person or institution then
contributing toward or providing for the care and maintenance of such
person. Any such payment shall be a payment for the account of such
person and a
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complete discharge of any liability of the Corporation or the Bank and
the Plan therefor.
P. CORPORATE SUCCESSORS. The Plan shall not be automatically
terminated by a transfer or sale of assets of the Corporation or the
Bank or by the merger or consolidation of the Corporation or the Bank
into or with any other corporation or other entity, but the Plan shall
be continued after such sale, merger or consolidation only if and to
the extent that the transferee, purchaser or successor entity agrees
to continue the Plan. In the event that the Plan is not continued by
the transferee, purchaser or successor entity, then the Plan shall
terminate subject to the provisions of Section H.
Q. UNCLAIMED BENEFIT. Each Participant shall keep the Corporation
informed of his current address and the current address of his
designated beneficiary. The Corporation shall not be obligated to
search for the whereabouts of any person. If the location of a
Participant is not made known to the Corporation within three (3)
years after the date on which payment of the Participant's account may
first be made, payment may be made as though the Participant had died
at the end of the three-year period. If, within one additional year
after such three year period has elapsed, or, within three years after
the actual death of a Participant, the Corporation is unable to locate
any designated beneficiary of the Participant, then the Corporation
shall have no further obligation to pay any benefit hereunder to such
Participant or designated beneficiary and such benefit shall be
irrevocably forfeited.
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R. LIMITATIONS ON LIABILITY. Notwithstanding any of the preceding
provisions of the Plan, neither the Corporation nor the Bank nor any
individual acting as employee or agent of the Corporation or the Bank
shall be liable to any Participant, former Participant or other person
for any claim, loss, liability or expense incurred in connection with
the Plan.
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TRUST AGREEMENT
This Trust Agreement (the "Trust Agreement") is made as of the _____ day of
__________ 1998, by and between PBOC Holdings, Inc., a Delaware corporation (the
"Company"), People's Bank of California (the "Bank") and
_________________________ (the "Trustee").
WITNESSETH:
WHEREAS, the Company has adopted a deferred compensation plan (the "Plan")
pursuant to which certain of its officers are granted the right to defer some or
all of their remuneration from the Company and/or the Bank;
WHEREAS, the Company wishes to establish this trust (the "Trust") to fund
the Company's obligations under the Plan, with the assets contributed to the
Trust to be subject to the claims of the Company's creditors in the event of the
Company's insolvency, as herein defined, until paid to the participants or their
respective beneficiaries in such manner and at such times as specified in the
Plan, and intends that the Trust shall satisfy the requirements of Revenue
Procedure 92-64 which sets forth a model grantor trust for use in executive
compensation arrangements; and
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
maintained for the purpose of providing deferred compensation for a select group
of management or highly compensated employees for purposes of Title I of the
Employee Retirement Income Security Act of 1974;
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
SECTION 1. ESTABLISHMENT OF TRUST.
(a) The Company hereby deposits with the Trustee in trust $______________,
which shall become the initial principal of the Trust to be held, administered
and disposed of by the Trustee as provided in this Trust Agreement. The initial
principal of the Trust, together with any future contributions to the Trust and
any other assets held by the Trust, and earnings thereon, are collectively
referred to herein as the "Trust Assets."
(b) The Trust hereby established shall be irrevocable by the Company.
(c) The Trust is intended to be a grantor trust, of which the Company is
the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended (the "Code"), and
shall be construed accordingly.
<PAGE>
(d) The principal of the Trust, and any earnings thereon, shall be held
separate and apart from other funds of the Company and shall be used exclusively
for the uses and purposes of the Plan and general creditors as herein set forth.
Participants and their beneficiaries shall have no preferred claim on, or any
beneficial ownership interest in, any of the Trust Assets. Any rights created
under the Plan and this Trust Agreement shall be mere unsecured contractual
rights of the participants and their beneficiaries against the Company. Any
assets held by the Trust will be subject to the claims of the Company's general
creditors under federal and state law in the event of the Company's Insolvency,
as defined in Section 3(a) herein.
(e) The Company, in its sole discretion, may at any time, or from time to
time, make additional deposits of cash or other property in trust with the
Trustee to augment the principal to be held, administered and disposed of by the
Trustee as provided in this Trust Agreement. Neither the Trustee nor any
participant or beneficiary of a participant shall have any right to compel such
additional deposits.
SECTION 2. PAYMENTS TO THE PARTICIPANTS AND THEIR BENEFICIARIES.
(a) The Company shall deliver to the Trustee a schedule (the "Payment
Schedule") consistent with the terms of the Plan in respect of each participant
(and his or her beneficiaries), or, if applicable, that provides a formula or
other instructions acceptable to the Trustee for determining the amounts so
payable, the form in which such amount is to be paid, and the time of
commencement for payment of such amounts. Except as otherwise provided herein,
the Trustee shall make payments to the participants and their beneficiaries in
accordance with such Payment Schedule. The Trustee shall make provision for the
reporting and withholding of any federal, state or local taxes that may be
required to be withheld with respect to the payment of benefits pursuant to the
terms of the Plan and shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported, withheld and paid
by the Company or the Bank.
(b) The entitlement of a participant or his or her beneficiaries to
benefits under the Plan shall be determined by the Company or such party as it
shall designate under the Plan, and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan, if any.
(c) The Company may make payment of benefits directly to participants or
their beneficiaries as they become due under the terms of the Plan. The Company
shall notify the Trustee of its decision to make payment of benefits directly
prior to the time amounts are payable to participants or their beneficiaries.
Any such payments made by the Company directly to a participant shall be in lieu
of any payments otherwise required to be made by the Trustee under the terms of
the Plan or the Trust. In addition, if the principal of the Trust, and any
earnings thereon, are not sufficient to make payments of benefits in accordance
with the terms of the Plan, the Company shall make the balance of each such
payment as it falls due. The Trustee shall notify the Company where principal
and earnings are not sufficient.
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SECTION 3. THE TRUSTEE'S RESPONSIBILITY REGARDING PAYMENTS TO TRUST
BENEFICIARIES WHEN THE COMPANY IS INSOLVENT.
(a) The Trustee shall cease payment of benefits to participants and their
beneficiaries if the Company becomes insolvent. The Company shall be
considered "Insolvent" for purposes of this Trust Agreement if (i) either the
Company is unable to pay its debts as they become due, or (ii) the Company is
subject to a pending proceeding as a debtor under the United States Bankruptcy
Code, or (iii) the Company is determined to be insolvent by the Federal Deposit
Insurance Corporation.
(b) At all times during the continuance of this Trust, the principal and
income of the Trust shall be subject to claims of general creditors of the
Company under federal and state law as set forth below.
(1) The Board of Directors and the Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing of the
Company's Insolvency. If a person claiming to be a creditor of the Company
alleges in writing to the Trustee that the Company has become insolvent,
the Trustee shall determine whether the Company is insolvent and, pending
such determination, the Trustee shall discontinue payment of benefits to
participants or their beneficiaries.
(2) Unless the Trustee has actual knowledge of the Company's
insolvency, or has received notice from the Company or a person claiming to
be a creditor alleging that the Company is insolvent, the Trustee shall
have no duty to inquire whether the Company is insolvent. The Trustee may
in all events rely on such evidence concerning the Company's solvency as
may be furnished to the Trustee and that provides the Trustee with a
reasonable basis for making a determination concerning the Company's
solvency.
