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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1999
Commission File No.: 0-24215
PBOC Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 33-0220233
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5900 Wilshire Boulevard, Los Angeles, California, 90036
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (323) 938-6300
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $0.01 per share)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of March 7, 2000, the aggregate value of the 19,262,913 shares of
Common Stock of the Registrant issued and outstanding on such date, which
excludes 613,292 shares held by all directors and executive officers of the
Registrant as a group, was approximately $163.7 million. This figure is based on
the last known trade price of $8.50 per share of the Registrant's Common Stock
on March 7, 2000.
Number of shares of Common Stock outstanding as of March 7, 2000:
19,876,205
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2000 Annual Meeting of
Stockholders are incorporated into Part III.
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PBOC HOLDINGS, INC.
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS ........................................................ 3
General...................................................... 3
Lending Activities........................................... 5
Asset Quality................................................ 10
Investment Activities........................................ 12
Sources of Funds............................................. 13
Competition.................................................. 14
Subsidiaries................................................. 15
Regulation .................................................. 15
Regulation of Savings and Loan Holding Companies............. 16
Regulation of Federal Savings Banks.......................... 17
Taxation..................................................... 20
ITEM 2. PROPERTIES....................................................... 22
ITEM 3. LEGAL PROCEEDINGS................................................ 24
The Goodwill Litigation...................................... 24
The Shareholder Rights Agreement............................. 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 28
ITEM 6. SELECTED FINANCIAL DATA.......................................... 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 32
General...................................................... 32
Financial Condition.......................................... 32
Results of Operations........................................ 44
Average Balances, Net Interest Income, Yields Earned and
Rates Paid................................................. 45
Rate /Volume Analysis........................................ 46
Asset and Liability Management............................... 50
Liquidity and Capital Resources.............................. 54
Year 2000.................................................... 56
Recent Accounting Pronouncements............................. 56
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 57
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................... 92
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 92
ITEM 11. EXECUTIVE COMPENSATION........................................... 92
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 92
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 92
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K .................................................... 92
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When used in this form 10-K or future filings by PBOC Holdings, Inc. (the
"Company") with the Securities and Exchange Commission ("SEC"), in the Company's
press releases or other public or stockholder communications, or in oral
statements made with an approval of an authorized executive officer, the words
or phrases "would be", "will allow", "intends to", "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project", or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risk of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected. The Company does not undertake, and specifically
disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such
statements.
PART I
ITEM 1. BUSINESS
General
The Company is a Delaware corporation which was organized in 1987 to
acquire the People's Bank of California (the "Bank") from the Federal Savings
and Loan Insurance Corporation ("FSLIC") in connection with its conversion from
mutual to stock form. (Unless the context otherwise requires, references herein
to the Company include the Bank and its other subsidiaries.) 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 23 full-service branch offices located primarily in
Los Angeles County as well as Orange and Ventura Counties in Southern
California. At December 31, 1999, the Company had total assets of $3.4 billion,
net loans receivable of $2.5 billion, total deposits of $1.6 billion and total
stockholders' equity of $179.5 million.
Business Strategy. The Bank experienced financial difficulties in the
early 1990s due in part to local economic conditions and the 1994 Northridge
earthquake, which resulted in significant increases in non-performing assets and
substantial losses. The Bank was required to be recapitalized in 1992 and again
in 1995. In connection with the 1995 recapitalization, the Bank replaced its
former senior managers with a new management team with considerable experience
in commercial banking and problem asset resolution.
The Bank's new management team initially adopted a business strategy
designed to enhance the Bank's internal controls and underwriting standards,
reduce problem assets, increase net interest income, reduce operating expenses
and cost of funds and maximize profitability while limiting interest rate and
credit risk. With the reduction in the Company's non-performing assets and the
Company's return to profitability in 1996, the Bank was able to actively resume
the origination and purchase of residential, commercial and consumer loans. In
order to fund the Bank's increased lending activities, in October 1997, the Bank
raised approximately $33.3 million in net proceeds in connection with the sale
of 1,426,000 shares of 9.75% Noncumulative Preferred Stock, Series A by Peoples
Preferred Capital Corporation ("PPCC"), all of the common stock of which is
owned by the Bank (the "Series A Offering") and, in May 1998 the Company raised
approximately $129.6 million in net proceeds in connection with an initial
public offering of common stock of the Company (the "IPO"), a substantial
portion of which was contributed as equity to the Bank. With the funds raised in
the Series A Offering and the IPO, management has been able to focus on the
following elements of its business strategy:
o Significantly Grow the Bank's Loan Portfolio. The Bank leveraged the
proceeds raised in the Series A Offering and the IPO through
wholesale purchases of $408.8 million and $876.9 million of
primarily single-family residential loans, respectively. The Bank
has since been shifting the composition of its assets toward the
types of commercial loans traditionally associated with commercial
banks. Accordingly, the Bank is replacing its whole loan purchases
with internally
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originated loans, primarily of a commercial nature, and, since June
1995, has hired over 25 individuals with significant expertise in
commercial and consumer lending. The increase in staffing has
enabled the Bank to increase its multi-family residential,
commercial real estate, commercial business and consumer loan
originations (including loans secured by deposits), which during the
years ended December 31, 1999, 1998 and 1997 amounted in the
aggregate to $627.0 million, $218.1 million and $72.6 million or
75.6%, 35.9% and 45.2% of total loans originations, respectively.
Substantially all of such loans are secured by property or made to
customers located within the Bank's primary market area. Management
intends to continue to place increased emphasis on commercial and
consumer lending, with a corresponding decrease in emphasis on
single-family and multi-family residential lending. Commercial and
consumer loans generally have shorter terms and higher interest
rates than singly-family residential loans but are generally
considered to have a higher level of credit risk.
o Expand the Bank's Branch Network. Management is enhancing the Bank's
branch network by opening new facilities and acquiring other banking
institutions and branches in strategic locations within its primary
market area. Since December 31, 1998, the Bank has acquired three
branches with approximately $141.6 million in deposits which
includes two branches with approximately $124.5 million in deposits
which were acquired in August 1999. In addition, on January 31,
2000, PBOC acquired The Bank of Hollywood ("BOH"), a California
commercial bank headquartered in Hollywood, California with $157.4
million of assets, $145.1 million of deposits and $12.4 million of
stockholders' equity at December 31, 1999. The BOH acquisition will
permit the Bank to expand into a high growth market for the
individuals and small-to-medium sized businesses the Bank is seeking
to attract as customers. The Bank focuses on acquiring branches or
whole institutions when such acquisitions are expected to be
accretive to earnings, when such acquisitions will reduce the Bank's
cost of funds through a lower rate paid on the deposits acquired, or
when the deposit mix of the branches so acquired will further the
Bank's strategy of shifting the composition of its assets and
liabilities closer to that of a commercial bank.
o Reduce Funding Costs. The Bank leveraged the proceeds raised in the
Series A Offering and the IPO through the use of reverse repurchase
agreements and Federal Home Loan Bank ("FHLB") advances. The Bank is
currently replacing such wholesale borrowings with lower cost
deposits. The Bank is currently replacing such wholesale borrowings
with lower cost deposits. The Bank has reduced its overall cost of
funds by promoting retail deposit growth (particularly transaction
accounts) and by allowing its out-of-market, institutional jumbo
certificates of deposit to run off as they mature. The Bank's
transactional accounts (passbook, checking and money market
accounts) have increased from $183.2 million or 13.2% of total
deposits at December 31, 1994 to $501.4 million or 30.4% of total
deposits at December 31, 1999.
o Improve Operating Efficiency. The Bank has significantly reduced its
operating expenses through the consolidation of certain of its
operations and, to lesser extent, reducing its staff levels. The
ratio of the Bank's operating expenses to average total assets has
steadily decreased, from 2.14% during the year ended December 31,
1994 to 1.10% during the year ended December 31, 1999 (excluding the
effect of extraordinary items and losses on the sale of investment
securities). Despite the Bank's - recent cost-cutting efforts,
management believes that it has significant operating leverage, and,
therefore, continued incremental growth will not cause the Bank's
ratio of operating expenses to average total assets to increase by a
corresponding amount.
o Manage the Bank's Capital. A substantial portion of the net proceeds
in connection with the Series A Offering and the IPO was contributed
by the Company to the Bank in order to enhance its capital and fund
its growth strategy. The Company has not paid dividends on its
common stock and instead has retained its earnings in furtherance of
its overall business objectives. Management of the Bank has
established a targeted minimum level of core capital of 6.0% of
adjusted total assets. At December 31, 1999 the Bank's core capital
amounted to $231.4 million or 6.78% of adjusted total assets.
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o Maintain a Community Focus. The Bank's growth strategy is focused on
individuals and businesses located in Los Angeles, Orange and
Ventura Counties in Southern California. Management of the Bank
believes that the recent consolidation of financial institutions
within Southern California has resulted in a decline in product
offerings and attention paid to the individuals and small-to medium
sized businesses which the Bank focuses on. The Bank intends to fill
this void by offering a community banking alternative and by
instilling a sales and service oriented culture in its personnel in
order to build relationships and maximize cross-selling
opportunities.
The Bank, as federally chartered savings bank, is subject to comprehensive
regulation and examination by the OTS, as its chartering authority and primary
regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), which
administers the Savings Association Insurance Fund ("SAIF"), which insures the
Bank's deposits to the maximum extent permitted by law. The Bank is a member of
the FHLB of San Francisco, which is one of the 12 regional banks which comprise
the FHLB System. The Bank is also subject to the regulations of the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") governing
reserves required to be maintained against deposits and certain other matters.
See "Regulation."
The Bank's principal executive offices are located at 5900 Wilshire
Boulevard, Los Angeles, California 90036, and its telephone number is (323)
938-6300.
Lending Activities
At December 31, 1999, the Bank's total loans receivable net amounted to
$2.5 billion, which represented 72.5% of the Company's $3.4 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, 1999, such loans constituted $1.5 billion and $327.3
million, or 57.1% and 12.6%, respectively, of the total loan portfolio.
Substantially all of the Bank's loan portfolio consists of conventional loans,
which are loans that are neither insured by the Federal Housing Administration
nor partially guaranteed by the Department of Veterans Affairs. More recently,
the Bank has increased it emphasis on commercial and consumer lending. At
December 31, 1999, commercial real estate loans amounted to $420.9 million or
16.3% of the total loan portfolio, while commercial business and consumer loans
(including loans secured by deposits) amounted to $159.7 million and $201.8
million or 6.2% and 7.8% of the total loan portfolio, respectively. The Bank's
total loan portfolio also included a small amount of land and other
miscellaneous loans, which amounted to $847,000 at December 31, 1999.
The Bank has general authority to originate and purchase loans secured by
real estate located throughout the United States. Notwithstanding this
nationwide lending authority, the Bank's primary market area for originations is
Los Angeles, Orange and Ventura Counties in Southern California. The Bank may
from time to time 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.
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 Appraisal Department 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
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of the Senior Lending Officer, the Chief Financial Officer and the Senior
Executive Vice President of Retail Banking, which has approval authority for all
loans in excess of $1.0 million and up to $5.0 million. Any loans exceeding $5.0
million must be approved by the Board of Directors of the Bank.
The Bank's commercial loan officers have approval authority up to
designated limits. The commercial loan officers do all of the underwriting
associated with an application and prepare the credit authorization for
submission to the Senior Commercial Lending Officer for verification. Loans in
excess of $100,000 are referred directly to the Senior Commercial Lending
Officer who has authority to approve loans up to $500,000. The Bank's Senior
Lending Officer can approve loans up to $1.0 million. Loans in excess of such
amounts fall under the jurisdiction of the Credit Committee or the Board of
Directors, based on the loan amounts set forth above.
Applications for consumer loans, as well as the Bank's smaller "business
express" loans, which range between $5,000 and $50,000, are taken in the Bank's
branches and submitted to the Vice President, Manager of the Bank's Business
Center, who has authority to approve consumer loans up to $300,000. Other
consumer loan officers have approval authority up to lesser designated amounts.
In order to improve the Bank's balance sheet as well as due to asset and
liability management considerations, during the year ended December 31, 1997,
the Bank sold $85.2 million of single-family residential mortgage loans tied to
the FHLB 11th District Cost of Funds ("COFI") and reinvested $59.0 million of
such proceeds in one year adjustable- rate single-family residential mortgage
loans. Management used the balance of the sale proceeds to purchase $4.8 million
and $5.0 million of multi-family residential loans and a land loan,
respectively. In addition, during the last quarter of 1997, management leveraged
the capital raised in the Series A Offering by purchasing in two transactions an
aggregate of $408.8 million of adjustable-rate single-family residential
mortgage loans.
In 1998, the Bank leveraged the capital raised from the IPO primarily
through purchases of single-family residential loans totaling $821.7 million.
Such loans were generally underwritten in accordance with the Bank's
underwriting guidelines for direct originations, and were a mix of adjustable
and fixed-rate loans.
During the year ended December 31, 1999, the Bank purchased $191.6 million
of single family residential loans. In order to decrease the Bank's interest
rate risk, of the single family loans purchased, $180.9 million become
adjustable after 5, 7 or 10 years. Additionally, the Bank sold $92.5 million of
long-term fixed-rate single family residential loans. The Bank intends to focus
on loan originations, but may continue to selectively purchase residential
mortgage loans that meet its underwriting criteria from time to time in order to
supplement its loan originations.
A savings institution generally may not make loans to any one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities. At December 31, 1999, the Bank's regulatory limit
on loans-to-one borrower was $37.4 million and its five largest loans or groups
of loans-to-one borrower, including related entities, aggregated $29.8 million,
$25.0 million, $25.0 million $21.0 million and $21.0 million. Four of the five
largest loans or loan concentrations were secured by commercial real estate and
multi-family residential properties. The fifth loan, a $25.0 million loan is
secured by marketable securities. All of these loans or loan concentrations were
performing in accordance with their terms at December 31, 1999.
Single-Family Residential Real Estate Loans. Although the Bank has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on existing single-family residences, more
recently, the Bank has placed less emphasis on such lending and has placed
increased emphasis on commercial and consumer lending. At December 31, 1999,
$1.5 billion or 57.1% of the Bank's total gross loan portfolio consisted of
single-family residential loans. The single-family residential loans originated
by the Bank are generally made on terms, conditions and documentation except for
non-conforming loan size which would permit the sale of loans to the Federal
Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA") and other institutional investors in the secondary market.
Although the Bank has historically originated its single-family
residential loans internally, in an effort to enhance its ability to originate
greater volumes of loans without increasing its staff, during 1997, the Bank
entered into agreements with various mortgage brokers with respect to the
origination of single-family residential loans. Under the
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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 75% of its single-family
residential loans pursuant to such mortgage broker relationships. The Bank
currently utilizes approximately 38 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, 1999 of over 700).
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 previously not been an active purchaser of
single-family residential loans, during 1997, the Bank established PPCCP as a
real estate investment trust ("REIT") and leveraged the capital generated from
two transactions through wholesale purchases of an aggregate of $408.8 million
of adjustable-rate (based upon a weekly average yield on U.S. Treasury
securities adjusted to a constant comparable maturity of one year) single-family
residential loans, which were funded by short- to intermediate-term FHLB
advances. Such purchases significantly increased the size of the Bank's
residential mortgage portfolio. Similarly, in 1998, the Bank leveraged the
proceeds raised from the IPO through wholesale purchases of $821.7 of
single-family residential loans. During the year ended, December 31, 1999, the
Bank purchased $180.9 million of fixed-rate single-family residential loans
which become adjustable after 5, 7 or 10 years. As the Bank is able to increase
its loan originations, management intends to, over time, replace its wholesale
loan purchases with loans which have been originated internally.
The Bank currently offers adjustable-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 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, 1999, the Bank had $1.1 billion or 71.7% of fixed-rate
single-family residential loans in its single-family residential portfolio.
Since the 1980's, the Bank has also offered a variety of adjustable- rate
single-family residential mortgage loans. Such loans generally have up to 30
year terms. Presently, the Bank offers a "5/1 Product," in which the loan is
fixed- at origination for a five year period, after which the interest rate
adjusts every year in accordance with a designated index (the weekly average
yield on U.S. Treasury securities adjusted to a constant comparable maturity of
one year, as made available by the Federal Reserve Board). Such loans currently
have a 2% cap on the amount of any increase or decrease in the interest rate per
year, and a 6% limit on the amount by which the interest rate can increase or
decrease over the life of the loan. In addition, the Bank's adjustable-rate
loans are currently not convertible into fixed-rate loans and do not contain
prepayment penalties. Approximately 28.3% of the single-family residential loans
in the Bank's single-family residential loan portfolio at December 31, 1999 had
adjustable interest rates.
Under prior management, the Bank's adjustable-rate loans were tied to
COFI, which does not adjust as rapidly to changes in interest rates as the U.S.
Treasury constant comparable maturity index now utilized by the Bank. The Bank
has discontinued the use of COFI-based loans. At December 31, 1999, 31.7% 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 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, 1999, $16.9 million or 1.1% of the Bank's single-family
residential loans had loan-to-value
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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 65%.
In 1997, the Bank sold the servicing rights both with respect to
substantially all of its residential mortgage loans as well as the residential
mortgage loans which the Bank was servicing for others to Temple Inland Mortgage
Corporation (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 the
estimated lives of the related loans.
In connection with the Bank's sale of servicing, the Bank entered into a
servicing agreement with the Residential Servicing Agent (the "Residential
Servicing Agreement"), pursuant to which the Residential Servicing Agent
serviced substantially all of such residential mortgage loans. The Bank also
entered into a forward production servicing purchase and sale agreement with the
Residential Servicing Agent with respect to new residential loan originations.