(3) If at any time the Trustee has determined that the Company is
insolvent, the Trustee shall discontinue payments to participants or their
beneficiaries and shall hold the assets of the Trust for the benefit of the
Company's general creditors. Nothing in this Trust Agreement shall in any
way diminish any rights of participants or their beneficiaries to pursue
their rights as general creditors of the Company with respect to benefits
due under the Plan or otherwise.
(4) The Trustee shall resume the payment of benefits to participants
or their beneficiaries in accordance with Section 2 of this Trust Agreement
only after the Trustee has determined that the Company is not insolvent (or
is no longer insolvent).
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to
participants or their beneficiaries under the terms of the Plan for the period
of such discontinuance, less the aggregate amount of any payments made to
participants or their
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<PAGE>
beneficiaries by the Company in lieu of the payments provided for hereunder
during any such period of discontinuance.
SECTION 4. PAYMENTS TO THE COMPANY.
Except as provided in Section 3 hereof, the Company shall have no right or
power to direct the Trustee to return to the Company or to divert to others any
of the Trust Assets before all payment of benefits have been made to
participants and their beneficiaries pursuant to the terms of the Plan.
SECTION 5. INVESTMENT AND OTHER AUTHORITY.
(a) The Trustee may invest in securities (including stock or rights to
acquire stock of the Company) or obligations issued by the Company,
interest-bearing accounts at the Bank, including Certificates of Deposit with
the Bank, U.S. government securities and agencies thereof and funds that invest
in such securities. All rights associated with assets of the Trust shall be
exercised by the Trustee or the person designated by the Trustee, and shall in
no event be exercisable by or rest with Plan participants, except that voting
rights with respect to Trust assets will be exercised by the Company. The
Company shall have the right at any time, and from time to time in its sole
discretion, to substitute assets of equal fair market value for any asset held
by the Trust. This right is exercisable by the Company in a nonfiduciary
capacity without the approval or consent of any person in a fiduciary capacity.
(b) Subject to the provisions of paragraph (a) above, the Trustee shall
have the following additional powers and duties with respect to the Trust:
(1) to sell at public or private sale, to exchange, to encumber, or
to lease any personal property;
(2) to commence or defend suits or legal proceedings and to represent
the Trust in all suits or legal proceedings; to settle, compromise or
submit to arbitration any claims, debts or damages due or owing to or from
the Trust;
(3) to exercise any right appurtenant to any securities or other such
property;
(4) to engage any legal counsel, including counsel to the Company, or
any other suitable agents; to consult with such counsel or agents with
respect to the construction of this Trust Agreement, the duties of the
Trustee hereunder, the transactions contemplated by this Trust Agreement,
or any act which the Trustee proposes to take or omit; to rely upon the
advice of such counsel or agents; and to pay the reasonable fees, expenses
and compensation thereof;
(5) to register any securities held by it in its own name or in the
name of any custodian of such property or of its nominee, including the
nominee of any system for the
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central handling of securities, with or without the addition of words
indicating that such securities are held in a fiduciary capacity; to
deposit or arrange for the deposit of any such securities with such a
system; and to hold any securities in bearer form;
(6) to make, execute and deliver, as Trustee, any and all leases,
notes, bonds, guarantees, mortgages, conveyances, contracts, waivers,
releases or other instruments in writing necessary or proper for the
accomplishment of any of the foregoing powers;
(7) to transfer assets of the Trust to a successor trustee as
provided in Section 10 (c) herein; and
(8) to exercise, generally, any of the powers which an individual
owner might exercise in connection with such property either real, personal
or mixed, and to do all other acts that Trustee may deem necessary or
proper to carry out any of the powers set forth in this Section or
otherwise in the best interests of the Trust.
SECTION 6. DISPOSITION OF INCOME.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
SECTION 7. ACCOUNTING BY THE TRUSTEE.
(a) The Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions required to be
made on both an aggregate basis and on behalf of each participant (or his or her
beneficiaries), including such specific records as shall be agreed upon in
writing between the Company and the Trustee. Within 30 days following the close
of each calendar year and within 30 days after the removal or resignation of the
Trustee, the Trustee shall deliver to the Company a written account of its
administration of the Trust during such year or during the period from the close
of the last preceding year to the date of such removal or resignation, setting
forth all investments, receipts, disbursements and other transactions effected
by it on both an aggregate basis and on behalf of each participant (or his or
her beneficiaries), including a description of all securities and investments
purchased and sold with the cost or net proceeds of such purchases or sales
(accrued interest or dividends paid or receivable being shown separately), and
showing all cash, securities and other property held in the Trust at the end of
such year or as of the date of such removal or resignation, as the case may be.
(b) With respect to each participant (or his or her beneficiaries), the
Trustee shall keep accurate and detailed records of (i) all contributions made
by the Company with respect to such participant, including the amount of each
such contribution and the date received, (ii) all securities and investments
purchased and sold with such contributions, including the cost or net proceeds
and the date of such purchases or sales, (iii) all dividends or interest paid on
the
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securities or investments and the reinvestment of such dividends or interest,
and (iv) such other matters as shall be agreed upon in writing between the
Company and the Trustee.
SECTION 8. RESPONSIBILITY OF THE TRUSTEE.
(a) The Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that the
Trustee shall incur no liability to any person for any action taken pursuant to
a direction, request or approval given by the Company which is contemplated by,
and in conformity with, the terms of the Plan or this Trust and is given in
writing by the Company. In the event of a dispute between the Company and a
party, the Trustee may apply to a court of competent jurisdiction to resolve the
dispute.
(b) If the Trustee undertakes or defends any litigation arising in
connection with this Trust, the Company agrees to indemnify the Trustee against
the Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If the Company does not pay such costs, expenses and liabilities
in a reasonably timely manner, the Trustee may obtain payment from the Trust.
(c) The Trustee may consult with legal counsel (who may also be counsel
for the Company generally) with respect to any of its duties or obligations
hereunder.
(d) The Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein.
(f) Notwithstanding any powers granted to the Trustee pursuant to this
Trust Agreement or to applicable law, the Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Code.
SECTION 9. COMPENSATION AND EXPENSES OF THE TRUSTEE.
The Company shall pay all administrative fees and expenses. If not so
paid, the fees and expenses shall be paid from the Trust.
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<PAGE>
SECTION 10. RESIGNATION AND REMOVAL OF THE TRUSTEE.
(a) The Trustee may resign at any time by written notice to the Company,
which shall be effective 30 days after receipt of such notice, unless the
Company and the Trustee agree otherwise.
(b) The Trustee may be removed by the Company on 15 days' notice or upon
shorter notice accepted by the Trustee.
(c) Upon resignation or removal of the Trustee and appointment of a
successor Trustee, all Trust Assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed within 30 days after receipt
of notice of resignation, removal or transfer, unless the Company extends the
time limit.
(d) If the Trustee resigns or is removed, a successor shall be appointed,
in accordance with Section 11 hereof, by the effective date of resignation or
removal under paragraphs (a) or (b) of this section. If no such appointment has
been made, the Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of the Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
SECTION 11. APPOINTMENT OF SUCCESSOR.
(a) If the Trustee resigns or is removed in accordance with Section 10(a)
or (b) hereof, the Company may appoint any third party, such as a bank trust
department (other than the Company's trust department) or other party that may
be granted corporate trustee powers under state law, as a successor to replace
the Trustee upon resignation or removal. The appointment shall be effective
when accepted in writing by the new Trustee, who shall have all of the rights
and powers of the former Trustee, including ownership rights in the Trust
Assets. The former Trustee shall execute any instrument necessary or reasonably
requested by the Company or the successor Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust Assets, subject to
Sections 7 and 8 hereof. The successor Trustee shall not be responsible for,
and the Company shall indemnify and defend the successor Trustee from, any claim
or liability resulting from any action or inaction of any prior Trustee or from
any other past event, or any condition existing at the time it becomes successor
Trustee.
SECTION 12. AMENDMENT OR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument executed
by the Trustee and the Company. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Plan.
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<PAGE>
(b) The Trust shall not terminate until the date on which participants and
their beneficiaries are no longer entitled to benefits pursuant to the terms of
the Plan.
SECTION 13. MISCELLANEOUS.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to participants and their beneficiaries under this
Trust Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance
with the laws of the State of California.
SECTION 14. EFFECTIVE DATE.
The effective date of this Trust Agreement shall be _________ ___, 1998.
IN WITNESS WHEREOF, the Company and the Trustee have caused this Trust
Agreement to be signed, and their respective corporate seals to be hereto
affixed, the day and year first above written.
PBOC HOLDINGS, INC.
Attest:
____________________________ By:__________________________________
Chairman, Compensation Committee
Attest: PEOPLE'S BANK OF CALIFORNIA
____________________________ By:__________________________________
__________________________
Attest:
____________________________ By:__________________________________
Trustee
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<PAGE>
SHAREHOLDER RIGHTS AGREEMENT
The Shareholder Rights Agreement (the "Agreement"), dated as of April
20, 1998, is entered into by and among PBOC Holdings, Inc., a Delaware
corporation (formerly known as SoCal Holdings, Inc.) (the "Company"),
People's Bank of California, a federally chartered savings bank and a
wholly-owned subsidiary of the Company (formerly known as Southern California
Federal Savings and Loan Association) (the "Bank"), and the Trustees of the
Estate of Bernice Pauahi Bishop, a trust organized under the laws of Hawaii
(the "Bishop Estate"), BIL Securities (Offshore) Limited, a corporation
organized under the laws of New Zealand ("BIL Securities"), and Arbur, Inc.,
a Delaware corporation ("Arbur") (each, a Holder and collectively referred to
herein as the "Shareholders").
WHEREAS, in April 1987, the Company acquired the Bank and, in connection
therewith, 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 Federal Savings and Loan Insurance Corporation, as well as
$79.7 million of goodwill which was recorded by the Bank under generally
accepted accounting principles;
WHEREAS, in August 1989, Congress enacted the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 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);
WHEREAS, on January 28, 1993, the Company, the Bank and certain current
and former stockholders of the Company (collectively, the "Plaintiffs") sued
the United States of America in the United States Court of Federal Claims
(the lawsuit, which is entitled SOUTHERN CALIFORNIA FEDERAL SAVINGS AND LOAN
ASSOCIATION, ET AL. V. UNITED STATES, No. 93-52C, is hereinafter referred to
as the "Litigation") seeking damages for breach of contract and for
deprivation of property without just compensation and without due process of
law;
WHEREAS, as of the date set forth above, the Shareholders are the
holders of all of the outstanding shares of common stock, par value $0.01 per
share ("Common Stock"), of the Company;
WHEREAS, each of the parties hereto has determined that it would be in
its best interest to agree to the terms of the distribution of any recovery
that may be obtained in the Litigation as set forth below;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
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<PAGE>
1. DEFINITIONS.
(a) Litigation Recovery. The term "Litigation Recovery" means
any aggregate cash payment or any cash resulting from the liquidation of
Non-Cash Proceeds (as defined in Section 3(b) hereof) (the "Cash Payment"),
if any, actually received by the Company and/or the Bank pursuant to a final,
nonappealable judgment in, or final settlement of, the Litigation (including
any post-judgment interest actually received by the Company and/or the Bank
with respect to any Cash Payment) after deduction of (i) (x) the aggregate
fees and expenses incurred from this date forward by the Company and the Bank
in prosecuting the 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
(y) the aggregate liabilities, fees and expenses incurred from this date
forward by the Company and the Bank with respect to any claim specified in
Section 6 hereof and/or (z) the amount reimbursed to any Litigation Trustees
under Section 7(c) hereof; (ii) any income tax liability of the Company
and/or the Bank, computed on a pro forma basis, as a result of the Company's
and/or the Bank's receipt of the Cash Payment (net of any income tax benefit
to the Company and/or the Bank from making the Recovery Payment to the
Shareholders, and disregarding for purposes of this clause (ii) the effect of
any net operating loss carryforwards or other tax attributes held by the
Company 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 as of the
date of distribution of any Recovery Payment is determined to be owing to one
or more of the Plaintiffs (other than the Company 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) above) which
Doreen J. Blauschild is entitled to receive as a result of her employment
agreement with the Bank, dated as of April 11, 1995.
(b) Recovery Payment. The term "Recovery Payment" means 95% of
the aggregate amount of the Litigation Recovery to which the Shareholders are
entitled as a result of their ownership of Rights.
(c) Rights. The term "Rights" shall have the meaning set forth in
Section 2 hereof.
2. DISTRIBUTION OF RIGHTS.
Pursuant to this Agreement and subject to the terms and conditions
hereof, each Shareholder is entitled to one Contingent Goodwill Participation
Right (each a "Right" and collectively, the "Rights") for each share of
Common Stock held by such Shareholder as of the date hereof. Therefore, each
Shareholder will respectively be entitled to the following number of Rights
corresponding to its pro rata share of
2
<PAGE>
Common Stock held as of the date hereof: The Bishop Estate: 59,100 Rights
(60%), BIL Securities: 29,550 Rights (30%), Arbur, Inc.: 9,850 Rights (10%).
The parties hereto confirm and agree that, notwithstanding the
provisions of any judgment entered or settlement agreement entered into or
executed in connection with the Litigation, each Right entitles its owner to
receive 0.0009645% of the Litigation Recovery and the 98,500 Rights owned
collectively by the three Shareholders as of the date hereof account for and
represent in the aggregate 95% of the Litigation Recovery and 100% of the
Recovery Payment. It is not the intent of the parties to create a debt
obligation owed by the Company or the Bank to each Shareholder. Each
Shareholder does not have the right to receive any distribution or payment
from the Company and/or the Bank pursuant to this Agreement, nor does the
Company and/or the Bank have a duty to make any payment to each Shareholder
or distribution pursuant to this Agreement, except in each case to the extent
of the Recovery Payment, if any, and except as described herein.
3. THE REDEMPTION AND PAYMENT PROCEDURES.
(a) Payment Notice. Within 5 days of receipt by the Company
and/or the Bank of any Litigation Recovery, or the liquidation by the Company
and/or the Bank of any Non-Cash Proceeds (as required by Section 3(b) below)
received in connection with the Litigation Recovery, the Company shall
deliver to each Shareholder a written notice (the "Payment Notice") (i)
specifying that a Litigation Recovery has been paid, (ii) describing the
amount of cash proceeds received, (iii) describing the type and amount of any
Non-Cash Proceeds received, the amounts received by the Company and/or the
Bank upon liquidation of such Non-Cash Proceeds and the financial and other
documentation supporting such liquidation value (as required by Section 3(b)
below), and (iv) subject to Section 3(d) below, specifying the date and
method by which the Company will redeem the Rights by payment of the Recovery
Payment.