However, the Bank terminated this agreement in early 1998, and the Bank began
servicing all of the residential mortgage loans it originated after February 20,
1998.
Multi-Family and Commercial Real Estate Loans. At December 31, 1999, the
Bank had an aggregate of $327.3 million and $420.9 million invested in
multi-family and commercial real estate loans, respectively, or 12.6% and 16.3%
of the gross loan portfolio, respectively. The Bank has generally targeted
higher quality, smaller commercial real estate loans with principal balances of
up to $5.0 million. In originating such loans, the Bank relies on relationships
it has developed with brokers, correspondents and mortgage brokers.
The Bank's portfolio of multi-family loans are secured by multi-family
properties of five units or more, while the Bank's commercial real estate loans
are secured by industrial, warehouse and self-storage properties, office
buildings, office and industrial condominiums, retail space and strip shopping
centers, mixed-use commercial properties, mobile home parks, nursing homes,
hotels and motels. Substantially all of these properties are located in
California. The Bank will presently originate these loans for terms of up to 10
years based upon a 20 to 25 year loan amortization period and up to 15 years for
loans amortized over a period of 15 years or less. The Bank will originate these
loans on both a fixed-rate or adjustable-rate basis, with the latter based
primarily on the one year or ten year U.S. Treasury index of constant comparable
maturities. Adjustable-rate loans may have an established ceiling and floor, and
the maximum loan-to-value for these loan products is 75%. As part of the
criteria for underwriting commercial real estate loans, the Bank generally
requires a debt coverage ratio (the ratio of net cash from operations before
payment of debt service to debt service) of 1.20 or more. It is also the Bank's
general policy to 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 imposing stringent loan-to-value ratios, requiring conservative
debt coverage ratios, and continually monitoring the operation and physical
condition of the collateral.
Originations of multi-family and commercial real estate loans increased
from an aggregate $40.0 million during the year ended December 31, 1997 to
$124.1 million during the year ended December 31, 1998 to $264.5 million during
the year ended December 31, 1999. The Bank began making purchases of
multi-family and commercial real estate loans during the year ended December 31,
1997. Such loan purchases aggregated $23.5 million in 1998 and $1.6 million in
1999.
Commercial Business and Consumer Loans. The Bank is placing increased
emphasis on the development of commercial business and consumer lending programs
within the areas serviced by its branches. Toward that end,
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during 1998 and 1999 the Bank hired over 25 individuals with significant
expertise in commercial and consumer credit administration and lending. Except
for loans secured by deposits, the Bank did not engage in this type of lending
activity prior to 1996. During the years ended December 31, 1999, 1998 and 1997,
the Bank originated $362.5 million, $94.0 million and $32.6 million,
respectively, of commercial business and consumer loans including loans secured
by deposits, which amounted to 43.7%, 15.5% and 20.3% of total originations
during such respective periods.
The Bank is originating and intends to originate commercial business loans
including working capital lines of credit, inventory and accounts receivable
loans (including a specialized accounts receivable loan product for small
business), equipment and other asset-based financing (including equipment
leases), term loans and loans guaranteed by the Small Business Administration
("SBA"). Depending on the collateral pledged to secure the extension of credit,
maximum loan-to-value ratios are 75% or less. Loan terms may vary from one to
seven years. The interest rates on such loans are generally variable and are
indexed to the Wall Street Journal Prime Rate, plus a margin.
The Bank intends to grow its SBA lending business, on which loans are
guaranteed up to certain levels by the SBA. The SBA-guaranteed loans bear
adjustable-rates tied to the lowest published New York prime rate, adjusted
monthly, plus a margin, which depends on the term of the loan. The loans
generally have amortization schedules of seven to 25 years, depending on the
purpose of the loan. Each loan is reviewed by the SBA and, depending on the size
of the loan and the proposed use of proceeds, the SBA establishes what
percentage of the loan it will guarantee. The guarantee cannot exceed 80% of the
loan or $750,000, whichever is less. The guarantee applies not only to the
principal, but also covers accrued interest, foreclosure costs, legal fees and
other expenses. The Bank plans to obtain preferred lender status, which will
permit it to underwrite and close such loans much more promptly. At December 31,
1999, approximately $18.4 million of the Bank's $159.7 million in commercial
business loans were comprised of SBA loans.
The Bank is authorized to make loans for a wide variety of personal or
consumer purposes but had not engaged in any lending other than loans secured by
deposits for most of the 1990s. The Bank began originating home equity loans and
lines of credit and automobile loans in August 1996 in order 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, 1999, home equity
loans and lines amounted to $9.7 million. On owner-occupied homes, these loans
and lines are originated by the Bank for up to 80% of the first $500,000 of
appraised value, plus 75% of the value from $500,001 to $1,000,000, plus 60% of
the value from $1,000,001 to $1,500,000, 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 $400,000 of appraised value, plus 60% of the value from $400,001 to
$1,000,000, less the amount of any prior liens on the property. Home equity
loans and lines of credit have a maximum term of 25 years and carry variable
interest rates. The Bank will secure each of these types of loans with a
mortgage on the property (generally a second mortgage).
The Bank also originates loans secured by new and used automobiles,
primarily through an indirect lending program with automobile dealers. The
maximum term for the Bank's automobile loans is 84 months for a new luxury car
loan and 72 months for 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, 1999,
the Bank had $2.6 million of direct automobile loans in portfolio. During 1998,
the Bank hired an individual with significant experience to manage the Bank's
indirect automobile lending program. As a result, the Bank has increased its
originations of indirect automobile loans. The Bank currently originates such
loans through approximately 61 dealers, all of which are located in California.
Although management believes that less than 10% of the Bank's indirect
automobile loan portfolio at December 31, 1999 consisted of loans made to
"subprime" borrowers at the time of origination, less than 10% of current
originations are being made to such "subprime" borrowers. The Bank intends to
securitize and sell a portion of its indirect automobile loan portfolio in the
future. At December 31, 1999, the Bank had $178 million of indirect automobile
loans in its portfolio with an effective yield of 9.03%. At December 31, 1999,
0.98% of the indirect automobile portfolio (net of repossessions) was delinquent
30 days or more.
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Commercial business and consumer loans generally have shorter terms and
higher interest rates than mortgage loans but generally involve more credit risk
than mortgage loans because of the type and nature of the collateral. In
addition, consumer lending collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness and personal bankruptcy. The Bank
believes that the generally higher yields earned on commercial business and
consumer loans compensate for the increased credit risk associated with such
loans and the Bank intends to continue to offer such loans in order to provide a
full range of services to its customers.
Asset Quality
General. The Bank's loan review function is carried out through an
internal asset review process which is supplemented on a quarterly basis by loan
reviews conducted by an unaffiliated firm. The Bank maintains an Internal Asset
Review Committee and Loan Review and Special Assets Departments and maintains
updated loan underwriting, credit, collection and monitoring procedures.
Management initiated a policy to take title to non-performing assets as promptly
as practicable and improve the properties' physical condition where appropriate
so that marketing efforts may be commenced. In the case of commercial
properties, management takes steps to enhance net operating income with respect
to its properties in order to command a better sales price. The Bank's future
results of operations will be significantly affected by its ability to continue
to maintain its reduced level of non-performing assets without incurring
additional material losses.
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.
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 began servicing all of the residential mortgage loans it originated 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 as they 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, 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
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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
Bank's 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 Bank's
Appraisal Department. The valuation is performed under two scenarios. First, a
review of the current market conditions of similar properties within the
collateral property's market is completed to ascertain comparable rent and sale
data. Second, a discounted cash flow analysis is prepared, utilizing current
investor return requirements and capitalization rates. Once a value for the
property has been estimated based upon its ability to generate cash flow,
expenses associated with the sale of the property, such as broker commissions
and closing costs are deducted from the estimated value. A comparison of this
amount is made to the loan balance to determine whether a specific allowance or
a write-off is appropriate.
During this on-going process, the Bank and the receiver will identify and
catalogue any potential purchasers who call and express an interest in the
property prior to the Bank taking title. Once title is transferred, the Bank
will then begin the process of contacting those entities that previously
expressed an interest to confirm that interest and proceed with the
qualification stage.
Real Estate Owned. Real estate acquired through foreclosure is carried at
the estimated fair value less estimated selling expenses at the date of
transfer. A loan charge-off is recorded for any writedown in the loan's carrying
value to fair value at the date of transfer. Real estate loss provisions are
recorded if the properties' estimated fair value subsequently declines below the
value determined at the recording date. In determining the fair value at
acquisition, costs relating to development and improvement of property are
considered. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
In preparing a real estate owned property to be marketed for sale, certain
repairs are undertaken and other repair items are left as negotiating points
pertaining to the sale contract. The Bank may offer to adjust the sale price for
such minor repair items, or may offer to deliver the property in a repaired
state. As part of the disposition strategy, the Bank may offer financing at
current market terms to qualified buyers of the real estate owned. Generally,
the Bank requires that the purchaser/borrowing entity provide a minimum of 20%
cash toward the purchase of the property. Terms offered are similar to terms
being offered on other new originations and at comparable rates. The Special
Assets Department makes great efforts to ensure that the underwriting for a loan
to facilitate is comparable to other new loan production, and that the
transactions are done at arms-length and reflect fair market terms.
Troubled Debt Restructuring. A loan constitutes a troubled debt
restructuring ("TDR") if the Bank, for economic or legal reasons related to the
borrower's financial difficulties, grants a concession to the borrower that it
would not otherwise consider. Among other things, a TDR involves the
modification of terms of the 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 TDR's, 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.
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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 TDR's 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.
The Bank's management has aggressively focused on problem asset
rehabilitation, and has undertaken a number of initiatives in this area. The
Bank has established an Internal Asset Review Committee, which is comprised of
the Chief Executive Officer, the Chief Financial Officer, the Senior Lending
Officer and the Vice President and Loan Review Officer. The Committee meets at
least monthly and monitors the Bank's assets to ensure proper classification.
All multi-family commercial real estate 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 by the Senior Lending Officer. Assets that are foreclosed
and become real estate owned continue to be managed by the Senior Lending
Officer through resolution.
Investment Activities
The Bank's securities portfolio is managed by the Senior 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 ten 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 corporate trust preferred obligations,
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, 1999, the Bank's securities portfolio consisted of $425.8
million of mortgage-backed securities, $421.5 million of which were classified
as available-for-sale and $4.3 million of which were classified as
held-to-maturity, $34.2 million of U.S. Government agency obligations, $241.9
million of investment-grade trust preferred securities and $74.3 million of SBA
certificates and other asset backed securities. Of the Bank's total investment
in mortgage-backed securities at December 31, 1999, $26.7 million consisted of
Government National Mortgage Association ("GNMA") certificates, $240.9 million
consisted of FNMA certificates, $110.7 million consisted of non-agency
certificates and $47.5 million consisted of FHLMC certificates. Of the $425.8
million of mortgage-backed securities at December 31, 1999, $296 million
consisted of fixed-rate securities and $129.8 million consisted of
adjustable-rate securities. Of the Bank's $34.2 million of U.S. Government and
federal agency obligations at December 31, 1999, none were scheduled to mature
within one through five years thereof, $34.2 million were scheduled to mature
after five through ten years thereof and none were scheduled to mature after ten
years. Of the Bank's $742 million of mortgage-backed and other securities
available-for-sale as well as held-to-maturity at December 31, 1999, none were
scheduled to mature within one year thereof, $62.4 million were scheduled to
mature after one through five years thereof, $147.9 million were scheduled to
mature after five through ten years thereof and $531.7 million were scheduled to
mature after ten years. The Bank's aggregate securities portfolio, net of
repayments and prepayments and sales, increased by $430.4 million or 74.1%
between 1997 and 1998 and decreased by $235.0 million or 23.2% during 1999. At
December 31, 1999, such portfolio amounted to $776.2 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
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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 $252,700. 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.
Sources of Funds
General. The Bank will consider various sources of funds to fund its
investing and lending activities and evaluates the available sources of funds in
order to reduce the Bank's overall funding costs, 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, checking accounts, money market deposit accounts, fixed-rate,
fixed-maturity retail certificates of deposit ranging in terms from 30 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.
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The Bank currently operates a total of 44 ATMs. As of June 30, 1999, 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.
Borrowings. 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, 1999, the Bank had total FHLB of San Francisco
advances of $1.1 billion at a weighted average interest rate of 5.15%, $614
million of which matures in 2000, $200 million of which matures in 2003 and the
remaining $310 million of which matures in 2008. Certain of these advances from
the FHLB of San Francisco have call provisions. FHLB advances decreased by $74
million during 1999.
The Bank increasingly relies on obtaining funds from the sale of
securities to investment dealers under reverse repurchase agreements. At
December 31, 1999, reverse repurchase agreements amounted to $381 million, as
compared to $364 million and $341 million at December 31, 1998 and 1997,
respectively. As of December 31, 1999, the weighted average remaining term to
maturity of the Bank's reverse repurchase agreements was 2.4 years compared to
3.73 years at December 31, 1998 and 2.71 years at December 31, 1997, and such
reverse repurchase agreements had a weighted average interest rate of 5.85%
compared to 5.61% and 5.76% at December 31, 1999, 1998 and 1997, respectively.
Certain of the reverse repurchase agreements have call provisions. In a reverse
repurchase agreement transaction, the Bank will generally sell a mortgage-backed
security agreeing to repurchase either the same or a substantially identical
security on a specified later date (which range in maturity from overnight to
ten years) at a price greater than the original sales price. The difference in
the sale price and purchase price is the cost of the use of the proceeds. The
mortgage-backed securities underlying the agreements are delivered to the
dealers who arrange the transactions. For agreements in which the Bank has
agreed to repurchase substantially identical securities, the dealers may sell,
loan or otherwise dispose of the Bank's securities in the normal course of their
operations. However, such dealers or third party custodians safe-keep the
securities which are to be specifically repurchased by the Bank. Reverse
repurchase agreements represent a competitive cost short-term funding source for
the Bank. Nevertheless, the Bank is subject to the risk that the lender may
default at maturity and not return the collateral. The amount at risk is the
value of the collateral which exceeds the balance of the borrowing. In order to
minimize this potential risk, the Bank only deals with large, established 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.
In December, 1999, the Company secured a $10 million line of credit from a
third-party commercial bank for working capital purposes and to fund the
repurchase of the Company's outstanding stock to be effected from time to time
in open market or privately-negotiated transactions. As of December 31, 1999,
$4.7 million of the line of credit had been utilized.
Competition
The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate, commercial business 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, commercial business and consumer loans, principally from other
savings and loan associations, commercial banks, mortgage banking companies,
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insurance companies, consumer finance companies, pension funds and commercial
finance companies. The primary factors in competing for loans are the quality
and extent of service to borrowers and brokers, economic factors such as
interest rates, interest rate caps, rate adjustment provisions, loan maturities,
loan-to-value ("LTV") ratios, loan fees, and the amount of time it takes to
process a loan from receipt of the loan application to date of funding. The
Bank's future performance is dependent on its ability to originate a sufficient
volume of loans and attract deposits in its local market areas. There can be no
assurance that the Bank will be able to effect such actions on satisfactory
terms.
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, 1999, 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, 1999, the
Bank's investment in its five service corporation subsidiaries amounted to $39.2
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 Internal
Revenue Code of 1986, as amended (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."
SMC is an inactive corporation which was formed in 1987 to originate
mortgage loans. However, SMC has never conducted any business since it was
organized. DIC was formed in 1987 to acquire, develop, construct and sell real
estate developments and is currently inactive. DIC owns 100% of the capital
stock of SCP which was formed in 1989 to invest in various real estate
development projects. In 1998, SCP sold the Bank's last remaining real estate
development project consisting of 62 acres of vacant land located in Corona,
California.
CDC was formed in 1969 for the purpose of acquiring, developing,
constructing and selling real estate developments. CDC does not currently hold
any real estate and CDC's sole operation consists of acting as trustee under the
Bank's deeds of trust with respect to its mortgage lending.
SCS was formed in 1984 in order to sell, through the Bank's branch
offices, annuities and various other investments as well as other insurance
products to the Bank's account holders and members of the general public. During
the years ended December 31, 1999, 1998 and 1997, SCS recognized net earnings of
$434,000, $434,000 and $362,000, respectively.
Regulation
The Bank is a federally chartered and insured stock savings bank subject
to extensive regulation and supervision by the OTS, as the primary federal
regulator of savings associations, and the FDIC, as the administrator of the
SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Company or the Bank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals. Certain federal banking laws have been recently amended. See
"Regulation of Savings and Loan Holding Companies-Financial Modernization."
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Regulation of Savings and Loan Holding Companies
The Company is a registered savings and loan holding company. The Home
Owners' Loan Act, as amended ("HOLA"), and OTS regulations generally prohibit a
savings and loan holding company, without prior OTS approval, from acquiring,
directly or indirectly, the ownership or control of any other savings
association or savings and loan holding company, or all, or substantially all,
of the assets or more than 5% of the voting shares thereof. These provisions
also prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
Holding Company Activities. 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, unless an application
is required. 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
Section 11 of the HOLA and 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 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.
Financial Modernization. Under the Gramm-Leach-Bliley Act enacted into law
on November 12, 1999, no company may acquire control of a savings and loan
holding company after May 4, 1999, unless the company is engaged only in
activities traditionally permitted to a multiple savings and loan holding
company or newly permitted to a
16
<PAGE>
financial holding company under Section 4(k) of the Bank Holding Company Act.
Existing savings and loan holding companies and those formed pursuant to an
application filed with the OTS before May 4, 1999, may engage in any activity
including non-financial or commercial activities provided such companies control
only one savings and loan association that meets the Qualified Thrift Lender
test. Corporate reorganizations are permitted, but the transfer of grandfathered
unitary thrift holding company status through acquisition is not permitted.