(b) Non-Cash Proceeds. To the extent the Company and/or the Bank
receives all or a portion of the Litigation Recovery in the form of non-cash
proceeds (which does not include nonmarketable assets or assets which are
unable to be sold or liquidated) (the "Non-Cash Proceeds"), the Company and
the Bank shall liquidate the Non-Cash Proceeds. The Company shall provide to
each Shareholder financial and other documentation reasonably sufficient to
support the liquidation value of such Non-Cash Proceeds. With respect to
Non-Cash Proceeds in the form of marketable securities, such documentation
shall include at least two quoted market prices or dealer quotes. With
respect to Non-Cash Proceeds in a form other than marketable securities, such
documentation shall include a valuation from an investment banking or
independent accounting firm, provided that in no event shall the Bank be
required to distribute to the Company or the Company be required to
distribute any amounts to the Shareholders in connection with any liquidation
of Non-Cash Proceeds which exceed the amounts received by the Company and/or
the Bank upon liquidation of such
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<PAGE>
Non-Cash Proceeds.
(c) Bank Distribution. Subject to Section 4 below, to the extent
all or any portion of the Litigation Recovery is received by the Bank, the
Bank shall distribute such Litigation Recovery to the Company (the "Bank
Distribution"). To the extent any Litigation Recovery is paid to the Bank in
installments, the distribution to the Company shall be made in similar
installments. Any Cash Proceeds received in connection with the Litigation
Recovery shall be so distributed within 5 days of their receipt,
independently of the need for liquidation by the Bank of any Non-Cash
Proceeds. Any Non-Cash Proceeds received by the Bank will be liquidated in
accordance with section 3(b) hereof. The liquidation value of any such
Non-Cash Proceeds received in connection with the Litigation Recovery shall
be distributed within 5 days of their liquidation, independently of the
distribution of any Cash Proceeds.
(d) Redemption of Rights. Subject to Section 4 hereof, as
promptly as practicable but in no event later than 5 days following the date
of the Payment Notice, the Company shall redeem all of the outstanding Rights
of each Shareholder by payment of the Recovery Payment to the Shareholders.
To the extent the Litigation Recovery is paid to the Company and/or the Bank
in installments, the redemption of the Rights and the distribution of the
Recovery Payment shall be paid in similar installments. However, the parties
confirm and agree that the Company shall not redeem any portion of the Rights
less than one-year from the date of an "ownership change" of the Company
and/or the Bank within the meaning of Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code"), unless the Company obtains an opinion
from an independent accounting firm which states that the redemption should
not materially affect the Company's and/or the Bank's limitation under
Section 382 of the Code with respect to such ownership change.
(e) Interest. The parties hereto agree that the Shareholders will
be entitled to any actual interest earned by the Company and/or the Bank
attributable to its investment of the Recovery Payment for the period of time
between the date on which the Company and/or the Bank receives any Litigation
Recovery in connection with the Litigation and the date on which the Company
either redeems the Rights pursuant to section 3(d) hereinabove or issues
Recovery Payment Preferred pursuant to Section 4.
4. CERTAIN RIGHTS OF SHAREHOLDERS.
(a) The parties to this Agreement intend that the Bank be
obligated to distribute the Bank Distribution and that the Company be
obligated to redeem the Rights and distribute the Recovery Payment pursuant
to the terms hereof. Nevertheless, applicable laws, rules, regulations,
directives or the terms of any judgment or settlement may limit or prevent
the Bank from distributing the Bank Distribution and/or the Company from
redeeming the Rights and distributing all or a portion of the Recovery
Payment. In any such event, the Bank shall distribute such
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<PAGE>
portion of the Bank Distribution and the Company shall redeem those Rights
(on a pro rata basis) and distribute such portion of the Recovery Payment (on
a pro rata basis), in each case to the extent not otherwise restricted under
applicable laws, rules, regulations, directives or the terms of any judgment
or settlement. The Bank has a continuing obligation pursuant hereto to
distribute the balance of any Bank Distribution which it has been precluded
from paying as soon as permissible under applicable laws, rules, regulations
or directives or the terms of any judgment or settlement and the Company has
a continuing obligation pursuant hereto 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 under applicable laws, rules,
regulations or directives or the terms of any judgment or settlement. In no
event, however, will the Company's redemption of the Rights result in an
aggregate distribution of an amount greater than the Recovery Payment.
(b) If the Bank is limited or prevented from distributing the Bank
Distribution and/or the Company is limited or prevented from redeeming all or
a portion of the Rights and distributing all or a portion of the Recovery
Payment, neither the Company nor the Bank will be deemed in default of this
Agreement or to have violated its obligations hereunder, provided the Company
shall have delivered to the Shareholders a certificate from the Chief
Financial Officer of the Company and the Bank specifying that portion of the
Rights that cannot be redeemed and that portion of the Recovery Payment that
cannot be paid and the applicable law, rule, regulation, directive, judgment,
settlement or action of a regulatory authority that is the source of the
restrictions described above, and either (i) an opinion of outside counsel
substantially to the effect that redemption of the Rights and the
distribution of the Recovery Payment, or the applicable portion thereof, as
the case may be, would result in the violation of the applicable law, rule,
regulation, directive, judgment, settlement, or action of a regulatory
authority that is the source of the restrictions described above or (ii) a
copy of written documentation from the applicable regulatory authority to the
effect that the Bank may not distribute the Bank Distribution, or any portion
thereof, and/or the Company may not redeem the Rights and distribute the
Recovery Payment, or any portion thereof.
(c) (1) To the extent the Company is prohibited from
distributing the Recovery Payment, or any portion thereof, or cannot do so
because the Bank is prohibited from making the Bank Distribution to the
Company, the Company shall, upon the written request of any Shareholder,
issue to such Shareholder preferred stock of the Company with an aggregate
liquidation preference equal in value to the Recovery Payment or portion
thereof which the Company shall have been prohibited from distributing or
unable to distribute (the "Recovery Payment Preferred"). The terms of the
Recovery Payment Preferred, as provided in this Section 4(c)(1) shall be set
forth in Certificate of Designations and Preferences filed as a supplement to
the Company's Amended and Restated Certificate of Incorporation. The Company
shall issue the Recovery Payment Preferred upon surrender to the Company of
such Shareholder's
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<PAGE>
Rights.
(2) The stated value of each share of Recovery Payment
Preferred shall be $1,000.
(3) (A) 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 the Company 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 %.
(B) Each quarterly dividend shall be fully cumulative
and dividends shall accrue, whether or not earned, declared or the Company
shall have funds or assets available for the payment of dividends, from the
first day of the quarter in which such dividends may be payable, except that
with respect to the first quarterly dividend, such dividend shall accrue from
the date of issue of the Recovery Payment Preferred.
(C) So long as any Recovery Payment Preferred remains
outstanding: (i) no dividend shall be declared or paid upon or set apart for
payment, and no distribution shall be ordered or made in respect of the
Company's Common Stock, or (ii) any other class of stock or series thereof;
and (b) no shares of Common Stock and no shares of any other class of stock
or series thereof; and (c) no moneys, funds or other assets shall be paid to
or made available for a sinking fund for the redemption or purchase of any
shares of: (i) Common Stock; or (ii) any other class of stock or series
thereof; unless, in each instance, full dividends on all outstanding shares
of Recovery Payment Preferred: (i) for all past dividend periods shall have
been paid; and (ii) for the then current calendar quarter shall have been
paid or declared and set aside for payment.
(4) In the event of any dissolution, liquidation or winding up of
the affairs of the Company, after payment or provision for payment of the
debts and other liabilities of the Company, the holders of the Recovery
Payment Preferred shall be entitled to receive, out of the net assets of the
Company available for distribution to its stockholders and before any
distribution shall be made to the holders of Common Stock or to the holders
of any other class of stock or series thereof 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 to but excluding the date fixed for
distribution, and no more. If upon such voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company, the net
assets of the Company shall be insufficient to permit payment in full of the
amounts required to be paid to the holders of the Recovery Payment Preferred,
then a pro rata portion of the full amount required to be paid upon such
dissolution, liquidation or winding up shall be paid to the holders of
Recovery
6
<PAGE>
Payment Preferred,.
(5) The Company shall have the right, at its option and by
resolution of its Board of Directors, to redeem at any time and from time to
time the Recovery Payment Preferred Stock, in whole or in part, upon payment
in cash in 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 but excluding the date fixed for redemption.
If less than all of the outstanding shares of Recovery Payment Preferred
shall be redeemed, the particular shares to be redeemed shall be allocated by
the Company among the respective holders of Recovery Payment Preferred, pro
rata.
(6) The holders of the Recovery Payment Preferred shall have no
voting power except as set forth in this Section 4(C)(6). If at any time the
equivalent of six or more full quarterly dividends (whether or not
consecutive) payable on any shares of Recovery Payment Preferred shall be in
default, the number of directors constituting the Board of Directors of the
Company shall be increased by two, and the holders of all Recovery Payment
Preferred shall have the exclusive right, voting together as one class, to
elect two directors to fill such newly-created directorships. This right
shall remain vested until all dividends in default on all outstanding
Recovery Payment Preferred have been paid, or declared and set apart for
payment, at which time: (i) the right shall terminate (subject to revesting
in the case of any subsequent default of the kind described above); (ii) the
term of the directors then in office elected by the holders of the
outstanding Recovery Payment Preferred as a class shall terminate; and (iii)
the number of directors constituting the Board of Directors of the Company
shall be reduced by two.
(7) No sinking fund or funds shall be established for the
retirement or redemption of the Recovery Payment Preferred.
(8) Shares of the Recovery Payment Preferred shall not be
convertible into Common Stock or any other class of capital stock of the
Company.
(9) For purposes hereof, any class or classes of stock of the
Company, including Common Stock and other preferred stock, whether now
existing or hereafter created shall be junior to the Recovery Payment
Preferred, as to dividends or as to the distribution of assets upon
redemption, liquidation, dissolution or winding up.
5. FEES AND EXPENSES. The parties hereto agree that, from the date of
this Agreement, the Company shall promptly pay directly all legal,
accounting, consulting and all other fees and expenses incurred by the
Company and the Bank and approved by the Litigation Committee (as defined in
Section 9(a) hereof) in connection with the Litigation or any litigation
against the Bank and/or the Company with respect to any
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<PAGE>
claim specified in Section 6 hereof ("Ancillary Litigation"). In accordance
with Section 1 hereof, such fees and expenses shall be deducted from the
Recovery Payment distributed to the Shareholders.
6. INDEMNIFICATION FOR CERTAIN CLAIMS. The Shareholders shall
indemnify the Bank and/or the Company for 95% of liability incurred for
claims specified in clause (1) below and 100% of the liability incurred for
claims specified in clause (2) below (including in both instances for any
amounts paid in any judgment or settlement of such claims or any portion of
the Litigation Recovery which is determined to be owing to parties other than
a Shareholder, the Company, and the Bank):
(1) Any claim by a party now pending or hereafter brought, seeking
in whole or in part any amounts paid or to be paid as the Litigation
Recovery; and
(2) Any claim by a party, other than the Company or the Bank,
challenging the validity or binding effect of this Agreement.
In no event shall the Shareholders be liable, with respect to any and all
claims or indemnities provided for in this Section 6, for an amount in excess
of the actual monies recovered or awarded in the Litigation and paid over to
that Shareholder as part of the Recovery Payment. To the extent any
liability, fees and expenses incurred for a matter covered by this Section 6,
are incurred subsequent to the distribution of the Recovery Payment to the
Shareholders, each Shareholder will bear responsibility and shall reimburse
the Company and/or the Bank for a share of such indemnification in the same
proportion as its pro rata share of the Rights outstanding. The obligations
and duties set forth in this Section 6 shall survive and continue as
obligations of the Shareholders irrespective of whether the Shareholders
assign any or all of the Rights pursuant to Section 7 hereof.
7. SUCCESSORS AND ASSIGNS.
(a) The Company's and the Bank's claims against the Government
that are the basis for the Litigation are, and shall remain, an asset of the
Company and the Bank. In the event of any acquisition, merger or
consolidation of the Company or the Bank in which the Company and/or the Bank
will not be the surviving entity, the Company and the Bank shall require its
respective successors to assume, and such respective successors shall assume,
the rights and obligations of the Company and the Bank under this Agreement.
(b) The Rights of any Shareholder are assignable, in whole or in
part, without charge to each Shareholder hereof upon surrender of this
Agreement with a properly executed assignment at the principal office of the
Company, provided that any such assignee shall execute this Agreement with
respect to the number of Rights assigned and agree to the terms and
conditions hereof. Upon any partial assignment,
8
<PAGE>
the Company and the Bank will at their expense issue and deliver to the
Shareholder a new Agreement of like tenor, in the name of the Shareholder,
which shall entitle such Shareholder to such number of Rights which were not
so assigned. Notwithstanding the foregoing, the Rights may not be sold,
transferred or otherwise disposed of, except in accordance with and subject
to the provisions of the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
(c) (1) To the extent that the Company enters into a definitive
agreement providing for the acquisition, merger, or consolidation of the
Company or the Bank, in which the Company or the Bank is not the surviving
entity (the "Acquisition Agreement"), such Acquisition Agreement shall be
required to specifically incorporate and provide for the terms set forth in
this Section 7(c).
(2) Effective upon consummation of the transaction
contemplated by the Acquisition Agreement, the Company (or any successor
thereto) shall create a Litigation Trust (the "Litigation Trust"). The
Litigation Trust shall be a statutory business trust created under Delaware
law pursuant to a Declaration of Trust and the filing of a Certificate of
Trust with the Delaware Secretary of State. The Litigation Trust shall have
five Trustees designated by the Shareholders as follows: The Bishop Estate
shall designate three Trustees; BIL Securities alone shall designate one
Trustee; and BIL Securities together with Arbur shall jointly designate one
Trustee. In the event a Trustee dies, resigns or is otherwise unable or
unwilling to perform his or her duties, such Trustee's replacement shall be
designated by the party or parties that designated the Trustee being replaced.
(3) Effective upon consummation of the transaction
contemplated by the Acquisition Agreement, the Company (or any successor
thereto) shall be contractually obligated to assume all duties and
obligations of the Company and the Bank with respect to the Litigation
Recovery and the redemption of the Rights under this Agreement.
(4) Effective upon consummation of the transaction
contemplated by the Acquisition Agreement, the Litigation Trustees shall
assume authority, identical to and succeeding to that of the Litigation
Committee, to make all decisions on behalf of the Company (and its
successors) with respect to the prosecution of the Litigation and in any
Ancillary Litigation, including the selection and supervision of existing and
any new counsel or other persons retained to assist in the prosecution of the
Litigation or in any Ancillary Litigation, and deciding whether or not to
accept any settlement offer. Without prejudice to any rights of the
Shareholders, the Litigation Trustees shall have the authority to bring suit
on behalf of the Shareholders to enforce any provision of this Agreement for
the benefit of the Shareholders, including specifically the redemption of the
Rights under Section 3 hereof. The Litigation Trustees may seek
reimbursement by the Bank and/or the Company for any expenses, costs or fees
reasonably incurred for their own administration and for management of the
Litigation and any Ancillary
9
<PAGE>
Litigation, to include the retention of professionals, consultants, or other
persons to assist in the management of the Litigation Trust or in the
prosecution of the Litigation or in any Ancillary Litigation. Any such
reimbursement by the Bank and/or the Company shall be deducted from the
Litigation Recovery in accordance with Section 1(a)(i) hereof.