Regulation of Federal Savings Banks
As a federally insured savings bank, lending activities and other
investments of the Bank must comply with various statutory and regulatory
requirements. The Bank is regularly examined by the OTS and must file periodic
reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks. The Bank is a member of the FHLB System. Among
other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal at least 1% of its aggregate unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each calendar
year or 5% of its advances from the FHLB, whichever is greater.
Liquid Assets. Under OTS regulations, for each quarter, a savings bank is
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations and certain other investments) not less than a specified
percentage of the average daily balance of its net withdrawable deposit accounts
and borrowings payable in one year or less. This liquidity requirement, which is
currently at 4.0%, may be changed from time to time by the OTS to any amount
between 4.0% to 10.0%, depending upon certain factors. The Bank maintains liquid
assets in compliance with these regulations.
Regulatory Capital Requirements. OTS capital regulations require savings
banks to satisfy minimum capital standards: risk-based capital requirements, a
leverage requirement and a tangible capital 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.) A savings bank is also required to
maintain tangible capital in an amount at least equal to 1.5% of its adjusted
total assets.
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries or other persons or savings associations with
which it has significant business relationships. The Bank is not subject to any
such individual minimum regulatory capital requirement.
17
<PAGE>
The Bank's Tier-1 risk-based capital ratio was 11.08%, its leverage
capital ratio was 6.78% and its total risk- based capital ratio was 11.96% at
December 31, 1999.
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements. A savings bank's failure to maintain capital at or above the
minimum capital requirements may be deemed an unsafe and unsound practice and
may subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is required
to submit a capital plan that addresses the bank's need for additional capital
and meets certain additional requirements. While the capital plan is being
reviewed by the OTS, the savings bank must certify, among other things, that it
will not, without the approval of its appropriate OTS Regional Director, grow
beyond net interest credited or make capital distributions. If a savings bank's
capital plan is not approved, the bank will become subject to additional growth
and other restrictions. In addition, the OTS, through a capital directive or
otherwise, may restrict the ability of a savings bank not in compliance with the
capital requirements to pay dividends and compensation, and may require such a
bank to take one or more of certain corrective actions, including, without
limitation: (i) increasing its capital to specified levels, (ii) reducing the
rate of interest that may be paid on savings accounts, (iii) limiting receipt of
deposits to those made to existing accounts, (iv) ceasing issuance of new
accounts of any or all classes or categories except in exchange for existing
accounts, (v) ceasing or limiting the purchase of loans or the making of other
specified investments, and (vi) limiting operational expenditures to specified
levels.
The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings bank still may be subject to
enforcement actions for other violations of law or unsafe or unsound practices
or conditions.
Prompt Corrective Action. The prompt corrective action regulation of the
OTS, promulgated under the Federal Deposit Insurance Corporation Improvement Act
of 1991, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that falls
within certain undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. At December 31, 1999, the Bank met the capital requirements of a
"well capitalized" institution under applicable OTS regulations.
Enforcement Powers. The OTS and, under certain circumstances, the FDIC,
have substantial enforcement authority with respect to savings associations,
including authority to bring various enforcement actions against a savings
association and any of its "institution-affiliated parties" (a term defined to
include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss restrict the growth of
the institution and rescind agreements and contracts.
Capital Distribution Regulation. In addition to the prompt corrective
action restriction on paying dividends, OTS regulations limit certain "capital
distributions" by OTS-regulated savings associations. Capital distributions
currently are defined to include, in part, dividends and payments for stock
repurchases and cash-out mergers. The current regulation requires savings
associations to file an application or notice with the OTS depending on whether
the association and the proposed dividend fall within certain criteria such as
the association's capital classification and the amount of the proposed
dividend. Since the Bank is a subsidiary of a savings and loan holding company,
the Bank is presently required to give the OTS at least 30 days notice prior to
distribution. The OTS may prohibit a proposed capital distribution that would
otherwise be permitted if the OTS determines that the distribution would
constitute an unsafe or unsound practice.
18
<PAGE>
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties. A
savings association may qualify as a qualified thrift lender not only by
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. As of December 31, 1999 the Bank's QTL
percentage was 71.3%.
FDIC Assessments. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
Under FDIC regulations, institutions are assigned to one of three capital
groups for insurance premium purposes -- "well capitalized," "adequately
capitalized" and undercapitalized" -- which are defined in the same manner as
the regulations establishing the prompt corrective action system, as discussed
above. These three groups are then divided into subgroups which are based on
supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Effective January 1, 1997,
assessment rates for both SAIF-insured institutions and BIF-insured institutions
ranged from 0% of insured deposits for well-capitalized institutions with minor
supervisory concerns to .27% of insured deposits for undercapitalized
institutions with substantial supervisory concerns. In addition, an additional
assessment of 6.4 basis points and 1.3 basis points was added to the regular
SAIF-assessment and the regular BIF-assessment, respectively, in order to cover
Financing Corporation debt service payments.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF satisfied the
required reserve ratio prior to the SAIF, and as a result, the FDIC reduced the
average deposit insurance premium paid by BIF-insured banks to a level
substantially below the average premium previously paid by savings institutions.
Banking legislation was enacted on September 30, 1996 to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions. The
legislation provided that all insured depository institutions with
SAIF-assessable deposits as of March 31, 1995 pay a special one-time assessment
to recapitalize the SAIF. Pursuant to this legislation, the FDIC promulgated a
rule that established the special assessment necessary to recapitalize the SAIF
at 65.7 basis points of SAIF-assessable deposits held by affected institutions
as of March 31, 1995. However, as a result of the Bank's financial condition,
the Bank made application to the FDIC for an exemption from this one-time
special assessment, which exemption was approved on October 5, 1996. As a
result, the Bank was exempt from paying the special one-time assessment and
instead, paid subsequent assessments at the assessment rate schedule in effect
as of June 30, 1995. However, upon consummation of the IPO, the Bank used $4.5
million of the proceeds from the IPO to pay the FDIC the special assessment
which the Bank had previously received permission from the OTS to defer. As a
result, the Bank's assessment rate was reduced from 35.28 basis points to 9.1
basis points (which included in each are the Financing Corporation debt service
payments).
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. There are no pending proceedings to terminate the deposit insurance of
the Bank.
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
19
<PAGE>
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.
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.
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.
Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the
"1996 Act") eliminated the use of the reserve method of accounting for bad debt
reserves by savings institutions, effective for taxable years beginning after
1995 and provided for recapture of a portion of the reserves existing at the
close of the last taxable year beginning before January 1, 1996 for institutions
such as the Bank. Prior to the 1996 Act, the Bank was permitted to establish a
reserve for bad debts and to make annual additions to the reserve. These
additions could, within specified formula limits, be deducted in arriving at the
Bank's taxable income.
As a further result of the 1996 Act, the Bank must use the specific
chargeoff method in computing its bad debt deduction beginning with its 1996
Federal tax return. Under this method, deductions may be claimed only and to the
extent that loans become wholly or partially worthless.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. NOLs can offset no more
than 90% of AMTI. Certain
20
<PAGE>
payments of alternative minimum tax may be used as credits against regular tax
liabilities in future years. As of December 31, 1999, the Bank had an
alternative minimum tax credit carryforward of approximately $1.7 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 three preceding taxable years and carried
forward and deducted from taxable income for the fifteen succeeding years
taxable years. For taxable years beginning after August 5, 1997, NOLs can be
carried back and deducted from taxable income for the two preceding taxable
years and carried forward and deducted from taxable income for the twenty
succeeding taxable years. The Company had federal tax NOLs of approximately
$153.4 million at December 31, 1999.
Impact of Ownership Change on Use of Net Operating Loss Carryforwards.
Section 382 of the Code imposes a limitation on the use of NOLs if there has
been an "ownership change." In general, an ownership change occurs if
immediately after any "owner shift involving a 5% stockholder" the percentage of
the stock of the corporation owned by one or more 5% stockholders has increased
by more than 50 percentage points over the lowest percentage of stock of the
corporation owned by such stockholders at any time during the testing period. An
"owner shift involving a 5% stockholder" is defined as any change in the stock
ownership of the corporation that affects the percentage of stock in the
corporation owned by any person who is a 5% stockholder before or after the
change. A 5% stockholder is any person (or group) holding 5% or more of the
corporation's stock at any time during the test period. It does not matter
whether that stockholder is a 5% stockholder before the change or after. As a
general rule, the ownership of owners of less than 5% is aggregated and treated
as the 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 Bank's 1992 recapitalization (the "1992 recapitalization") resulted in
an ownership change within the meaning of Section 382 of the Code (the "1992
Ownership Change"). The 1992 Ownership Change resulted in an annual Section 382
limitation on the Company's ability to utilize its NOLs in any one year of
approximately $7.7 million. At December 31, 1999, the Bank had $30.1 million of
NOLs which were created prior to the 1992 Ownership Change.
Similarly, the IPO resulted in a second ownership change within the
meaning of Section 382 of he Code (the "1998 Ownership Change"). The 1998
Ownership Change resulted in an annual Section 382 limitation on the Bank's
ability to utilize any NOLs created prior to the 1998 Ownership Change but after
the 1992 Ownership Change in any one year of approximately $21.3 million. At
December 31, 1999, the Bank had $111.2 million of NOLs which were created prior
to the 1998 Ownership Change but after the 1992 Ownership Change.
Treatment of Rights. KPMG LLP has issued an opinion to the Company and the
Bank to the effect that, for federal income tax purposes, the Rights (as defined
and described under Item 3. Legal Proceedings) evidenced by the terms of the
Shareholder Rights Agreement (as defined and described under Item 3. Legal
Proceedings) 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 Material 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
Material Stockholders. Finally, the amount of value taken into account for
purposes of determining the annual Section 382 limitation should include the
value of the Rights. Despite the Company's receipt of the foregoing opinion from
KPMG LLP, 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.
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
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<PAGE>
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, 1999.
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
Company's offices at December 31, 1999.
<TABLE>
<CAPTION>
Net Book Value of
Lease/Owned Property at Total Deposits at
Office Location Lease Expiration Date December 31, 1999 December 31, 1999
--------------- --------------------- ----------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Executive Office (and Branch):
Los Angeles
5900 Wilshire Blvd. Leased $2,098 $15,824
3rd, 15th and 16th Floors 04/2006
Los Angeles, CA 90036 Option: 1 - 5 years
Branch Offices:
North Hollywood
6350 Laurel Canyon Blvd. Leased 147 61,733
North Hollywood, CA 91606 09/2009
Option: 1 - 5 years
Long Beach
525 East Ocean Blvd. Leased 243 48,641
Long Beach, CA 90802 02/2010
Option: 1 - 10 years
Beverly Hills
9100 Wilshire Blvd. Leased 119 129,596
Beverly Hills, CA 90212 03/2010
Option: 1 - 5 years
Orange
216 E Chapman Avenue Leased 117 99,793
Orange, CA 92866-1506 01/2001
Option: 2 - 5 years
Pacific Palisades
15305 Sunset Blvd. Leased 211 74,691
Pacific Palisades, CA 90272 12/2006
Option: 1 - 10 years
Montebello
1300 W Beverly Blvd. Leased 192 99,694
Montebello, CA 90640 08/2003
Option: 1 - 10 years
Garden Grove
12112 Valley View Owned 141 80,937
Garden Grove, CA 92845
Simi Valley
1445 Los Angeles Ave. Leased 143 98,442
Simi Valley, CA 93065 01/2002
Option: 1 - 30 months
followed by 3 - 5 years
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Net Book Value of
Lease/Owned Property at Total Deposits at
Office Location Lease Expiration Date December 31, 1999 December 31, 1999
--------------- --------------------- ----------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Sylmar
13831 Foothill Blvd. Leased 143 51,975
Sylmar, CA 91342 09/2002
Option: 2 - 10 years
Buena Park
5470 Beach Blvd. Leased 129 31,602
Buena Park, CA 90621 12/2004
Option: 3 - 5 years
North Hollywood
12848 Victory Blvd. Leased 79 89,790
North Hollywood, CA 91606 05/2000
Beverly/Serrano
4500 W. Beverly Blvd. Leased 154 42,415
Los Angeles, CA 90004 01/2006
Option: 2 - 5 years
Tarzana
19500 Ventura Blvd. Leased 202 81,311
Tarzana, CA 91356 10/2002
Burbank
240 North San Fernando Road Leased 360 160,836
Burbank, CA 91502 09/2000
Option: 2 - 5 years
No. Irvine
4860 Irvine Blvd. Leased 159 18,682
Irvine, CA 92620 12/2010
Option: 1 - 20 years
Santa Clarita
26425 Sierra Highway Owned 199 69,625
Santa Clarita, CA 91321
Ventura
996 South Seaward Ave. Leased 98 65,306
Ventura, CA 93001 10/2001
Option: 1 - 3 years
Calabasas
23642 Calabasas Road, Bldg 2 Leased 160 70,864
Calabasas, CA 91302 03/2007
Irvine
15475 Jeffrey Road Leased 218 58,025
Irvine, CA 92620-4102 10/2005
Fairfax
145 South Fairfax Avenue Leased 116 86,029
Los Angeles, CA 90036 01/2003
Option: 1 - 5 years
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Net Book Value of
Lease/Owned Property at Total Deposits at
Office Location Lease Expiration Date December 31, 1999 December 31, 1999
--------------- --------------------- ----------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Westminster
15555 Brookhurst Street Leased 159 19,264
Westminster, CA 92683 09/2000
Option: 2 - 5 years
San Pedro
28110 South Western Avenue Owned 770 92,262
San Pedro, CA 90732 ------ ----------
$6,357 $1,647,337
====== =========
</TABLE>
In addition to the foregoing branch office locations, the Bank currently
operates 44 ATMs.
ITEM 3. LEGAL PROCEEDINGS
Except with respect to the Goodwill Litigation and the Ancillary
Litigation, each of which is defined and discussed below, 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.
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
Company's and Bank's allegations in the complaint arose out of the abrogation of
certain contractual promises made to the Company and to the Bank, by the Federal
Home Loan Bank Board (the predecessor to the OTS) and the Federal Savings and
Loan Insurance Corporation ("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, Inc. ("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 the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("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 generally accepted accounting principles ("GAAP"). In
August 1989, Congress enacted FIRREA which provided, among other things, that
savings institutions such as the Bank were no longer permitted to include
goodwill in their regulatory capital (subject to a gradual phase out 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.
24
<PAGE>
Related Cases. On July 1, 1996, the United States Supreme Court issued its
opinion for United States v. Winstar Corporation, No. 95-865, which affirmed the
decisions of the United States Court of Appeals for the Fourth Circuit and the
United States Court of Federal Claims in various consolidated cases (the
"Winstar Cases") granting summary judgment to the plaintiff thrift institutions
on the liability portion of their breach of contract claims against the United
States. The Supreme Court held that the U.S. Government breached certain express
contracts when Congress enacted FIRREA, and the Supreme Court remanded the
proceedings for a determination of the appropriate measure and amount of
damages, which have not been finally litigated.
The Court of Claims issued a Case Management Order ("CMO") in all of the
Winstar Cases, including the Goodwill Litigation. The CMO sets forth procedures
for all of the plaintiffs and the defendant, the United States, to follow
relating to the exchange of documents, filing of partial summary judgment
motions with respect to liability only, discovery on damages issues and the
timing of all of the Winstar Cases being set for trial. Pursuant to the CMO, the
Company and the Bank filed a motion for partial summary judgment as to the
Government's liability to the them for breach of contract. The Government's
response thereto appears to concede that there was a contract allowing the Bank
to apply the Capital Credit to regulatory capital and that, by enacting FIRREA,
the Government acted inconsistently with that contract. The Government still
maintains that it does not have liability with respect to the Bank's $79.7
million of GAAP goodwill. Furthermore, the Government contends that only the
Bank and not the Company nor the other Plaintiffs have standing to pursue breach
of contract claims. The Court of Claims has not yet ruled on this motion for
partially summary judgement
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 another year. The amount of damages
the Plaintiffs have suffered as a result of the Government's breach of contract
has not yet been determined. In addition, although the decision of the Supreme
Court in the Winstar Cases has been rendered, there can be no assurance that the
court will not reach a different conclusion in the Goodwill Litigation. To date,
there have been no material substantive settlement discussions to resolve the
Goodwill Litigation by and among the Company, the Bank and the Government and no
trial date has been set.
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 has not yet ruled on Ariadne's
motion. Ariadne had previously filed its own action in the Court of Claims in
April 1996 against the Government which has been dismissed (and which dismissal
has been upheld on appeal) based on the statute of limitations. In February
1998, Ariadne petitioned the Circuit Court of Appeals for a rehearing, and in
March 1998, Ariadne's petition was denied.
In May 1997, Ariadne filed a lawsuit against 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 Trustees of the Estate of Bernice Pauahi
Bishop (the "Bishop Estate"), BIL Securities (Offshore) Limited ("BIL
Securities") and Arbur (collectively, the "Material 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. In August 1998, Ariadne named the
Bishop Estate and BIL Securities and certain affiliates of BIL Securities as
defendants in this lawsuit. In June 1999, Ariadne amended its complaint to
include Ariadne's parent company as a plaintiff and to allege additional causes
of action against the defendants. Ariadne's amended complaint seeks damages in
an amount not specified but in excess of $63 million. The Company and the Bank
(by demurrer and summary judgement) successfully eliminated most of Ariadne's
causes of action against them.
25
<PAGE>
However, these rulings are subject to appeal by Ariadne. The Company and the
Bank intend to continue 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."
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 finally
adjudicated precedents on how to assess damages in cases such as the Goodwill
Litigation. In addition, the Government may argue that some or all of the
damages proffered by the Plaintiffs are too speculative to permit a recovery.
Therefore, even if the Plaintiffs prevail in establishing the liability of the
United States, there can be no assurances as to the amount, if any, and type of
damages that they may recover. Without limiting the generality of the foregoing,
there can be no assurance that the Plaintiffs will obtain any cash recovery in
the Goodwill Litigation. Furthermore, assuming that there is a cash recovery, it
is impossible to predict the amount of the Litigation Recovery (as defined
below) because the fees, costs and taxes associated with the Litigation Recovery
cannot be estimated. To the extent that the Plaintiffs must engage in protracted
litigation, such fees and costs may increase significantly.
The Shareholder Rights Agreement
General. The Company, the Bank and each of the Material Stockholders
(i.e., the Bishop Estate, BIL Securities and Arbur) have entered into an
agreement (the "Shareholder Rights Agreement"), the effective date of which was
the commencement of the IPO, whereby each Material Stockholder received one
Contingent Goodwill Participation Right (each a "Right" and collectively, the
"Rights") for each share of Common Stock held by the Material Stockholder as of
the date of the Shareholder Rights Agreement.
Each Right entitles the Material Stockholders to receive 0.0009645% of the
Litigation Recovery, if any (as defined below) and all of the Rights to be owned
by the Material Stockholders will entitle the Material Stockholders to receive
in the aggregate 95% of the Litigation Recovery (such portion of the Litigation
Recovery, the "Recovery Payment"). The remaining 5.0% of the Litigation Recovery
will be retained by 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 Material Stockholders have paid 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 Material
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 claim by a party now
pending or hereafter brought seeking in whole or in part any amounts paid or to
be paid as part of the Litigation Recovery or a claim by a party other than the
Company or the Bank challenging the validity or binding effect of the
Shareholder Rights Agreement (the "Ancillary Litigation").
Litigation Recovery. The Litigation Recovery will equal the cash payment
(or any cash resulting from the liquidation of Non-Cash Proceeds (as defined
below)) (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 Shareholder Rights 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
Shareholder Rights 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
26
<PAGE>
to the Company and/or the Bank from making the Recovery Payment to the Material
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 (calculated for purposes of this clause (iii) before the
deduction of the amounts calculated pursuant to clauses (i) and (ii) above and
clause (iv) below) which is determined to be owing to one or more of the
Plaintiffs (other than 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))which Doreen J. Blauschild is entitled to receive as a
result of her employment agreement with the Bank, dated as of April 11, 1995
(which entitles Ms. Blauschild to 0.25% of the amount by which any net recovery
(i.e., gross amount less attorneys' fees incurred by the Bank) by and payable to
the Bank relating to the Goodwill Litigation, whether by judgment or settlement,
exceeds $150.0 million).
Conversion of Rights to Preferred Stock. In the event that applicable
laws, rules, regulations, directives or the terms of any judgment or settlement
limit or prevent the Bank from distributing any or all of the Litigation
Recovery 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 Litigation Recovery and the Company shall only redeem those Rights (on a pro
rata basis) and distribute such portion of the Recovery Payment (on a pro rata
basis), to the extent not otherwise restricted. While the Bank has a continuing
obligation to distribute the balance of any Litigation Recovery which it has
been precluded from paying as soon as permissible, and 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 distributing the Litigation Recovery to the Company, the Company shall,
upon the written request of any Material Stockholder, issue to such Material
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
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 Material Stockholder's Rights.
The stated value of each share of Recovery Payment Preferred shall be
$1,000. The holders of the Recovery Payment Preferred shall be entitled to
receive, 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%. 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.
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 Material 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 Material Stockholders have reimbursed the
Company and the Bank for their expenses to date and 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 Material Stockholders will in fact continue to
reimburse the Company and the Bank for any fees and expenses incurred with
respect to the Goodwill Litigation and any Ancillary Litigation and the Material
Stockholders are not obligated to do so. The Shareholder Rights Agreement
provides that the Material 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 than the Company or the Bank,
challenging the validity or binding effect of the Shareholders Rights Agreement.
27
<PAGE>
Rights of the Material Stockholders. The Material Stockholders will not
have any rights to receive any payment pursuant to the Shareholder Rights
Agreement except in each case to the extent of the Recovery payment, if any and
except as described in the Shareholder Rights Agreement. The Rights (i) will be
junior to all debt obligations of the Company and the Bank existing at the time
of the redemption except as to an obligation that is expressly made junior to
the Rights, (ii) do not have a right to vote, and (iii) will be a senior claim
in relation to the right of the holders of any stock of Company, including the
Company Common Stock or 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 Material Stockholders will
continue to have such other rights on liquidation attributable to their status
as holders of Common Stock).
Tax Consequences. KPMG 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 Material 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 Material Stockholders. Furthermore,
the Material Stockholders should not be required to include the amount of the
Rights in income. Finally, the amount of value taken into account for purposes
of determining the annual Section 382 limitation in connection with the 1998
Ownership Change should include the value of the Rights.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "PBOC" since the Company's initial public offering in May 1998.
At March 7, 2000 the Company had approximately 34 stockholders of record (not
including the number of persons or entities holding stock in nominee or street
name through various brokerage firms) and 19,876,205 outstanding (excluding
treasury stock) shares of Common Stock. The following table sets forth for the
quarters indicated the range of high and low bid information per share of Common
Stock as reported by the Nasdaq National Market.
1998 High Low
------------------------ ------ ------
First Quarter........... $ -- $ --
Second Quarter.......... 14.50 13.62
Third Quarter........... 13.81 9.00
Fourth Quarter.......... 10.75 8.00
Year.................... 14.50 8.00
28
<PAGE>
1998 High Low
------------------------ ------ ------
First Quarter........... 10.53 8.75
Second Quarter.......... 10.00 8.37
Third Quarter........... 10.87 7.90
Fourth Quarter.......... 9.87 7.66
Year.................... 10.87 7.66
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 for the foreseeable
future. 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.
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
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, 1999 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 or For The Year Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ------------ ----------- ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets................................... $ 3,398,228 $ 3,335,027 $ 2,213,054 $ 1,747,918 $ 1,579,760
Cash and cash equivalents...................... 19,582 22,401 14,113 14,720 7,258
Federal funds sold............................. 2,000 24,000 7,004 7,200 11,800
Securities purchased under agreements to resell -- -- -- -- 35,000
Securities available-for-sale.................. 771,864 1,004,937 571,160 502,301 241,645
Mortgage-backed securities held-to-maturity.... 4,326 6,282 9,671 10,971 --
Loans receivable, net.......................... 2,462,837 2,148,857 1,533,212 1,141,707 1,228,152
Real estate held for investment and sale, net.. 846 2,723 15,191 22,561 16,288
Deposits....................................... 1,647,337 1,542,162 1,266,615 1,371,243 1,473,318
Securities sold under agreements to repurchase. 381,109 364,000 340,788 192,433 --
FHLB advances.................................. 1,123,700 1,198,000 472,000 80,000 31,746
Senior debt(1)................................. -- -- 11,113 11,398 10,000
Other borrowings 4,621 -- -- -- --
Minority interest(2)........................... 33,250 33,250 33,250 -- --
Stockholders' equity(3)........................ 179,457 180,606 79,602 64,822 56,613
Selected Operating Data:
Interest, fees and dividend income............. $ 230,428 $ 180,873 $ 130,979 $ 122,896 $ 122,926
Interest expense............................... 161,677 140,358 97,205 90,791 97,977
----------- ----------- ------------ ----------- ------------
Net interest income............................ 68,751 40,515 33,774 32,105 24,949
Provision for loan losses...................... 4,747 2,000 2,046 2,884 8,823
----------- ----------- ------------ ----------- ------------
Net interest income after provision for loan losses 64,004 38,515 31,728 29,221 16,126
Gain (loss) on sale of mortgage-backed securities, net (3,217) 1,682 1,275 3,638 641
Gain (loss) on loan and servicing sales, net... 49 613 3,413 (53) (166)
Income (loss) from other real estate operations, net 513 1,479 (1,805) 1,946 (2,067)
Other noninterest income....................... 2,547 2,662 2,234 2,593 2,095
Operating expenses............................. 38,123 46,962 29,543 27,816 30,751
----------- ----------- ------------ ----------- ------------
Earnings (loss) before income tax benefit, minority
interest and extraordinary item............. 25,773 (2,011) 7,302 9,529 (14,122)
Income tax benefit............................. 4,500 16,390 4,499 3,015 2,644
----------- ----------- ------------ ----------- ------------
Earnings (loss) before minority interest and
extraordinary item ........................ 30,273 14,379 11,801 12,544 (11,478)
Minority interest.............................. 3,476 3,476 859 -- --
----------- ----------- ------------ ----------- ------------
Earnings (loss) before extraordinary item 26,797 10,903 10,942 12,544 (11,478)
Extraordinary item gain on sale of FHLB advances 6,678 -- -- -- --
----------- ----------- ------------ ----------- ------------
Net earnings (loss)......................... 33,475 10,903 10,942 12,544 (11,478)
Dividends on preferred stock -- 2,160 7,340 6,555 3,385
----------- ----------- ------------ ----------- ------------
Net earnings (loss) available to common stockholders $ 33,475 $ 8,743 $ 3,602 $ 5,989 $ (14,863)
=========== =========== ============ =========== ============
Earnings (loss) per share basic and diluted before
extraordinary item $ 1.31 $ 0.59 $ 1.14 $ 1.90 $ (3.41)
Earnings (loss) per share, basic and diluted(4) $ 1.63 $ 0.59 $ 1.14 $ 1.90 $ (3.41)
----------- ----------- ------------ ----------- ------------
Weighted average number of shares outstanding 20,487,111 14,793,644 3,152,064 3,152,064 4,361,280
----------- ----------- ------------ ----------- ------------
</TABLE>
(Continued)
30
<PAGE>
<TABLE>
<CAPTION>
At or For The Year Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Key Operating Ratios:(5)
Return on average assets .......................... 0.97% 0.39% 0.57% 0.72% (0.65)%
Return on average assets, as adjusted (6) ......... 0.87 0.72 0.57 0.72 (0.65)
Return on average equity .......................... 19.49 7.79 15.37 22.00 (38.21)
Return on average equity, as adjusted (6) ......... 17.59 14.37 15.37 22.00 (38.21)
Average equity to average assets .................. 4.96 4.98 3.72 3.29 1.70
Dividend payout ratio ............................. -- -- -- -- --
Average interest-earning assets to average
interest-bearing liabilities ............... 108.34 105.58 100.69 100.00 100.00
Interest rate spread(7) ........................... 1.62 1.20 1.80 1.91 1.46
Net interest margin(7) ............................ 2.01 1.49 1.84 1.92 1.45
Operating expenses to average assets .............. 1.10 1.67 1.55 1.60 1.74
Operating expenses to average assets, as
adjusted (6) .................................. 1.10 1.12 1.55 1.60 1.74
Efficiency ratio(8) ............................... 55.54 100.02 72.17 64.52 89.72
Efficiency ratio, as adjusted (6)(8) .............. 52.90 66.80 72.17 64.52 89.72
Asset Quality Data:
Total non-performing assets and troubled debt
restructurings(9) ............................. $ 10,494 $ 14,806 $ 33,123 $ 46,218 $ 52,640
Non-performing loans as a percent of loans, net ... 0.13% 0.40% 0.65% 1.60% 2.90%
Non-performing assets as a percent of total
assets (9) .................................... 0.12 0.34 1.05 2.21 2.94
Non-performing assets and troubled debt
restructurings as a percent of total assets (9) 0.31 0.44 1.50 2.64 3.33
Allowance for loan losses as a percent of loans,
gross ......................................... 0.81 0.86 1.15 1.99 2.50
Allowance for loan losses as a percent of non-
performing loans (9) .......................... 662.40 222.14 179.97 127.65 88.71
Allowance for loan losses as a percent of non-
performing loans and troubled debt
restructurings (9) ............................ 218.19 156.39 89.84 90.30 75.67
Net charge-offs to average loans, net ............. 0.11 0.05 0.63 0.95 0.55
Bank Regulatory Capital Ratios(10):
Tier 1 leverage ................................... 6.78% 6.30% 5.43% 4.57% 4.18%
Tier 1 risk-based ................................. 11.08 11.48 10.74 9.15 7.56
Total risk-based .................................. 11.96 12.36 11.99 10.38 8.43
</TABLE>
- ----------
(1) The senior debt was repaid in connection with the IPO.
(2) Minority interest consists of the interest in PPCCP held by persons other
than the Bank. See "ITEM 1. BUSINESS--Subsidiaries."
(3) At December 31, 1999, 1998 and 1997, stockholders' equity is net of $38.7
million, $13.6 million and $2.0 million of unrealized losses on securities
available-for-sale, respectively.
(4) Based on a weighted average number of shares of Common Stock of
20,487,111, 14,793,644, 3,152,064, 3,152,064 and 4,361,280 for 1999, 1998,
1997, 1996 and 1995, respectively.
(5) With the exception of end of period ratios, all ratios are based on
average daily balances during the respective periods.
(6) For 1999, excludes effect of extraordinary item and loss on investment
securities sales. For 1998, excludes effect of one-time IPO-related
expenses.
(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 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
"ITEM 1. BUSINESS--Asset Quality."
(10) For information on the Bank's regulatory capital requirements. See "ITEM
1. BUSINESS--Regulation of Federal Savings Banks--Regulatory Capital
Requirements."
31
<PAGE>
ITEM 7. 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
in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" incorporated hereof.
General
The Bank is a community oriented savings bank which emphasizes customer
service and convenience. As a part of its overall business strategy, the Bank
has sought to develop a wide variety of products and services which meet the
needs of its retail and commercial customers. On the asset side of the Bank's
balance sheet, management is emphasizing commercial real estate, commercial
business and consumer lending which complements the Bank's residential lending
operations. In addition, the Bank has increased its investment in corporate
trust preferred obligations and U.S. Government agency mortgage-backed
securities, which investments enhance net interest income while limiting credit
and interest rate risk. On the liability side of the Bank's balance sheet, the
Bank has been accessing cost-efficient funding sources, including retail
deposits, FHLB advances and securities sold under agreements to repurchase.
The Bank's business strategy focuses on achieving attractive returns
consistent with the Company's risk management objectives. The Bank has
implemented this strategy by (i) significantly growing its loan portfolio, with
a particular emphasis on commercial and consumer lending; (ii) expanding the
Bank's branch network through the acquisition of branch offices and whole
institutions; (iii) reducing funding costs through the utilization of retail
deposits; (iv) improving operating efficiency by maintaining a low level of
operating expenses relative to interest-earning assets; (v) managing the Bank's
capital in order to support its growth strategy; (vi) taking advantage of recent
consolidation in its market area by promoting the Bank as a community banking
alternative to individuals and small-to-medium sized businesses in Southern
California.
Financial Condition
General. Total assets increased by $63.2 million or 1.9% to $3.4 billion
during the year ended December 31, 1999 and increased by $1.1 billion or 50.7%
during the year ended December 31, 1998. During 1998, the Bank took advantage of
the leverage opportunities presented as a result of the capital raised from the
IPO, originating $607.6 million of loans and purchasing $876.9 million of loans,
which were funded by intermediate-term FHLB advances. Total investments
increased by $430.4 million during 1998 and were the primary reason for the
increase in total assets in 1998. These assets were funded primarily through the
use of short- and intermediate-term borrowings, consisting of reverse repurchase
agreements and FHLB advances.
Cash, Cash Equivalents and Other Short-Term Investments. Cash, cash
equivalents and other short-term investments (consisting of cash, federal funds
sold and securities purchased under agreements to resell) amounted to $21.6
million and $46.4 million at December 31, 1999 and 1998, 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, 1999, the Bank's regulatory liquidity
exceeded the minimum OTS requirements. See "Liquidity And Capital Resources."
Securities. At December 31, 1999, the Bank's securities portfolio (both
held-to-maturity and available-for-sale) amounted to $776.2 million or 22.8% of
the Company's total assets, as compared to $1.0 billion or 30.3% at December 31,
1998. At December 31, 1999 and 1998, $425.8 million and $590.8 million, or 54.9%
and 58.4% of the Bank's securities portfolio consisted of mortgage-backed
securities, $241.9 million and $325.0 million, or 31.1% and 32.1% of such
portfolio, consisted of investment-grade trust preferred obligations, and $34.2
million and $37.0 million, or 4.4% and 3.7% 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,
32
<PAGE>
1999, $4.3 million of the Bank's securities portfolio was classified as
held-to-maturity and reported at historical cost and $771.9 million of such
portfolio was classified as available-for-sale and reported at fair value, with
unrealized gains and losses excluded from earnings and instead reported as a
separate component of 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,
1999, the Bank's securities classified as available-for-sale had in the
aggregate $38.7 million of unrealized losses, which represents a substantial
increase from the $13.6 million of unrealized losses at December 31, 1998.
During the fourth quarter of 1999 the Bank sold $200 million of its investment
securities in an effort to improve its regulatory capital ratios.