(d) Nothing in this Agreement is intended to create any rights in
the Shareholders against the United States, except as such parties may have
had prior to the date of this Agreement or may have by operation of law.
8. COOPERATION AND RIGHTS OF SHAREHOLDERS. The parties hereto agree
that the Shareholders are and shall remain the principal beneficiaries of the
Litigation so long as they retain their Rights under this Agreement, and that
the Shareholders do and shall retain a significant beneficial interest in the
direction and outcome of the Litigation. The parties also agree that they
shall cooperate in good faith with respect to the prosecution of the
Litigation so as to maximize the Litigation Recovery. The Rights (i) are
junior to all debt obligations (whether for borrowed money or otherwise) of
the Company and the Bank existing at the time of the redemption described in
Section 3(d) except as to an obligation that is expressly made junior to the
Rights, (ii) do not have a right to vote, and (iii) are a senior claim in
relation to the right of the holders of any stock of the Company, including
common stock and other preferred stock, whether now existing or hereafter
created, as to dividends or as to the distribution of assets upon redemption,
liquidation, dissolution, or winding up with respect to a Recovery Payment
attributable to any Litigation Recovery (although the Shareholders will
continue to have such other rights on liquidation attributable to their
status as holders of Common Stock).
9. MANAGEMENT OF THE LITIGATION
(a) The Company shall prosecute the Litigation vigorously following the
distribution of Rights with a view to resolution of the Litigation as
promptly as practicable. In furtherance of this prosecution of the
Litigation, the Board of Directors of the Company shall designate a special
litigation committee of the Board of Directors (the "Litigation Committee")
comprised of three directors which shall include the Chief Executive Officer
of the Company, one Director designated by the Bishop Estate, and one
Director who shall be designated jointly by BIL Securities and Arbur. The
Litigation Committee shall have the exclusive right to oversee and to direct
the prosecution of the Litigation (and any Ancillary Litigation) and to
consider and decide upon settlement of the Litigation (and any Ancillary
Litigation) as hereinafter provided. The Litigation Committee shall be
authorized to make final decisions relating to any dismissal, settlement, or
termination of the Litigation (and any Ancillary Litigation) and to decline
to pursue any appeal or to settle the Litigation (and any Ancillary
Litigation) prior to any Recovery Payment. In the event that any or all of
the Shareholders should lose their representation upon the Board of Directors
before the conclusion of the Litigation (or any Ancillary Litigation) and the
distribution of the Recovery Payment, the relevant
10
<PAGE>
Shareholder(s) shall retain the right to designate member(s) of the
Litigation Committee, which designees may include persons not members of the
Board of Directors of the Company. If any such designee should not be
simultaneously a member of the Board of Directors, the Litigation Committee
shall thereupon become an advisory committee of the Company. The Litigation
Committee's authority shall thenceforward consist of making recommendations
to the Board of Directors relating to the prosecution of, and any dismissal,
settlement, or termination of the Litigation (and any Ancillary Litigation),
in whole or in part. The Litigation Committee shall present such
recommendations in writing to the Board of Directors of the Company and the
Board of Directors shall not dismiss, settle or terminate the Litigation (and
any Ancillary Litigation), in whole or in part, without first receiving the
favorable recommendation to that effect from the Litigation Committee. The
adoption of any such recommendation to settle or otherwise terminate the
Litigation and any Ancillary Litigation by the Board of Directors shall
require an affirmative vote of 6 of the 7 members of the Board of Directors
of the Company. The Company, as the sole shareholder of the Bank, shall
cause the Bank to take no action which is inconsistent with any action taken
at the direction of the Litigation Committee.
(b) The Litigation Committee, regardless of its composition, shall
select counsel of its choice to represent the Company and the Bank in the
prosecution of the Litigation (or any Ancillary Litigation) and shall have
the right to replace counsel at any time. The Litigation Committee's
authority to hire or replace counsel shall include the authority to enter
into compensation agreements with counsel.
(c) Counsel designated by the Litigation Committee to prosecute the
Litigation (or any Ancillary Litigation) and other persons retained to assist
in the prosecution of the Litigation (or any Ancillary Litigation) shall be
authorized to accept direction and control from the Litigation Committee on
all matters concerning the Litigation (or any Ancillary Litigation).
(d) In the event a member of the Litigation Committee dies, resigns, or
is otherwise unable or unwilling to perform his or her duties, such member's
replacement shall be designated by the party or parties that designated the
member being replaced. The Company or the Bank shall have the right to
remove any member from the Litigation Committee in the event such removal is
required by any federal or state regulator having jurisdiction over the
Company or the Bank or any of their subsidiaries. If any individual is so
removed, his or her replacement shall be designated by the party or parties
that designated the member being replaced. Any designation of a member under
this subparagraph shall be effective upon written notice from the designating
party or parties to the other parties to this Agreement.
10. WAIVER; AMENDMENT. Any provision of this Agreement may be (i)
waived by the party or parties benefited by the provision or (ii) amended or
modified at any time, by an agreement in writing between the parties hereto,
executed in the same
11
<PAGE>
manner as this Agreement.
11. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement,
and the Agreement shall become effective when one or more counterparts have
been signed by each of the parties and delivered to the other parties.
12. ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the Shareholders and the Company and the Bank with respect to the
subject matter hereof, supersedes all previous agreements, negotiations,
discussions, writings, understandings, commitments and conversations with
respect to such subject matter, and there are no agreements or understandings
other than those set forth or referred to herein. Notwithstanding this
section, BIL Securities and Arbur may enter into agreements between
themselves concerning their shared representation on the Board of Directors
of the Company, the Litigation Committee, or the Litigation Trust.
13. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of California, irrespective of the
choice of laws principles of the State of California, as to all matters,
including matters of validity, construction, assignment, enforceability,
performance and remedies.
14. DISPUTES. In any dispute between the Bank or the Company, on the
one hand, and one or more of the Shareholders, on the other hand, arising
under this Agreement, the prevailing party or parties shall be entitled to
reimbursement of its reasonable attorneys fees, costs, and expenses incurred
in the prosecution and resolution of the dispute.
15. SEVERABILITY. Any covenant, provision, agreement or term of this
Agreement that is prohibited or held to be void or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective as to the extent
of such prohibition or unenforceability without invalidating the remaining
portions hereof.
16. COMMUNICATIONS. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing by
hand-delivery, registered first-class mail, telex, telecopier, or air courier
guaranteeing overnight delivery:
(a) If to the Company or the Bank, initially at 5900 Wilshire
Boulevard, Los Angeles, California 90036, Attention: President, Telephone
(213) 938-6300; Telecopier: (213) 965-6218, and thereafter at such other
address, notice of which is given in accordance with this Section 16; and
(b) If to the Holder, initially at the following addresses and
thereafter at such other address, notice of which is given in accordance with
this Section 16:
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<PAGE>
Trustees of the Estate of Bernice Pauahi Bishop
567 South King Street
Suite 200
Honolulu, Hawaii 96813
Attention: Aaron Au
Telephone: (808) 523-6319
Telecopier: (808) 524-7013
BIL Securities (Offshore) Limited
Suite 4150
355 South Grand Avenue
Los Angeles, CA 90071
Attention: Michael S. Dreyer
Telephone: (213) 683-8790
Telecopier: (213) 617-1806
Arbur, Inc.
c/o William E. Simon & Sons, Inc.