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,
------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale (at market):
U.S. Government and federal
agency obligations ........... $ 34,202 $ 34,202 $ 36,977 $ 36,977 $ 139,719 $ 139,719
Investment-grade trust preferred
obligations ................. 241,875 241,875 324,965 324,965 -- --
Mortgage-backed securities ..... 421,439 421,439 584,515 584,515 418,450 418,450
SBA and asset backed securities 74,348 74,348 58,480 58,480 12,991 12,991
---------- ---------- ---------- ---------- ---------- ----------
$ 771,864 $ 771,864 $1,004,937 $1,004,937 $ 571,160 $ 571,160
========== ========== ========== ========== ========== ==========
Held-to-maturity:
Mortgage-backed securities ..... $ 4,326 $ 4,274 $ 6,282 $ 6,372 $ 9,671 $ 9,743
========== ========== ========== ========== ========== ==========
</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,
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Securities at beginning of period ...... $ 1,011,219 $ 580,831 $ 513,272
Purchases .............................. 270,731 1,134,026 408,729
Sales .................................. (322,040) (513,159) (234,339)
Repayments and prepayments,
amortization /accretion of
premiums/discounts .................. (158,625) (178,842) (110,941)
Decrease (increase) in unrealized losses
on available-for-sale securities(1) . (25,095) (11,637) 4,110
----------- ----------- -----------
Securities at end of period(2)(3)(4) ... $ 776,190 $ 1,011,219 $ 580,831
=========== =========== ===========
</TABLE>
- ----------
(1) At December 31, 1999, the cumulative unrealized losses on securities
classified as available-for-sale amounted to $38.7 million, which reduces
stockholders' equity.
(2) At December 31, 1999, the book value and market value of the Bank's
securities (including held-to-maturity and available-for-sale securities)
amounted to $776.2 million and $776.1 million, respectively.
(3) At December 31, 1999, $389.9 million or 50.2% of the Bank's securities
portfolio consisted of adjustable-rate securities, compared to $501.1
million or 49.5% and $222.4 million or 43.3% at December 31, 1998 and
1997, respectively.
33
<PAGE>
- ---------------------
(4) The decrease in securities during 1999 reflects the sale of $200 million
of investment securities by the Bank during the fourth quarter of 1999.
Such sales reflected management's strategy of replacing wholesale assets
with loan originations.
Loans Receivable. Net loans receivable increased by $314.0 million, or
14.6% during the year ended December 31, 1999, and by $615.6 million, or 40.2%,
during the year ended December 31, 1998. The increase during 1999 reflected the
increase in loan originations from $607.6 million in 1998 to $828.8 million in
1999. The significant increase during 1998 was directly attributable to
management's strategy of leveraging the capital generated from the IPO. The Bank
purchased $191.6 million and $821.7 million of single-family residential
mortgage loans in 1999 and 1998, respectively on a servicing retained basis. The
Bank also increased its loan originations to $607.6 million in 1998 compared to
$160.7 million in 1997.
34
<PAGE>
Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loans at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------ -------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential ..... $ 1,475,151 57% $ 1,494,756 68% $ 953,701 61%
Multi-family residential ...... 327,252 13 366,625 17 426,254 27
Commercial real estate ........ 420,919 16 206,402 9 135,407 9
Land and other ................ 847 -- 880 -- 5,896 --
----------- ----------- ----------- ----------- ----------- -----------
Total mortgage loans ...... 2,224,169 86 2,068,663 94 1,521,258 97
----------- ----------- ----------- ----------- ----------- -----------
Other loans:
Commercial business ........... 159,740 6 62,665 3 22,484 2
Consumer ...................... 199,879 8 53,826 3 8,485 1
Secured by deposits ........... 1,918 -- 3,537 -- 2,287 --
----------- ----------- ----------- ----------- ----------- -----------
Total loans receivable .... 2,585,706 100% 2,188,691 100% 1,554,514 100%
----------- =========== ----------- =========== =========== ===========
Less:
Undistributed loan proceeds ... 95,683 17,152 6,206
Unamortized net loan discounts
and deferred origination fees 4,045 814 (6,859)
Deferred gain on servicing sold. 2,090 2,971 4,131
Allowance for loan losses....... 21,051 18,897 17,824
----------- ---------- -----------
Loans receivable, net........... $2,462,837 $2,148,857 $1,533,212
=========== =========== ===========
<CAPTION>
December 31,
------------------------------------------------------
1996 1995
------------------------- -------------------------
Percent of Percent of
Amount Total Amount Total
----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential ..... $ 595,915 51% $ 658,412 52%
Multi-family residential ...... 453,064 39 479,100 38
Commercial real estate ........ 110,931 10 120,109 10
Land and other ................ 1,639 -- 3,176 --
----------- ----------- ----------- -----------
Total mortgage loans ...... 1,161,549 100 1,260,797 100
----------- ----------- ----------- -----------
Other loans:
Commercial business ........... 3,523 -- -- --
Consumer ...................... 988 -- -- --
Secured by deposits ........... 2,132 -- 1,976 --
----------- ----------- ----------- -----------
Total loans receivable .... 1,168,192 100% 1,262,773 100%
----------- =========== =========== ===========
Less:
Undistributed loan proceeds ... 473 28
Unamortized net loan discounts
and deferred origination fees 2,732 3,021
Deferred gain on servicing sold. -- --
Allowance for loan losses....... 23,280 31,572
----------- -----------
Loans receivable, net........... $1,141,707 $1,228,152
=========== ===========
</TABLE>
35
<PAGE>
Contractual Principal Repayments and Interest Rates. The following table
sets forth scheduled contractual amortization of the Bank's total loan portfolio
at December 31, 1999, as well as the dollar amount of such loans which are
scheduled to mature after one year which have fixed or adjustable interest
rates. Demand loans, loans having no schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
Principal Repayments Contractually Due or Repricing
in Year(s) Ended December 31,
-------------------------------------------------------------------------------------
Total at
December 31, 2003- 2005- 2011- There-
1999 2000 2001 2002 2004 2010 2016 after
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential . $1,475,151 $ 29,917 $ 29,946 $ 32,527 $ 33,996 $ 38,346 $ 37,959 $1,272,460
Multi-family residential .. 327,252 7,582 10,783 8,001 8,561 10,753 14,154 267,418
Commercial real estate .... 420,919 50,803 6,088 22,064 12,578 9,612 6,206 313,568
Land ...................... 847 144 10 693 -- -- -- --
Other loans:
Commercial business ....... 159,740 119,149 6,005 3,673 5,740 1,317 292 23,564
Consumer .................. 199,879 40,068 31,498 33,572 36,114 10,898 341 47,388
Secured by deposits ....... 1,918 1,918 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total (1) ............ $2,585,706 $ 249,581 $ 84,330 $ 100,530 $ 96,989 $ 70,926 $ 58,952 $1,924,398
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
- -------------------
(1) Of the $2.3 billion of loan principal repayments contractually due after
December 31, 2000, $1.4 billion have fixed-rates of interest and $888
million have adjustable-rates of interest.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the Bank
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to increase
when 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).
36
<PAGE>
The following table shows the activity in the Bank's loans during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Gross loans held at beginning of period . $ 2,188,691 $ 1,554,514 $ 1,168,192
Originations of loans:
Mortgage loans:
Single-family residential ............ 201,836 389,475 88,077
Multi-family residential ............. 11,003 7,847 15,806
Commercial real estate ............... 253,477 116,242 24,232
Other loans:
Commercial business .................. 166,140 57,492 20,869
Consumer ............................. 194,432 32,969 8,050
Secured by deposits .................. 1,918 3,537 3,664
----------- ----------- -----------
Total originations ................ 828,806 607,562 160,698
----------- ----------- -----------
Purchases of loans:
Single-family residential ............ 191,576 821,716 482,943
Multi-family residential ............. 1,579 13,302 4,834
Commercial real estate ............... -- 10,201 12,899
Land ................................. -- -- 5,000
Commercial business .................. 57 9,200 --
Consumer ............................. 183 22,479 5
----------- ----------- -----------
Total purchases ................... 193,395 876,898 505,681
----------- ----------- -----------
Total originations and purchases 1,022,201 1,484,460 666,379
----------- ----------- -----------
Loans sold:
Single-family residential ............ (92,492) (37,051) (85,241)
Commercial real estate ............... (1,563) (357) --
Commercial business .................. -- (5,000) --
Consumer ............................. (7) (13) --
----------- ----------- -----------
Total sold ........................ (94,062) (42,421) (85,241)
----------- ----------- -----------
Repayments .............................. (522,601) (794,127) (162,814)
Transfers to real estate owned .......... (6,384) (10,248) (31,349)
Principal charge-offs ................... (2,139) (3,487) (653)
----------- ----------- -----------
Net activity in loans ................... 397,015 634,177 386,322
----------- ----------- -----------
Gross loans held at end of period ....... $ 2,585,706 $ 2,188,691 $ 1,554,514
=========== =========== ===========
</TABLE>
37
<PAGE>
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) ("TDR's") from an
aggregate of $25.8 million at December 31, 1996 to an aggregate of $9.6 million
at December 31, 1999.
The following table sets forth information with respect to non-performing
assets identified by he Bank, including non-accrual loans, real estate owned and
TDR's at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans, net:
Mortgage loans:
Single-family residential ........... $ 2,331 $ 3,959 $ 8,435 $ 7,947 $10,467
Multi-family residential ............ 557 428 405 9,198 16,840
Commercial real estate .............. 20 3,613 1,064 1,093 8,173
Land ................................ -- -- -- -- 112
Non-mortgage loans:
Commercial business ................. 163 99 -- -- --
Consumer ............................ 107 408 -- -- --
------- ------- ------- ------- -------
Total non-performing loans, net ... 3,178 8,507 9,904 18,238 35,592
------- ------- ------- ------- -------
Real estate owned, net:
Single-family residential ........... 846 2,723 678 3,268 6,387
Multi-family residential ............ -- -- 6,482 8,310 901
Commercial real estate .............. -- -- 5,921 8,614 3,506
Land ................................ -- -- 202 244 121
------- ------- ------- ------- -------
Total real estate owned, net ........... 846 2,723 13,283 20,436 10,915
------- ------- ------- ------- -------
Total non-performing assets ............ 4,024 11,230 23,187 38,674 46,507
Troubled debt restructurings ........... 6,470 3,576 9,936 7,544 6,133
------- ------- ------- ------- -------
Total non-performing assets and
troubled debt restructurings ........ $10,494 $14,806 $33,123 $46,218 $52,640
======= ======= ======= ======= =======
Non-performing loans to total loans, net 0.13% 0.40% 0.65% 1.60% 2.90%
Non-performing loans to total assets ... 0.09 0.26 0.45 1.04 2.25
Non-performing assets to total assets .. 0.12 0.34 1.05 2.21 2.94
Total non-performing assets and
troubled debt restructurings to total
assets ............................... 0.31 0.44 1.50 2.64 3.33
</TABLE>
The interest income that would have been recorded during the years ended
December 31, 1999, 1998 and 1997 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 $372,000, $950,000, and $644,000, respectively.
As a result of the focus given by the Bank to rehabilitate or liquidate
the Bank's problem assets, nonperforming assets and TDR's have declined from
$14.8 million or 0.44% of total assets at December 31, 1998 to $10.5 million or
0.31% of total assets at December 31, 1999.
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 1999. In particular,
during 1999, the Company sold all multi- family, commercial real estate, and
79.8% of residential properties owned during the year. As a consequence of such
actions, at December 31, 1999, real estate owned totaled $846,000 compared to
$2.7 million as of December 31, 1998.
38
<PAGE>
Of the Bank's $3.2 million of non-performing loans at December 31, 1999,
the largest loan was secured by an apartment complex, with a carrying value of
$556,900. This loan has been classified as collateral dependent, and as of
December 31, 1999 was carried at fair value. The Bank's $846,000 of real estate
owned at December 31, 1999 was comprised of two residential properties.
The decline in real estate owned in 1997 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 current
management has financed the disposition of real estate owned, such loans have
been made consistent with market terms and conditions and cash down payments to
qualify the transaction as a sale under applicable accounting guidelines. During
1998 and 1997, the Bank extended an aggregate of $6.1 million and $16.1 million
to finance the disposition of real estate owned, respectively, which constituted
22.8% and 40.8% of total sales of real estate owned during such years,
respectively. During 1999, the Bank did not fund any loans to finance the
disposition of real estate owned.
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 TDR's. Since the change in the
Bank's management in 1995, the Bank enters into TDR's 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. 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.
39
<PAGE>
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period ...... $ 18,897 $ 17,824 $ 23,280 $ 31,572 $ 29,801
Provision for loan losses ............. 4,747 2,000 2,046 2,884 8,823
Charge-offs:
Mortgage loans:
Single-family residential ..... (303) (616) (1,967) (2,213) (3,416)
Multi-family residential ...... (131) (261) (5,599) (5,039) (1,854)
Commercial real estate ........ (820) -- (42) (3,371) (860)
Land .......................... -- -- -- (1,478) (956)
Non-mortgage loans:
Commercial business ........... (741) (16) -- -- --
Consumer ...................... (1,101) (119) -- -- --
-------- -------- -------- -------- --------
Total charge-offs ........... (3,096) (1,012) (7,608) (12,101) (7,086)
Recoveries:
Mortgage loans:
Single-family residential ..... 32 85 106 16 34
Multi-family residential ...... -- -- -- 22 --
Commercial real estate ........ 60 -- -- 2 --
Land .......................... -- -- -- 885 --
Non-mortgage loans:
Commercial business ........... 134 -- -- -- --
Consumer ...................... 277 -- -- -- --
-------- -------- -------- -------- --------
Total recoveries ............ 503 85 106 925 34
-------- -------- -------- -------- --------
Net charge-offs ....................... (2,593) (927) (7,502) (11,176) (7,052)
-------- -------- -------- -------- --------
Allowance at end of period ............ $ 21,051 $ 18,897 $ 17,824 $ 23,280 $ 31,572
======== ======== ======== ======== ========
Allowance for loan losses to total
nonperforming loans at end of
period ............................ 662.40% 222.14% 179.97% 127.65% 88.71%
======== ======== ======== ======== ========
Allowance for loan losses to total
nonperforming loans and troubled
debt restructurings at end of
period ............................ 218.19% 156.39% 89.84% 90.30% 75.67%
======== ======== ======== ======== ========
Allowance for loan losses to
total loans, gross at end of period 0.81% 0.86% 1.15% 1.99% 2.50%
======== ======== ======== ======== ========
</TABLE>
As shown in the table above, loan charge-offs (net of recoveries) amounted
to $2.6 million, $927,000 and $7.5 million, during the years ended December 31,
1999, 1998 and 1997, respectively. The net charge-offs recognized by the Bank
during the years ended December 31, 1999, 1998 and 1997 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 since 1995, which has
contributed to the decrease in the Bank's provision for loan losses. The Bank
also experienced increased net charge-offs of $824,000 and $607,000 on its
consumer and commercial business portfolios in 1999 due to growth in such
portfolios. The increase in provision for loan losses in 1999 reflects the
Bank's increased volume of originations of commercial real estate, commercial
business and consumer loans. Management believes that its allowance for loan
losses at December 31, 1999 is 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.
40
<PAGE>
The following table sets forth information concerning the allocation of
the Bank's allowance for loan losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------- ---------------------- --------------------- ----------------------
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 . $ 5,020 23.8% $ 5,636 29.8% $ 5,014 28.1% $ 4,051 17.4%
Multi-family
residential .......... 4,990 23.7 7,239 38.3 8,964 50.3 15,753 67.7
Commercial real estate .. 4,073 19.4 3,887 20.6 3,062 17.2 3,267 14.0
Land .................... 42 0.2 44 0.2 305 1.7 94 0.4
Commercial business ..... 3,959 18.8 1,160 6.1 352 2.0 102 0.5
Consumer ................ 243 1.2 160 0.9 127 0.7 13 --
Auto .................... 2,724 12.9 771 4.1 -- -- -- --
------- ----- ------- ----- ------- ----- ------- -----
Total ................ $21,051 100.0% $18,897 100.0% $17,824 100.0% $23,280 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Deposits. Total deposits increased by $105.2 million or 6.8% during the
year ended December 31, 1999. The Bank's aggregate certificates of deposit
increased from $1.109 billion, or 71.9% of total deposits, at December 31, 1998
to $1.146 billion, or 69.6% of total deposits, at December 31, 1999. The Bank
has offered a wide array of deposit products through its branch system in order
to foster retail deposit growth. Transaction accounts (consisting of passbook,
checking and money market accounts) increased from $433.0 million, or 28.1% of
total deposits, at December 31, 1998 to $501.4 million, or 30.4% of total
deposits, at December 31, 1999.
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,
------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts .......... $ 182,275 1.22% $ 120,632 1.75% $ 83,248 1.96%
Money market accounts ...... 141,149 4.13 96,422 4.71 21,938 2.94
Passbook accounts .......... 137,725 3.40 158,355 3.88 235,162 4.34
---------- ---------- ----------
Total transaction accounts . 461,149 375,409 340,348
Term certificates of deposit 1,145,621 5.22 1,010,307 5.71 966,863 5.66
---------- ---------- ----------
Total deposits .......... $1,606,770 4.51% $1,385,716 5.09% $1,307,211 5.14%
========== ========== ========== ========== ========== ==========
</TABLE>
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Beginning balance......................... $1,542,162 $1,266,615 $1,371,243
Net increase (decrease) before interest... 47,948 221,269 (157,599)
Interest credited......................... 57,227 54,278 52,971
---------- ---------- ----------
Net increase (decrease) in deposits....... 105,175 275,547 (104,628)
---------- ---------- ----------
Ending balance............................ $1,647,337 $1,542,162 $1,266,615
========== ========== ==========
</TABLE>
41
<PAGE>
The following table sets forth by various interest rate categories the
term certificates of deposit with the Bank at the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1999 1998 1997
---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
0.00% to 2.99%.................. $ 3,869 $ 4,536 $ 4,071
3.00 to 3.99.................... 9,740 5,085 2,993
4.00 to 4.99.................... 207,756 107,373 5,700
5.00 to 6.99.................... 923,621 961,204 918,842
7.00 to 8.99.................... 962 30,961 1,219
---------- ---------- ---------
Total...................... $1,145,948(1) $1,109,159(1) $ 932,825(1)
========== ========== =========
</TABLE>
- -----------
(1) At December 31, 1999, 1998 and 1997, certificates of deposit in amounts
greater than or equal to $100,000 amounted to $320.4 million, $316.3
million and $138.2 million, respectively.
The following table sets forth the amount and remaining maturities of the
Bank's term certificates of deposit at December 31, 1999.
<TABLE>
<CAPTION>
Over Six Months Over One Over Two
Six Months Through Year Through Years Through Over
and Less One Year Two Years Three Years Three Years
- ----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
0.00% to 1.99% ..... $ 206 $ -- $ -- $ -- $ --
2.00 to 2.99 ....... 2,732 620 311 -- --
3.00 to 3.99 ....... 9,012 676 52 -- --
4.00 to 4.99 ....... 176,842 25,466 4,867 311 270
5.00 to 6.99 ....... 533,973 257,170 112,319 9,367 10,792
7.00 to 8.99 ....... 867 -- 95 -- --
-------- -------- -------- -------- --------
Total ......... $723,632 $283,932 $117,644 $ 9,678 $ 11,062
======== ======== ======== ======== ========
</TABLE>
The following table presents the maturity of term certificates of deposit
in amounts greater than or equal to $100,000 at December 31, 1999.
At December 31, 1999
--------------------
(Dollars in Thousands)
3 months or less............................. $ 117,972
Over 3 months through 6 months............... 88,886
Over 6 months through 12 months.............. 79,776
Over 12 months............................... 33,799
-----------
Total..................................... $ 320,433
===========
42
<PAGE>
Borrowings. The following table sets forth certain information regarding
the borrowings of the Bank at or for the dates indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB of San Francisco advances:
Average balance outstanding ...................... $ 1,211,000 $ 902,083 $ 148,681
Maximum amount outstanding at any month-end
during the period ............................ 1,259,000 1,249,000 472,000
Balance outstanding at end of period ............. 1,123,700 1,198,000 472,000
Weighted average interest rate during the period . 5.39% 5.54% 5.91%
Weighted average interest rate at end of period .. 5.15% 5.38% 5.87%
Weighted average remaining term to maturity at end
of period (in years) ......................... 3.49 5.01 1.61
Securities sold under agreements to purchase:
Average balance outstanding ...................... $ 417,604 $ 385,451 $ 357,396
Maximum amount outstanding at any month-end
during the period ............................ 480,181 658,409 415,676
Balance outstanding at end of period ............. 381,109 364,000 340,788
Weighted average interest rate during the period . 5.60% 5.66% 5.49%
Weighted average interest rate at end of period .. 5.85% 5.61% 5.76%
Weighted average remaining term to maturity at end
of period (in years) ......................... 2.40 3.73 2.71
</TABLE>
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, 1999, reverse repurchase agreements amounted to $381.1 million,
compared to $364.0 million at December 31, 1998. The Bank has been utilizing
reverse repurchase agreements as part of its overall asset growth and leverage
strategy. As of December 31, 1999, the weighted average remaining term to
maturity of the Bank's reverse repurchase agreements decreased to 2.40 years,
compared to 3.73 years at December 31, 1998, and such reverse repurchase
agreements had a weighted average interest rate of 5.85% at December 31, 1999 as
compared to 5.61% at December 31, 1998. Certain of the reverse repurchase
agreements have call provisions.
Advances from the FHLB of San Francisco amounted to $1.1 billion and $1.2
billion at December 31, 1999 and 1998, respectively. Of the Bank's FHLB advances
outstanding as of December 31, 1999, $613.7 million is scheduled to mature
during 2000 and the remaining $510 million matures between years of 2003 and
2008. Certain of these advances from the FHLB of San Francisco have call
provisions. As of December 31, 1999, the weighted average remaining term to
maturity of the Bank's FHLB advances amounted to 3.49 years, compared to 5.01 at
December 31, 1998, and had a weighted average interest rate of 5.15% at December
31, 1999, compared to 5.38% at December 31, 1998. At December 31, 1999, the Bank
had a collateralized available line of credit of approximately $1.1 billion with
the FHLB of San Francisco.
During the fourth quarter of 1999 the Bank sold $199 million of FHLB
advances. The sales resulted in a gain of $6.7 million, which was reported as an
extraordinary item.
In 1999 the Company secured a $10 million line of credit with a third
party commercial bank for working capital as well as to fund the repurchase of
the Company's outstanding common stock. As of December 31, 1999, $4.7 million of
the line of credit had been utilized.
Stockholder's Equity. Stockholder's equity decreased from $180.6 million
at December 31, 1998 to $179.5 million at December 31, 1999. The Bank's 1999 net
earnings of $33.5 million, offset by a (loss) in market valuation of securities
for ($25.1) million and the purchase of treasury stock ($10.4) million, a
decrease in minimum pension liability of $820,000 resulted in decrease of $1.1
million in stockholders' equity.
43
<PAGE>
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 provisions for loan losses resulting
from the Bank's assessment of the adequacy of its allowance for loan losses, the
level of its other income, including loan service and related fees, net gains on
sales of securities, loans and loan servicing, and net earnings and losses from
real estate operations, the level of its operating expenses, such as personnel
and benefits expense, occupancy and other office related expense and FDIC
insurance premiums, and income taxes and benefits.
The Company reported net earnings before preferred dividends of $33.5
million, $10.9 million and $10.9 million during the years ended December 31,
1999, 1998 and 1997, respectively. During 1999, the Bank executed its strategy
to expand its franchise by purchasing three existing branches in Southern
California. Additionally, management focused on growing its commercial and
consumer loan portfolio in order to achieve a higher yielding loan portfolio,
while controlling expenses and increasing the number of lower-cost transaction
deposit accounts. The 1999 results were impacted by an extraordinary gain on
sale of FHLB advances of $6.7 million and an income tax benefit of $4.5 million.
The 1998 results were impacted by a one-time expense of $11.1 million ($6.5
million net of applicable tax benefits) for employment agreement benefits due to
certain senior executives officers of the Company in connection with the IPO. In
1998, the Company also paid a one-time special FDIC assessment, which it had
deferred from paying in prior years, of $4.5 million ($2.7 million net of
applicable tax benefits). Without the effect of such one-time payments, the
Company would have reported net earnings of $20.1 million for the year ended
December 31, 1998.
Net earnings, after extraordinary item, increased $22.6 million for the
year ended December 31, 1999, primarily due to the increase of the loan
portfolio reflecting an increased volume of originations and purchases.
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 $68.8 million, $40.5 million and $33.8 million
during the years ended December 31, 1999, 1998 and 1997, respectively. Net
interest income increased by $28.2 million or 70% for the year ended December
31, 1999, compared to the prior year, due to a $688.0 million or 25.2% increase
in the average balance of interest-earning assets (consisting primarily of a
$489.6 million increase in the average balance of loans receivable and a $141.4
million increase in the average balance of other interest earning assets and
FHLB stock), and an increase in the interest rate spread of 42 basis points. Net
interest income increased by $6.7 million, or 20%, during the year ended
December 31, 1998 compared to the year ended December 31, 1997 due a $888.5
million or 48.4% increase in the average balance of total interest earning
assets.
The Company's net interest margin for the year ended December 31, 1999 was
2.01% as compared to 1.49% and 1.84% for the years ended December 31, 1998 and
1997. The increase in net interest margin during 1999 compared to 1998 reflects
the increase in yields on earning assets consistent with management's strategy
of originating higher yielding loans and reducing lower yielding securities in
the investment portfolio. The decrease in net interest margin during the year
ended December 31, 1998 reflected the decrease in yields on earning assets,
primarily due to accelerated premium amortization on the Bank's purchased
adjustable-rate single family residential loan portfolio.
44
<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,
---------------------------------------------------------------------------------
1999 1998
------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1).......... $2,304,450 $166,595 7.23% $1,814,855 $125,851 6.93%
Mortgage-backed securities (2) 614,019 34,535 5.62 557,038 32,439 5.82
Other interest-earning assets (3) 430,210 25,869 6.01 310,462 20,062 6.46
FHLB stock.................... 65,116 3,429 5.27 43,464 2,521 5.80
---------- ------- ---------- -------
Total interest-earning assets 3,413,795 230,428 6.75 2,725,819 180,873 6.64
Noninterest-earning assets....... 47,889 84,039
---------- ----------
Total assets................ $3,461,684 $2,809,858
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts (4).... $ 376,581 $ 12,520 3.32% $ 330,762 $ 12,786 3.87%
Term certificates of deposit 1,145,621 59,771 5.22 1,010,307 57,141 5.66
----------- -------- ---------- --------
Total deposits............ 1,522,202 72,291 4.75 1,341,069 69,927 5.21
Senior debt and other borrowings -- 19 -- 4,467 445 9.96
FHLB advances and repurchase
agreements.................. 1,628,656 89,221 5.48 1,236,120 69,772 5.64
Hedging costs................. -- 146 -- -- 214 --
----------- -------- ---------- --------
Total interest-bearing
liabilities .............. 3,150,858 161,677 5.13% 2,581,656 140,358 5.44%
------- --------
Noninterest-bearing liabilities 139,042 88,308
----------- ----------
Total liabilities........... 3,289,900 2,669,964
Stockholders' equity............. 171,784 139,894
----------- ----------
Total liabilities and
stockholders' equity.......... $3,461,684 $2,809,858
========== ==========
Net interest-earning assets...... $ 262,937 $ 144,163
========== ==========
Net interest income/interest
rate spread ................... $ 68,751 1.62% $ 40,515 1.20%
========== ==== ========== ====
Net interest margin.............. 2.01% 1.49%
==== ====
Ratio of average interest-earning
assets to average
interest-bearing liabilities 108.34% 105.58%
====== ======
<CAPTION>
Year Ended December 31,
-------------------------------------
1997
-------------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1).......... $1,200,137 $ 89,938 7.49%
Mortgage-backed securities (2) 501,261 32,672 6.52
Other interest-earning assets (3) 119,429 7,346 6.15
FHLB stock.................... 16,520 1,023 6.19
--------- --------
Total interest-earning assets 1,837,347 130,979 7.13
Noninterest-earning assets....... 74,487
----------
Total assets................ $1,911,834
==========
Interest-bearing liabilities:
Deposits:
Transaction accounts (4).... $ 340,348 12,476 3.67%
Term certificates of deposit 966,863 54,771 5.66
---------- ---------
Total deposits............ 1,307,211 67,247 5.14
Senior debt and other borrowings 11,404 1,271 11.15
FHLB advances and repurchase
agreements.................. 506,077 28,420 5.62
Hedging costs................. -- 267 --
---------- ---------
Total interest-bearing
liabilities .............. 1,824,692 97,205 5.33%
-------
Noninterest-bearing liabilities 15,957
----------
Total liabilities........... 1,840,649
Stockholders' equity............. 71,185
----------
Total liabilities and
stockholders' equity.......... $1,911,834
==========
Net interest-earning assets...... $ 12,655
==========
Net interest income/interest
rate spread ................... $ 33,774 1.80%
========== ====
Net interest margin.............. 1.84%
====
Ratio of average interest-earning
assets to average
interest-bearing liabilities 100.69%
======
</TABLE>
- --------------------------
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(2) Includes mortgage-backed securities classified as held-to-maturity and
available-for-sale.
(3) Includes short-term investments, securities purchased under agreements to
resell and investment securities.
(4) Includes passbook checking and money market accounts.
45
<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, 1999 Compared Year Ended December 31, 1998 Compared
to Year Ended December 31, 1998 to Year Ended December 31, 1997
-------------------------------------------- -------------------------------------------
Increase (decrease) due to Total Net Increase (decrease) due to Total Net
------------------------------- Increase ------------------------------ Increase
Rate Volume Rate/Volume (Decrease) Rate Volume Rate/Volume (Decrease)
---- ------ ----------- ---------- ---- ------ ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable .............. $ 5,350 $ 33,951 $ 1,443 $ 40,744 $ (6,715) $ 46,067 $ (3,439) $ 35,913
Mortgage-backed securities .... (1,109) 3,318 (113) 2,096 (3,481) 3,636 (388) (233)
Other interest-earning assets . (1,394) 7,738 (537) 5,807 371 11,750 595 12,716
FHLB stock .................... (232) 1,256 (116) 908 (65) 1,669 (106) 1,498
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in income on
interest-earning assets .... 2,615 46,263 677 49,555 (9,890) 63,122 (3,338) 49,894
-------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts ....... (1,789) 1,771 (248) (266) 681 (351) (20) 310
Term certificates of deposit (4,430) 7,653 (593) 2,630 (87) 2,461 (4) 2,370
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits ........... (6,219) 9,424 (841) 2,364 594 2,110 (24) 2,680
Senior debt and other
borrowings ................. -- (445) 19 (426) (135) (773) 82 (826)
FHLB advances and
repurchase agreements ...... (2,055) 22,156 (652) 19,449 145 40,997 210 41,352
Hedging costs ................. -- -- (68) (68) -- -- (53) (53)
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in expense on
interest-bearing liabilities .. (8,274) 31,135 (1,542) 21,319 604 42,334 215 43,153
-------- -------- -------- -------- -------- -------- -------- --------
Change in net interest income .... $ 10,889 $ 15,128 $ 2,219 $ 28,236 $(10,494) $ 20,788 $ (3,553) $ 6,741
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
46
<PAGE>
Interest Income. Total interest income increased by $49.6 million or 27.4%
during the year ended December 31, 1999 and increased by $49.9 million or 38.1%
during the year ended December 31, 1998. These increases were primarily due to
the increase of the loan portfolio. Interest income on loans receivable, the
largest component of interest-earning assets, increased by $40.7 million or
32.4% during the year ended December 31, 1999 and increased by $35.9 million or
39.9% during the year ended December 31, 1998. The increase during 1999 was due
to loan growth and, to a lesser extent, a shift in the portfolio to a greater
proportion of commercial and consumer loans, which has resulted in an increase
in the weighted average yield earned on the loan portfolio. The increase in
interest income in 1998 was primarily due to loan growth and investment of funds
as a result of leverage of capital raised in the Company's IPO. Loan purchases
in 1998 were funded by FHLB advances with a weighted average rate of 5.38%. See
"ITEM 1. BUSINESS--Lending Activities--Origination, Purchase and Sale of Loans."
Interest income on mortgage-backed securities increased by $2.1 million or
6.5% during the year ended December 31, 1999 and decreased by $233,000 or 0.7%
during the year ended December 31, 1998. This increase in 1999 was mainly due to
an increase in the average balance of such securities. The small decrease in
interest income on mortgage-backed securities during the year ended December 31,
1998 was mainly due to sales and accelerated premium amortization due to
prepayments.
Interest income on other interest-earning assets (which consist of U.S.
Government agency securities, corporate trust preferred securities, FHLB stock,
securities purchased under agreements to resell and other short-term
investments) increased by $6.7 million or 29.7% during the year ended December
31, 1999 and increased by $14.2 million or 169.8% during the year ended December
31, 1998. The increase in such interest income during the year ended December
31, 1999 was primarily due to a $141.4 million increase in the average balance
of investments, which was partially offset by a 47 basis point decrease in the
weighted average yield earned therein. The increase in such interest income
during 1998 was due primarily to a $218.0 million increase in the average
balance of such investments and an increase in the weighted average yield earned
on such investments of 22 basis points.
Interest Expense. Total interest expense increased by $21.3 million or
15.2% during the year ended December 31, 1999 and increased by $43.2 million or
44.4% during the year ended December 31, 1998. The increase during 1999 was the
result of a $569.2 million or 22.1% increase in the average balance of
interest-bearing liabilities, reflecting the growth in the balance sheet. The
increase during 1998 was the result of an increase in the average balance of
interest-bearing liabilities (primarily borrowings), reflecting the Bank's
leveraging of it balance sheet. Interest expense on deposits, the largest
component of the Bank's interest-bearing liabilities, increased by $2.4 million
or 3.4% during the year ended December 31, 1999 and increased by $2.7 million or
4.0% during the year ended December 31, 1998. The increase in interest expense
on deposits during the year ended December 31, 1999 was primarily due to a
$181.1 million increase in the average balance of deposits. The increase in
interest expense on deposits during the year ended December 31, 1998 was
primarily due to a $33.9 million increase in the average balance of deposits.
Interest expense on borrowings consists primarily of reverse repurchase
agreements and FHLB advances. Interest expense on borrowings increased by $19.5
million or 27.9% during the year ended December 31, 1999 and increased by $41.4
million or 145.5% during the year ended December 31, 1998. Interest expense on
advances from the FHLB increased by $18.1 million or 38.1% during 1999 and $38.8
million or 442.0% during 1998. The Bank's new management has utilized FHLB
advances when the rates and other terms on such borrowings are favorable as
compared to its other funding sources. Interest expense on securities sold under
agreements to repurchase increased by $1.3 million or 6.0% during the year ended
December 31, 1999 and increased by $2.5 million or 12.9% during the year ended
December 31, 1998. The Bank has increased its use of FHLB balances and reverse
repurchase agreements in order to fund its leverage strategy.
The Bank's interest expense during the years ended December 31, 1999, 1998
and 1997 included the costs of hedging the Bank's interest rate exposure. Such
hedging costs amounted to $146,000, $214,000 and $267,000 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
47
<PAGE>
rate contracts and has allowed its remaining contracts to expire as they mature.
The Bank has instead focused on internal hedging through balance sheet
restructuring. At December 31, 1999, the Bank had no remaining interest rate
swap contracts and five remaining interest rate corridors with an aggregate
contract amount of $32 million.