310 South Street
Morristown, NJ 07960-1913
Attention: Mark Butler
Telephone: (973) 898-0290
Telecopier: (973) 993-0925
All such notices and communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; five
business days after being sent by certified mail, return receipt requested,
if mailed; when answered back, if telexed; when receipt acknowledged, if
telecopied; and on the second following business day if timely delivered to
an air courier guaranteeing overnight delivery.
17. NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement expressed
or implied is intended to confer upon any person, other than the parties
hereto or their respective successors, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
18. EFFECTIVE DATE. This Agreement shall be effective upon
commencement of the Company's public offering, as contemplated by the
Registration Statement filed with the Securities and Exchange Commission on
March 20, 1998.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first shown above.
PBOC HOLDINGS, INC.
By:
------------------------------------
Name:
Title:
PEOPLE'S BANK OF CALIFORNIA
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
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<PAGE>
TRUSTEES OF THE ESTATE OF
BERNICE PAUAHI BISHOP
By:
------------------------------------
Name:
Title: Trustee
By:
------------------------------------
Name:
Title: Trustee
By:
------------------------------------
Name:
Title: Trustee
BIL SECURITIES (OFFSHORE) LIMITED
By:
------------------------------------
Name:
Title:
ARBUR, INC.
By:
------------------------------------
Name:
Title:
15
<PAGE>
STOCKHOLDERS' AGREEMENT
Stockholders' Agreement (this "Agreement"), dated as of this 20th day of
April 1998, by and among PBOC Holdings, Inc., a Delaware corporation (formerly
known as SoCal Holdings, Inc.) (the "Company"), and the Trustees of the Estate
of Bernice Pauahi Bishop, a trust organized under the laws of Hawaii ("Bishop"),
BIL Securities (Offshore) Limited, a corporation organized under the laws of New
Zealand ("BIL Securities"), and Arbur, Inc., a Delaware corporation ("Arbur")
(collectively the "Stockholders"), who are the holders of all of the outstanding
shares of common stock, par value $0.01 per share ("Common Stock") and all of
the outstanding shares of series preferred stock, par value $0.01 per share
("Preferred Stock") of the Company.
WHEREAS, the Company and the Stockholders (which included BIL (Far East
Holdings) Limited which transferred its interest in the Company to BIL
Securities as of August 2, 1995) entered into an Agreement and Plan of
Reorganization dated as of June 1, 1995 ("Plan of Reorganization"), which
provided for the recapitalization of the Company and its wholly-owned
subsidiary, People's Bank of California (formerly known as Southern California
Federal Savings and Loan Association) (the "Bank");
WHEREAS, Article II of the Plan of Reorganization provided, among other
things, that the Company would issue and sell to: (x) Bishop: $10.0 million
aggregate principal amount of its senior notes ("Senior Notes"), 85,000 shares
of its Preferred Stock, Series C ("Series C Preferred Stock"), 14,000 shares of
its Preferred Stock, Series D ("Series D Preferred Stock"), 226,000 shares of
its Preferred Stock, Series E ("Series E Preferred Stock"); (y) BIL Securities:
14,000 shares of Series D Preferred Stock and 106,000 shares of Series E
Preferred Stock; and (z) Arbur: 40,000 shares of Series D Preferred Stock
(collectively, the outstanding Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock is referred to as the "Outstanding Preferred
Stock"), and the Stockholders agreed to purchase such securities from the
Company;
WHEREAS, the Company provided the Stockholders in the Plan of
Reorganization with, among other things, (i) a right of first refusal with
respect to the sale by the Company or the Bank of any shares of Capital
Securities (as defined in the Plan of Reorganization) of either of the Company
or the Bank, under the circumstances defined therein; and (ii) certain
continuing covenants as set forth in Article V of the Plan of Reorganization.
WHEREAS, the Company and the Stockholders entered into a Stockholders'
Agreement dated as of June 1, 1995 (the "1995 Stockholders' Agreement"), which
provides, among other things, for restrictions on the ability of the
Stockholders to transfer shares of SCH Common Stock and registration rights
under various circumstances with respect to the Company's SCH Capital Stock, as
each term is defined in the 1995 Stockholders' Agreement;
WHEREAS, the Company has filed a Registration Statement on Form S-1 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission")
<PAGE>
with respect to a proposed public offering of its Common Stock (the "Public
Offering") and, in connection therewith, but subject to consummation of the
Public Offering, the Stockholders desire to (i) take certain actions to amend
and restate the Amended and Restated Certificate of Incorporation and to
adopt new Bylaws of the Company, (ii) simplify the Company's capital
structure, including an exchange of Outstanding Preferred Stock for shares of
Common Stock in accordance with the terms hereof and prepayment of the
Company's Senior Notes, (iii) terminate the remaining operative provisions of
the Plan of Reorganization and the 1995 Stockholders' Agreement and (iv)
agree to continuing Board representation by the Stockholders subject to
certain conditions; and
WHEREAS, the Stockholders understand that in order to normalize the number
of shares of Common Stock and price per share of Common Stock that is
outstanding prior to the Public Offering, the Company has authorized a 32:1
stock split (the "Stock Split"), to be effected in the form of a stock dividend
of additional shares of Common Stock, which dividend is intended to be paid
subsequent to the exchange of Outstanding Preferred Stock for Common Stock and
immediately prior to the declaration of effectiveness by the Commission of the
Company's Registration Statement with respect to the Public Offering.
NOW, THEREFORE, in consideration of the mutual promises and agreements of
the parties hereto and other good and valuable consideration, the parties hereby
agree as follows:
1. EFFECTIVE TIME OF AGREEMENT.
Each of the transactions contemplated by this Agreement shall be taken
immediately prior to the declaration of effectiveness by the Commission of
the Company's Registration Statement with respect to the Public Offering
2. AGREEMENT WITH RESPECT TO AMENDMENT AND RESTATEMENT OF CERTIFICATE OF
INCORPORATION AND ADOPTION OF NEW BYLAWS.
(a) The Stockholders hereby authorize the Board of Directors to adopt
the Amended and Restated Certificate of Incorporation of the Company in the
form attached hereto as Exhibit A (the "Amended Certificate") and authorize
the Board of Directors to cause such Amended Certificate to be filed with
the Delaware Secretary of State immediately prior to consummation of the
Public Offering. The Stockholders hereby approve and affirm the adoption
and filing with the Delaware Secretary of State of the Amended Certificate.
(b) The Stockholders hereby authorize the Board of Directors to adopt
new Bylaws in the form attached hereto as Exhibit B, which Bylaws shall be
effective upon consummation of the Public Offering.
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<PAGE>
3. EXCHANGE OF OUTSTANDING PREFERRED STOCK.
(a) The Stockholders acknowledge that the terms of the Certificate of
Designation and Preferences with respect to each series of Outstanding
Preferred Stock provides that the Company has the right to redeem the
Outstanding Preferred Stock at any time, upon providing specified notice to
each of the Stockholders as to the date and place of redemption. The
Stockholders hereby agree with the Company that in lieu of said redemption
of the Outstanding Preferred Stock, each share of Outstanding Preferred
Stock shall be exchanged for 0.5495 shares of Common Stock, which exchange
shall take place prior to the Stock Split and the commencement of the
Public Offering. Thus, Bishop, BIL Securities and Arbur shall receive
178,571, 65,934 and 21,978 shares of Common Stock in such exchange,
respectively. Notwithstanding the foregoing, the Pricing Committee of the
Company's Board of Directors which has been established in connection with
the Public Offering may, in their discretion, determine not to exchange the
full amount of BIL Securities' Outstanding Preferred Stock prior to
commencement of the Public Offering. To the extent that not all of BIL
Securities' Outstanding Preferred Stock is so exchanged, the Stockholders
hereby authorize the Pricing Committee to exchange such Outstanding
Preferred Stock of BIL Securities for Common Stock of the Company
immediately following the commencement of the Public Offering under terms
which would provide BIL Securities with shares of Common Stock of
equivalent value to that which was exchanged for the Stockholders pursuant
to this Section 3 prior to commencement of the Public Offering.