Provision for Loan Losses. The Bank established provisions for loan losses
of $4.7 million, $2.0 million and $2.0 million during the years ended December
31, 1999, 1998 and 1997, respectively. Management has aggressively charged off
non-performing loans and taken possession of and sold a significant amount of
the assets which collateralized such loans. As a consequence of such actions,
the Bank's non-performing assets have been reduced over the periods presented
and the Bank's provision for loan losses have been reduced to more normalized
levels. The increase in provision for loan losses in 1999 reflects the Bank's
increased volume of originations of commercial real estate, commercial business
and consumer loans.
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,
1999 is adequate. Nevertheless, there can be no assurance that additions to such
allowance will not be necessary in future periods, particularly if the growth in
the Bank's commercial and consumer lending continues. In addition, as a result
of continuing uncertainties in certain real estate markets, increases in the
valuation allowance may be required in future periods. Furthermore, various
regulatory agencies, as an integral part of their examination process,
periodically review the 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 (Loss). Total other income decreased by $6.5 million or
(101.7%) during the year ended December 31, 1999 and increased by $1.3 million
during the year ended December 31, 1998. Loan service and loan related fees
amounted to $219,000, $111,000 and $481,000 during the years ended December 31,
1999, 1998 and 1997, respectively. The decline in such fees from 1997 to 1998
primarily reflected the sale of residential loan servicing during 1998 and the
reduction in loan balances outstanding in the loan servicing portfolio due to
normal repayments and prepayments. See "ITEM 1. BUSINESS--Lending
Activities--Single-Family Residential Real Estate Loans."
The Bank recognized net gains (losses) on sales of mortgage-backed and
other securities of $(3.2) million, $1.7 million and $1.3 million during the
years ended December 31, 1999, 1998 and 1997, respectively. During such
respective periods, the Bank sold $203.7 million, $281.2 million and $234.3
million of mortgage-backed securities. The 1999 sales were completed in an
effort to improve regulatory capital ratios.
Net gains (losses) on the sale of loans and loan servicing amounted to
$49,000, $613,000 and $3.4 million during the years ended December 31, 1999,
1998 and 1997, respectively. The Bank sold $94.1 million, $42.4 million and
$85.2 of loans during the years ended December 31, 1999, 1998 and 1997,
respectively, and $868.4 million of loan servicing during the year ended
December 31, 1997. The Bank did not sell any loan servicing during the years
ended December 31, 1998 and 1999. In connection with the sale of loan servicing
during 1997, the Bank recognized a gain of $3.2 million during the year and an
additional $5.3 million was deferred and is being recognized over a period
corresponding with the estimated lives of the related loans. See "ITEM 1.
BUSINESS--Lending Activities--Single- Family Residential Real Estate Loans."
Income (loss) from real estate operations amounted to $513,000, $1.5
million and $(1.8) million during the years ended December 31, 1999, 1998 and
1997, respectively. Income (loss) from real estate operations consists of (i)
losses from real estate operations (rental income less operating expenses), (ii)
gains on sales of real estate owned and real estate held for investment, and
(iii) provisions for losses on real estate owned and real estate held for
investment.
48
<PAGE>
During the years ended December 31, 1999, 1998 and 1997, losses from real estate
operations amounted to $(36,000), $(701,000) and $(1.3) million, respectively.
Gains on sales of real estate owned and real estate held for investment amounted
to $602,000, $2.2 million and $2.2 million for the years ended December 31,
1999, 1998 and 1997, respectively, and provisions for losses on real estate
owned and real estate held for investment amounted to $53,000, $0 and $2.8
million for the respective periods. The improving economy in Southern California
since 1996 has assisted in management's efforts to dispose of the Bank's real
estate holdings and has facilitated sales.
Miscellaneous other income, consisting primarily of bank service charges,
amounted to $2.3 million, $2.6 million and $1.8 million during the years ended
December 31, 1999, 1998 and 1997, respectively. The increase in 1998 was
primarily due to litigation settlements of $680,000 related to investment
securities and property damage recoveries. The decrease in 1999 was primarily
due to lack of such litigation settlements offset by increases in Bank service
charge income of $167,000 and increases in Bank subsidiary income of $209,000.
Operating Expenses. Total operating expenses decreased by $8.8 million or
18.8% during the year ended December 31, 1999 and increased by $17.4 million or
59.0% during the year ended December 31, 1998. The decrease in operating
expenses during 1999 and the increase in operating expenses during 1998 were
primarily attributable to one-time payments of $15.6 million ($9.2 million net
of applicable tax benefits) which were incurred in connection with the Company's
IPO. During the years ended December 31, 1999, 1998 and 1997, total operating
expenses as a percentage of average total assets amounted to 1.10%, 1.67% and
1.55%, respectively, and the Company's efficiency ratio amounted to 55.54%,
100.02% and 72.17%, respectively.
The principal category of the Company's operating expenses is personnel
and benefits expense of the Bank, which amounted to $15.8 million, $23.8 million
and $11.8 million during the years ended December 31, 1999, 1998 and 1997,
respectively. The decrease in 1999 and the increase in 1998 were primarily the
result of a one-time $11.1 million payment of benefits to certain senior
executives in connection with the Company's IPO in 1998, partially offset by
increases due to the expansion of the Bank's commercial business and consumer
lending activities in 1999.
Occupancy expense amounted to $10.1 million, $8.4 million and $7.1 million
during the years ended December 31, 1999, 1998 and 1997, respectively. The
increase in such expense during the year ended December 31, 1999 was primarily
due to the acquisition of three new branches. Management expects occupancy
expense to continue to increase over the next year as the Bank has begun to
operate additional branch offices.
FDIC insurance premiums totaled $1.4 million, $7.3 million and $4.9
million during the years ended December 31, 1999, 1998 and 1997, respectively.
The decrease in 1999 and the increase in 1998 was mainly due to the one-time
special FDIC assessment, which the Company deferred paying in prior years, of
$4.5 million. As a result of paying the one-time special assessment, the Bank
lowered its assessment rate from 35.28 basis points to 9.1 basis points which
includes the debt service paid to the Financing Corporation. The Financing
Corporation was established by the government in the early 1980's for the
purpose of liquidating troubled thrift institutions. FDIC insurance premiums are
a function of the size of the Bank's deposit base.
Professional services expense amounted to $1.5 million, $1.3 million and
$528,000 during the years ended December 31, 1999, 1998 and 1997, respectively.
These increases were primarily due to increases in other consulting expenses.
Office related expenses have increased over the periods presented and
amounted to $5.1 million, $4.4 million and $3.9 million during the years ended
December 31, 1999, 1998 and 1997, respectively. These increases were primarily
due to increases in data processing expenses reflecting increases in the number
of loan and deposit accounts.
Miscellaneous other expense amounted to $4.3 million, $1.8 million and
$1.3 million during the years ended December 31, 1999, 1998 and 1997,
respectively. The increase during 1999 was due primarily to increases in
customer
49
<PAGE>
data processing charges of $956,000, goodwill amortization expense of $413,000,
regulatory assessments of $274,000 and Delaware franchise taxes of $144,000.
Goodwill expense amounted to $481,000, $68,000 and $0 during the years
ended December 31, 1999, 1998 and 1997, respectively. The increase during 1999
in goodwill reflects costs associated with management's execution of its
strategy to expand the Bank's franchise through the purchase of three existing
banking facilities.
Income Taxes. During the years ended December 31, 1999, 1998 and 1997, the
Company recognized $4.5 million, $16.4 million and $4.5 million, respectively,
in income tax benefits primarily as a result of offsetting available NOLs
against taxable income and projected future taxable income. At December 31,
1999, the Company had $153.4 million of federal NOLs which expire between 2001
and 2018.
The Company had Federal and California alternative minimum tax credit
carryforwards at December 31, 1999 and 1998 of approximately $1.7 million and
$1.4 million, respectively. These carryforwards are available to reduce future
regular federal income taxes and California franchise taxes, if any, over an
indefinite period.
The 1992 Ownership Change resulted in an annual Section 382 limitation on
the Bank's ability to utilize any NOLs created prior to the 1992 Ownership
Change in any one year of approximately $7.7 million. A December 31, 1999, the
Bank had $30.1 million of NOLs which were created prior to the 1992 Ownership
Change. Similarly, the 1998 Ownership Change resulted in an annual Section 382
limitation on the Bank's ability to utilize any NOLs created prior to the 1998
Ownership Change but after the 1992 Ownership Change in any one year of
approximately $21.3 million. At December 31, 1999, the Bank had $111.2 million
of NOLs which were created prior to the 1998 Ownership Change but after the 1992
Ownership Change.
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 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.
50
<PAGE>
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 emphasized loan products tied to a U.S. Treasury based
index (which reacts much more quickly to changes in interest rates). During the
year ended December 31, 1997, the Bank sold $85.2 million of such COFI-based
residential mortgage loans and used most of the sale proceeds to purchase $59.0
million of one-year adjustable-rate loans tied to the U.S. Treasury index of
comparable maturity. During the years ended December 31, 1999 and 1998, the Bank
sold loans totaling $94.1 million and $42.4 million, respectively, in order to
raise liquidity to support new loan originations. See"ITEM 1. BUSINESS--Lending
Activities--Origination, Purchase and Sale of Loans."
The Bank has been replacing wholesale earning assets with loan
originations. Purchases of adjustable-rate mortgage-backed securities have
consequently decreased and were $10.0 million, $105.7 million and $186.0 million
during the years ended December 31, 1999, 1998 and 1997, respectively. In
addition, during the fourth quarter of 1999, the Bank sold $200.9 million of
investment securities which include in part the 1999 purchases of
adjustable-rate mortgage-backed securities. At December 31, 1999, $129.8 million
or 30.5% of the Bank's mortgage-backed securities consisted of adjustable-rate
instruments. See "ITEM 1. BUSINESS-Investment Activities."
During the years ended December 31, 1999, 1998 and 1997, the Bank
originated in the aggregate $362.5 million, $94.0 million and $32.6 million,
respectively, of commercial business and consumer loans which amounted to 43.7%,
15.5% and 20.3% 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 ITEM 1. 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, 1997
to $0 at December 31, 1999 and FHLB advances and reverse repurchase agreements
have decreased from $1.6 billion in the aggregate at December 31, 1998 to $1.5
billion in the aggregate at December 31, 1999.
Consistent with management's strategy of reducing lower-yielding
securities in the portfolio, during the fourth quarter the Bank recognized a
$3.4 million loss on the sale of $200.9 million of investment securities. The
loss recognized from this sale was offset by the $6.7 million gain on sale of
$199 million of FHLB advances, which was reported as an extraordinary item. The
net effect of these transactions was a $3.3 million gain in the fourth quarter,
equaling $0.16 per share pre-tax. These transactions improved the Bank's capital
ratios as earnings were increased and the balance sheet was decreased by $200
million.
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.
51
<PAGE>
At December 31, 1999, the Bank was not a party to any interest rate swap
agreements. The net expense relating to the Bank's interest rate swap agreements
was $0, $0 and $2,000 during the years ended December 31, 1999, 1998 and 1997,
respectively.
At December 31, 1999, the Bank was also a party to five interest rate
corridor agreements, which agreements expire from 2000 through 2001 and cover an
aggregate contract amount of approximately $32.0 million. An interest rate
corridor consists of an agreement whereby the issuer agrees to pay the
purchaser, in exchange for the payment of a premium, the prevailing rate of
interest in the event interest rates rise above a specified rate on a specified
interest rate index and do not exceed a specified upper rate on the same index.
The Bank entered into interest rate corridors as a means to artificially raise
the interest rate cap on certain loans. As of December 31, 1999, the interest
rate corridors have an average strike price of 6.54% and an average limit rate
of 8.20% (the Bank's interest rate corridors are based on either three month
London Inter-Bank Offered Rate ("LIBOR") or COFI). The aggregate net expense
relating to the Bank's interest rate corridors and floors was $146,000, $214,000
and $265,000 during the years ended December 31, 1999, 1998, and 1997,
respectively. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" Note
(18)--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. FHLB
advances totaling $290 million were called in January 2000. The effect of those
called borrowings are incorporated as pro forma information into the following
table summarizing anticipated maturities and repricing of the Company's interest
earning assets and interest bearing liabilities.
52
<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, 1999, based on the information and assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
Three to More than One More Than
Within Three Twelve Year to Three Three Years Over Five
Months Months Years to Five Years Years Total
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Loans receivable (2):
Single-family residential loans:
Fixed ............................... $ 24,728 $ 117,280 $ 233,958 $ 185,987 $ 495,602 $ 1,057,555
Adjustable .......................... 141,296 123,229 67,510 83,230 -- 415,265
Multi-family residential:
Fixed ............................... 594 2,804 8,070 4,343 12,840 28,651
Adjustable .......................... 287,898 10,146 -- -- -- 298,044
Commercial, industrial and land:
Fixed ............................... 4,660 24,097 49,484 45,661 105,464 229,366
Adjustable .......................... 159,131 33,249 -- -- -- 192,380
Other loans (3) ........................ 113,696 101,543 77,363 58,633 10,032 361,267
Mortgage-backed and other securities(4) ...... 62,253 70,413 24,228 42,486 244,684 444,064
Other interest-earning assets(5) ............. 255,645 14,442 -- -- 169,388 439,475
----------- ----------- ----------- ----------- ----------- -----------
Total .................................. 1,049,901 497,203 460,613 420,340 1,038,010 3,466,067
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
Deposits:
Checking accounts ...................... 107,474 -- -- -- -- 107,474
Passbook accounts ...................... 134,377 -- -- -- -- 134,377
Money market accounts .................. 152,899 -- -- -- -- 152,899
Term certificates of deposit ........... 202,101 805,462 127,322 10,890 173 1,145,948
Other borrowings .......................... 668,700 289,621 71,109 480,000 -- 1,509,430
----------- ----------- ----------- ----------- ----------- -----------
Total ................................ 1,265,551 1,095,083 198,431 490,890 173 3,050,128
----------- ----------- ----------- ----------- ----------- -----------
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities ............................... $ (215,650) $ (597,880) $ 262,182 $ (70,550) $ 1,037,837 $ 415,939
=========== =========== =========== =========== =========== ===========
Excess (deficiency) of interest- earning
assets over interest- bearing liabilities
as a percent of total assets .............. (6.35%) (17.59%) 7.72% (2.08%) 30.54% 12.24%
=========== =========== =========== =========== =========== ===========
Cumulative excess(deficiency) of
interest-earning assets over interest-
bearing liabilities ....................... $ (215,650) $ (813,530) $ (551,348) $ (621,898) $ 415,939
=========== =========== =========== =========== ===========
Cumulative excess(deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets .................................... (6.35%) (23.94%) (16.22%) (18.30%) 12.24%
=========== =========== =========== =========== ==========
Pro forma cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets (6) ............ 9.13% (8.46%) (10.93%) (13.00%) 12.24%
=========== =========== =========== =========== ==========
</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
$3.2 million at December 31, 1999.
(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
$38.7 million.
(5) Comprised of short-term investments, securities purchased under agreements
to resell, investment securities and FHLB stock.
(6) A call is a feature of a loan that retracts the terms of loan (maturity
date) at times pre-specified in the loan. $290 million in FHLB advances
were called and refinanced in January 2000. The effect of this transaction
is included in the pro forma cumulative excess (deficiency) information in
the table above.
53
<PAGE>
Although the interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, the Asset/Liability Management Committee also regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and net portfolio value ("NPV"), which is defined as the net
present value of an institution's existing assets, liabilities and off-balance
sheet instruments, and evaluating such impacts against the maximum potential
changes in net interest income and NPV that is authorized by the Board of
Directors of the Bank.
The following table sets forth as of December 31, 1999 the Bank's
estimated net interest income over a two year period and NPV based on the
indicated changes in interest rates.
Change (in Basis Point) Net Interest Income
in Interest Rates(1) (next two years) NPV
-------------------- ---------------- ---
(Dollars in Thousands)
+300 $ 99,601 $ 35,407
+200 121,049 99,144
+100 140,346 156,574
0 156,873 208,839
-100 168,617 253,171
-200 170,123 244,500
-300 162,917 216,137
- -----------
(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 "ITEM 1.
BUSINESS--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, 1999, the
Bank would not have been required to deduct an IRR component in calculating
total risk-based capital had the IRR component of the capital regulations been
in effect.
Liquidity and Capital Resources
Liquidity. Liquidity refers to 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
54
<PAGE>
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 and federal funds sold.
If the Bank requires funds beyond its ability to generate them internally,
various forms of both short- and long-term borrowings provide an additional
source of funds. At December 31, 1999, the Bank had $1.1 billion in borrowing
capacity under a collateralized line of credit with the FHLB of San Francisco.
Although the Bank has in the past utilized brokered deposits as a source of
liquidity, the Bank does not currently rely upon brokered deposits as a source
of liquidity, and does not anticipate a change in this practice in the
foreseeable future.
In 1999 the Company secured a $10 million line of credit from a
third-party commercial bank for operations and the repurchase of the Company's
outstanding stock to be effected from time to time in open market or privately-
negotiated transactions. As of December 31, 1999, $4.7 million of the line of
credit had been utilized.
At December 31, 1999, the Bank had outstanding commitments (including
unused lines of credit) of $95.7 million, and commitments to originate mortgage
and non-mortgage loans of $50.9 million. Certificates of deposit which are
scheduled to mature within one year totaled $1.01 billion at December 31, 1999,
and borrowings that are scheduled to mature within the same period amounted to
$958.3 million. The Bank anticipates that it will have sufficient funds
available to meet its current loan commitments.
Capital Resources. Federally insured savings institutions such as the Bank
are required to maintain minimum levels of regulatory capital. See "ITEM 1.
BUSINESS--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, 1999.