(b) The Stockholders acknowledge that the accumulated and unpaid
dividends on the Outstanding Preferred Stock, at the stated dividend rate
with respect to each of the Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock, shall be paid by the Company to the
Stockholders following the closing of the Public Offering by wire transfer
of funds to the account designated in writing by each Stockholder to the
Secretary of the Company. The Stockholders acknowledge that the
Outstanding Preferred Stock shall be cancelled by the Company upon
consummation of such exchange and the Public Offering.
4. PREPAYMENT OF SENIOR NOTES.
Bishop agrees that effective upon consummation of the Public Offering
and pursuant to Section 7 of the Senior Notes, the Company shall prepay all
$10.0 million aggregate principal amount of the Senior Notes. Bishop
acknowledges that immediately following the Public Offering, the Company
shall pay Bishop the aggregate principal amount of such Senior Notes, plus
accrued interest thereon to the date of prepayment (but not including the
date of prepayment), by wire transfer of funds to the account designated in
writing by Bishop to the Secretary of the Company. Bishop acknowledges
that the Senior Notes shall be marked "paid in full" by the Company
following such prepayment hereunder.
3
<PAGE>
5. TERMINATION OF PLAN OF REORGANIZATION AND 1995 STOCKHOLDERS'
AGREEMENT.
The Stockholders agree that the remaining operative provisions of the
Plan of Reorganization and the 1995 Stockholders' Agreement in its entirety
are terminated effective with the consummation of the Public Offering.
6. CONTINUING BOARD REPRESENTATION BY STOCKHOLDERS.
(a) The Company agrees that for so long as each Stockholder continues
to be a Material Stockholder (as defined in Section 6(b) hereof), if
requested by such Stockholder, it shall (i) exercise all authority under
applicable law to cause the number of nominees permitted to be designated
by such Stockholder (as provided in Section 6(b) hereof) and consented to
by the Board of Directors of the Company (such consent not to be
unreasonably withheld) (a "Company 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 the
Company after the date of this Agreement at which the term of the Company
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 Company Designated
Director.
(b) For purposes of this Section 6, Bishop shall be considered a
Material Stockholder and entitled to nominate two (2) directors for
election to the Company's Board of Directors for so long as Bishop
beneficially owns 9.9% or more of the Company's outstanding Common Stock
following the consummation of the Public Offering. Bishop shall be
considered a Material Stockholder entitled to nominate one (1) director for
election to the Company's Board of Directors for so long as Bishop
beneficially owns less than 9.9% but 5.0% or more of the Company's
outstanding Common Stock following the consummation of the Public Offering.
BIL Securities and Arbur collectively shall be considered a Material
Stockholder entitled to nominate one (1) director for election to the
Company's Board of Directors for so long as BIL Securities and Arbur
collectively beneficially own 5.0% or more of the Company's outstanding
Common Stock following the consummation of the Public Offering. Bishop
shall not be considered a Material Stockholder if Bishop's beneficial
ownership of the Company's outstanding Common Stock following consummation
of the Public Offering is less than 5.0% and BIL Securities and Arbur
collectively shall not be considered Material Stockholders if BIL
Securities' and Arbur's collective beneficial ownership of the Company's
outstanding Common Stock following consummation of the Public Offering is
less than 5.0% For purposes of this Agreement, "beneficial ownership"
shall have the meaning set forth in Section 13(d) of the Securities
Exchange Act of 1934, as amended.
(c) Notwithstanding any other provision of this Section 6, the
Company shall not be required to take any action required by this Section 6
if such action would
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cause the Company to be in violation of any law, regulation, order or other
written requirement of the Office of Thrift Supervision, the Federal
Deposit Insurance Corporation, or any successor thereto, provided that the
Company agrees to promptly use its reasonable best efforts to remove any
regulatory impediment to the exercise of the Stockholder's rights under
this Agreement.
(d) The Company agrees that in the event that a Stockholder's Company
Designated Director elected to the Board of Directors of the Company shall
cease to serve as a director for any reason while such Stockholder remains
a Material Stockholder, the vacancy resulting therefrom (including a
vacancy on any committee of the Board of Directors) will be filled promptly
by the Board of Directors with a substitute Company Designated Director
designated by such Stockholder if requested to do so by such Stockholder.
(e) Unless otherwise approved by the requisite vote of all
stockholders required by the Company's Amended and Restated Certificate of
Incorporation to amend the Bylaws, for so long as the provisions of this
Section 6 shall be applicable, the Bylaws of the Company shall provide for
and the Board of Directors shall be comprised of seven (7) directors.
(f) Notwithstanding any other provisions of this Agreement and
subject to any applicable regulatory restrictions, the Stockholders shall
at all times have and retain a right of attendance at Board of Directors
meetings, irrespective of their continued status as Material Stockholders,
until such time as the Litigation shall have been settled or otherwise
terminated (and any Litigation Recovery therefrom distributed) in
accordance with the Shareholder Rights Agreement executed contemporaneously
with this Agreement, or until the Stockholders shall have transferred all
of their Rights under such Shareholder Rights Agreement. For purposes of
this Section 6(f), the terms "Litigation," "Litigation Recovery," and
"Rights" shall have the meaning set forth in such Shareholder Rights
Agreement.
7. REPRESENTATIONS AND WARRANTIES.
Each of the parties hereto represents and warrants to the other
parties that (i) such party has full power and authority to enter into this
Agreement and to perform its obligations hereunder, (ii) such party has
taken all actions required to authorize the execution of this Agreement and
the performance of its obligations hereunder, (iii) this Agreement is a
valid and binding obligation upon and enforceable in accordance with its
terms against such party, and (iv) such party will not take any action
inconsistent with the purposes and provisions of this Agreement.
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8. EXECUTION IN COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties hereto on separate counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an
original and all of which counterparts, taken together, shall constitute
but one and the same Agreement.
9. GOVERNING LAW.
This Agreement shall be deemed to be a contract made under the laws of
the State of California and for all purposes shall be construed in
accordance with the laws of said State, without regard to principles of
conflict of laws.
10. ENTIRE AGREEMENT.
This Agreement constitutes the entire contract between the parties
relative to the subject matter hereof and all other previous agreements
among the parties relative to the subject matter hereof are superseded by
this Agreement.
11. SURVIVAL.
The provisions of Section 6 shall survive the consummation of the
Public Offering and shall continue in full force and effect thereafter, but
only so long as any of the Stockholders are Material Stockholders.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first shown above.
PBOC HOLDINGS, INC.
By:
------------------------------------
Name:
Title:
STOCKHOLDERS:
TRUSTEES OF THE ESTATE OF
BERNICE PAUAHI BISHOP
By:
------------------------------------
Name:
Title: Trustee
By:
------------------------------------
Name:
Title: Trustee
By:
------------------------------------
Name:
Title: Trustee
BIL SECURITIES (OFFSHORE) LIMITED
By:
------------------------------------
Name:
Title:
ARBUR, INC.
By:
------------------------------------
Name:
Title:
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