<TABLE>
<CAPTION>
Required Actual Excess
--------------------- --------------------- ---------------------
Percent Amount Percent Amount Percent Amount
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital......... 1.50% $ 51,193 6.78% $231,374 5.28% $180,181
Tier 1 leverage capital.. 4.00 136,514 6.78 231,374 2.78 94,860
Tier 1 risk-based
capital (1)(2)........ 4.00 83,520 11.08 231,374 7.08 147,854
Risk-based capital (1)(2) 8.00 167,040 11.96 249,715 3.96 82,675
</TABLE>
- -----------
(1) Does not reflect the interest-rate risk component to the risk-based
capital requirement, the effective date of which has been postponed.
(2) Tangible and Tier 1 leverage (or core) capital are computed as a
percentage of adjusted total assets of $3.4 billion. Risk-based capital is
computed as a percentage of adjusted risk-weighted assets of $2.1 billion.
55
<PAGE>
Year 2000
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
To date, the Bank has not experienced any year 2000 issues with any of our
internal systems or our products, and we do not expect to experience any in the
future. To date, the Bank has not experienced any year 2000 issues related to
any of its key third party suppliers and customers nor do we expect to
experience any in the future. Costs associated with remediating our internal
systems were not material.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") as amended by SFAS 137. SFAS 133
establishes accounting and reporting standards for hedging and derivative
activities. Among other things, this statement requires that an entity recognize
all derivative instruments on the balance sheet as either an asset or liability,
and to account for these instruments at fair value. The adoption of SFAS 133 is
not expected to have a material impact on our results or operations or financial
position. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Asset and Liability Management."
56
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PBOC HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report............................................ 58
Consolidated Statements of Financial Condition--December 31, 1999
and 1998....................................................... 59
Consolidated Statements of Operations--Years ended December 31,
1999, 1998 and 1997............................................ 60
Consolidated Statements of Comprehensive Earnings (Loss)--Years ended
December 31, 1999, 1998 and 1997............................... 61
Consolidated Statements of Changes in Stockholders' Equity--Years
ended December 31, 1999, 1998 and 1997......................... 62
Consolidated Statements of Cash Flows--Years ended December 31,
1999, 1998 and 1997............................................ 63
Notes to Consolidated Financial Statements.............................. 65
57
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PBOC Holdings, Inc.:
We have audited the accompanying consolidated statements of financial condition
of PBOC Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1999
and 1998 and the related consolidated statements of operations, comprehensive
earnings (loss), changes in stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three- year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Los Angeles, California
January 31, 2000
58
<PAGE>
PBOC HOLDINGS, INC.
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ..................................................... $ 19,582 $ 22,401
Federal funds sold ............................................................ 2,000 24,000
Securities available-for-sale, at estimated market values (notes 3, 11 and 12) 771,864 1,004,937
Mortgage-backed securities held-to-maturity, market values $4,274
and $6,372 at December 31, 1999 and 1998 (notes 5 and 12) ................ 4,326 6,282
Loans receivable, net (notes 6, 7 and 12) ..................................... 2,462,837 2,148,857
Real estate held for sale, net (note 8) ....................................... 846 2,723
Premises and equipment, net (note 9) .......................................... 7,105 7,212
Federal Home Loan Bank stock, at cost (note 12) ............................... 66,643 63,150
Accrued interest receivable ................................................... 16,863 17,607
Other assets .................................................................. 46,162 37,858
----------- -----------
Total assets ............................................................. $ 3,398,228 $ 3,335,027
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 10) ............................................................ $ 1,647,337 $ 1,542,162
Securities sold under agreements to repurchase (note 11) ...................... 381,109 364,000
Advances from Federal Home Loan Bank (note 12) ................................ 1,123,700 1,198,000
Accrued expenses and other liabilities ........................................ 28,754 17,009
Other borrowings (note 13) .................................................... 4,621 --
----------- -----------
Total liabilities ........................................................ 3,185,521 3,121,171
----------- -----------
Commitments and contingencies (notes 6, 9 and 20)
Minority interest (note 1) ............................................... 33,250 33,250
Stockholders' equity (notes 1, 15 and 22):
Preferred stock, $.01 par value. Authorized 25,000,000 shares;
none issued and outstanding .......................................... -- --
Common stock, par value $.01 per share. Authorized 75,000,000
and 500,000 shares; issued 21,876,205 shares;
and outstanding 19,941,005 and 21,041,205 shares ..................... 219 219
Additional paid-in capital ............................................... 259,260 259,207
Accumulated other comprehensive loss ..................................... (38,300) (14,025)
Accumulated deficit ...................................................... (23,012) (56,487)
Treasury stock, at cost (1,935,200 and 835,000 shares at December 31, 1999
and 1998, respectively) .............................................. (18,710) (8,308)
----------- -----------
Total stockholders' equity ....................................... 179,457 180,606
----------- -----------
Total liabilities and stockholders' equity ....................... $ 3,398,228 $ 3,335,027
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
PBOC HOLDINGS, INC.
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest, fees and dividend income:
Short term investments ................................... $ 1,289 $ 1,797 $ 1,038
Securities purchased under agreements to resell .......... 528 519 2,328
Investment securities available-for-sale ................. 24,052 17,746 3,980
Mortgage-backed securities ............................... 34,535 32,439 32,672
Loans receivable ......................................... 166,595 125,851 89,938
Federal Home Loan Bank stock ............................. 3,429 2,521 1,023
------------ ------------ ------------
Total interest, fees and dividend income ............. 230,428 180,873 130,979
------------ ------------ ------------
Interest expense:
Deposits (note 10) ....................................... 72,291 69,927 67,247
Advances from the Federal Home Loan Bank ................. 65,743 47,613 8,785
Securities sold under agreements to repurchase ........... 23,478 22,159 19,635
Other borrowings ......................................... 19 -- --
Senior debt .............................................. -- 445 1,271
Hedging costs, net (note 18) ............................. 146 214 267
------------ ------------ ------------
Total interest expense ............................... 161,677 140,358 97,205
------------ ------------ ------------
Net interest income ........................................... 68,751 40,515 33,774
Provision for loan losses (note 7) ............................ 4,747 2,000 2,046
------------ ------------ ------------
Net interest income after provision for loan losses ...... 64,004 38,515 31,728
------------ ------------ ------------
Other income:
Loan service and loan related fees ....................... 219 111 481
Gain (loss) on sale of mortgage-backed securities, net ... (3,217) 1,682 1,275
Gain on loan and loan servicing sales, net (note 4) ...... 49 613 3,413
Income (loss) from real estate operations, net (note 8) .. 513 1,479 (1,805)
Other income ............................................. 2,328 2,551 1,753
------------ ------------ ------------
Total other income (loss) ............................ (108) 6,436 5,117
------------ ------------ ------------
Operating expenses:
Personnel and benefits ................................... 15,719 23,814 11,787
Occupancy ................................................ 10,056 8,371 7,109
FDIC insurance ........................................... 1,408 7,316 4,899
Professional services .................................... 1,511 1,294 528
Office related expenses .................................. 5,142 4,393 3,913
Other .................................................... 4,287 1,774 1,307
------------ ------------ ------------
Total operating expenses ............................. 38,123 46,962 29,543
------------ ------------ ------------
Earnings (loss) before income tax benefit, minority interest
and extraordinary item .................................. 25,773 (2,011) 7,302
Income tax benefit (note 14) .................................. 4,500 16,390 4,499
------------ ------------ ------------
Earnings before minority interest and extraordinary item ...... 30,273 14,379 11,801
Minority interest ............................................. 3,476 3,476 859
------------ ------------ ------------
Earnings before extraordinary item ....................... 26,797 10,903 10,942
Extraordinary item - gain on sale of FHLB advances ............ 6,678 -- --
------------ ------------ ------------
Net earnings ............................................. 33,475 10,903 10,942
Preferred dividends ........................................... -- (2,160) (7,340)
------------ ------------ ------------
Net earnings available to common stockholders ............ $ 33,475 $ 8,743 $ 3,602
============ ============ ============
Earnings per share, basic and diluted before extraordinary item $ 1.31 $ 0.59 $ 1.14
Earnings per share, basic and diluted ......................... $ 1.63 $ 0.59 $ 1.14
Weighted average shares outstanding ........................... 20,487,111 14,793,644 3,152,064
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE>
PBOC HOLDINGS, INC.
Consolidated Statements of Comprehensive Earnings (Loss)
Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net earnings ................................................. $ 33,475 $ 10,903 $ 10,942
Other comprehensive earnings (loss):
Unrealized gain (loss) on securities available-for-sale ...... (26,517) (11,190) 4,899
Reclassification of realized (gain) loss included in earnings 1,422 (447) (789)
Decrease (increase) in minimum pension liability, net of tax 820 (121) (293)
-------- -------- --------
Other comprehensive earnings (loss) .......................... (24,275) (11,758) 3,817
-------- -------- --------
Comprehensive earnings (loss) ............................... $ 9,200 $ (855) $ 14,759
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE>
PBOC HOLDINGS, INC.
Consolidated Statements Of Changes In Stockholders' Equity
For the Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
-------------------------- Additional Comprehensive
Preferred Stock Number Amount Paid-in Capital Income (Loss)
--------------- ------ ------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ................... $ 5 98,502 $ 1 $ 129,793 $ (6,084)
Net earnings ............................ -- -- -- -- --
Change in unrealized losses on securities -- -- -- -- 4,110
Capital contributions, net .............. -- -- -- 21 --
Change in minimum pension liability ..... -- -- -- -- (293)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ................... 5 98,502 1 129,814 (2,267)
Net earnings ............................ -- -- -- -- --
Change in unrealized losses on securities -- -- -- -- (11,637)
Conversion of preferred stock to common . (5) 8,527,473 -- -- --
Split of common stock 32 for 1 ......... -- (98,502) -- -- --
Split of common stock 32 for 1 .......... -- 3,152,065 -- -- --
Issuance of common stock in initial
public offering ...................... -- 10,196,667 218 129,393 --
Preferred dividend paid ................. -- -- -- -- --
Change in minimum pension liability ..... -- -- -- -- (121)
Purchases of treasury stock ............. -- (835,000) -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 ................... -- 21,041,205 219 259,207 (14,025)
Net earnings ............................ -- -- -- -- --
Change in unrealized losses on securities -- -- -- -- (25,095)
Stock based compensation ................ -- -- -- 53 --
Change in minimum pension liability ..... -- -- -- -- 820
Purchases of treasury stock ............. -- (1,100,200) -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 ................... $ -- 19,941,005 $ 219 $ 259,260 $ (38,300)
=========== =========== =========== =========== ===========
<CAPTION>
Accumulated
Deficit Treasury Stock Total
------- -------------- -----
<S> <C> <C> <C>
Balance, December 31, 1996 ................... $ (58,893) $ -- $ 64,822
Net earnings ............................ 10,942 -- 10,942
Change in unrealized losses on securities -- -- 4,110
Capital contributions, net .............. -- -- 21
Change in minimum pension liability ..... -- -- (293)
----------- ----------- -----------
Balance, December 31, 1997 ................... (47,951) -- 79,602
Net earnings ............................ 10,903 -- 10,903
Change in unrealized losses on securities -- -- (11,637)
Conversion of preferred stock to common . -- -- (5)
Split of common stock 32 for 1 ......... -- -- --
Split of common stock 32 for 1 .......... -- -- --
Issuance of common stock in initial
public offering ...................... -- -- 129,611
Preferred dividend paid ................. (19,439) -- (19,439)
Change in minimum pension liability ..... -- -- (121)
Purchases of treasury stock ............. -- (8,308) (8,308)
----------- ----------- -----------
Balance, December 31, 1998 ................... (56,487) (8,308) 180,606
Net earnings ............................ 33,475 -- 33,475
Change in unrealized losses on securities -- -- (25,095)
Stock based compensation ................ -- -- 53
Change in minimum pension liability ..... -- -- 820
Purchases of treasury stock ............. -- (10,402) (10,402)
----------- ----------- -----------
Balance, December 31, 1999 ................... $ (23,012) $ (18,710) $ 179,457
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
62
<PAGE>
PBOC HOLDINGS, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings .................................................. $ 33,475 $ 10,903 $ 10,942
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization ............................. 1,844 1,221 1,234
Provision for loan and real estate losses ................. 4,747 2,000 4,800
Decrease in valuation allowance on net deferred tax asset 18,178 15,569 7,006
(Amortization) write-down for discontinued lease operations 51 55 (265)
Increase (decrease) in net deferred tax asset ............. (13,417) 1,024 (2,281)
Amortization and accretion of premiums, discounts and
deferred fees ........................................ 7,786 11,524 7,288
Amortization of purchase accounting intangible assets,
premiums and discounts, net .......................... 184 180 (90)
(Gain) loss on sale of mortgage-backed securities ......... 3,217 (1,682) (1,275)
Gain on sale of FHLB advances ............................. 6,678 -- --
(Gain) loss on sale of loans and loan servicing ........... (49) (613) (3,413)
(Gain) on real estate sales ............................... (602) (2,180) (2,214)
Federal Home Loan Bank stock dividend ..................... (3,421) (1,640) (952)
Increase in accrued interest receivable ................... 744 (4,391) (1,605)
Increase (decrease) in accrued interest payable ........... (1,898) 5,974 (1,000)
Decrease in other assets .................................. (12,726) (35,261) (8,697)
Increase (decrease) in accrued expenses ................... 13,645 1,349 (17,364)
Amortization of Goodwill .................................. 481 68 --
----------- ----------- -----------
Net cash provided by (used in) operating activities .. 58,917 4,100 (7,886)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of investment and mortgage-backed
securities available-for-sale ............................. 318,823 514,841 235,612
Proceeds from sale of loans and servicing rights .............. 94,111 43,034 88,654
Investment and mortgage-backed security principal repayments
and maturities ............................................ 153,189 173,830 108,022
Loan originations, net of repayments .......................... (228,128) 206,219 7,644
Purchases of investments and mortgage-backed securities
available-for-sale ........................................ (270,731) (1,134,026) (408,780)
Purchases of loans ............................................ (193,395) (876,898) (505,681)
Costs capitalized on real estate .............................. 40 (174) (1,424)
Proceeds from sale of real estate ............................. 8,823 18,923 23,458
Additions to premises and equipment ........................... (1,921) (1,937) (1,833)
Sales of premises and equipment ............................... -- -- --
Purchase of FHLB stock ........................................ (72) (37,876) (8,475)
Redemption of FHLB stock ...................................... -- -- 1,173
----------- ----------- -----------
Net cash used in investing activities ................ (119,261) (1,094,064) (461,630)
----------- ----------- -----------
</TABLE>
(Continued)
63
<PAGE>
PBOC HOLDINGS, INC.
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from subsidiary preferred stock offering ................ $ -- $ -- $ 33,250
Proceeds from capital infusion, net .............................. -- 129,611 21
Repayment on senior debt ......................................... -- (11,370) (285)
Preferred dividend paid .......................................... -- (19,439) --
Redemption of preferred stock .................................... -- (5) --
Purchases of treasury stock ..................................... (10,402) (8,308) --
Net increase (decrease) in deposits .............................. 105,175 275,547 (104,628)
Net increase in securities sold under agreements to repurchase ... 17,109 23,212 148,355
Proceeds from FHLB advances ..................................... 3,344,743 4,360,900 1,137,684
Repayment of FHLB advances ....................................... (3,425,721) (3,634,900) (745,684)
Net change in other borrowings ................................... 4,621 -- --
----------- ----------- -----------
Net cash provided by financing activities .............. 35,525 1,115,248 468,713
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents .................. (24,819) 25,284 (803)
Cash and cash equivalents at beginning of year ........................ 46,401 21,117 21,920
----------- ----------- -----------
Cash and cash equivalents at end of year .............................. $ 21,582 $ 46,401 $ 21,117
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest ..................................................... $ 163,575 $ 134,632 $ 96,667
Income taxes ................................................. 300 120 200
Supplemental schedule of non cash investing and financing activities:
Foreclosed real estate ........................................... $ 6,384 $ 10,248 $ 31,349
Loans originated in connection with sale of foreclosed real estate -- 6,147 16,145
Transfer of loans held for investment to loans held for sale ..... 94,062 42,421 85,241
</TABLE>
See accompanying notes to consolidated financial statements.
64
<PAGE>
PBOC HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
General
On May 15, 1998, the Company completed an Offering of its Common Stock. An
aggregate of 14.6 million shares of Common Stock were sold to the public at an
Offering price of $13.75 per share, of which 10.2 million shares were issued and
sold by the Company and 4.4 million shares were sold by the existing
stockholders of the Company.
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 banking industry. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosures of contingent assets
and liabilities at the date of the consolidated 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 PPCCP in which
the Bank owns all of the common stock. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Fees on Loans and Mortgage-Backed and Investment Securities
The 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' yields for estimated
prepayments when prepayments are probable and the timing and amount of
prepayments can be reasonably estimated based on market consensus prepayment
rates.
65
<PAGE>
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, 1999, 1998 and 1997. 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
Management determines the appropriate classification of its securities
(mortgage-backed and investment securities) at the time of purchase or
origination.
Securities available-for-sale -- Securities to be held for indefinite
periods of time and not intended to be held-to-maturity are classified as
available-for-sale. Assets included in this category are those assets that
management intends to use as part of its asset/liability management strategy and
that may be sold in response to changes in interest rates, resultant prepayment
risk and other factors related to interest rate and resultant prepayment risk
changes. Securities available-for-sale are recorded at fair value. Both
unrealized gains and losses on securities available-for-sale are included in
other comprehensive income in the consolidated statements of financial condition
until these gains or losses are realized. Gains or losses on sales of securities
available-for-sale are based on the specific-identification method. If a
security has a decline in fair value that is other than temporary, then the
security will be written down to its fair value by recording a loss in the
consolidated statements of operations. Premiums and discounts are accreted or
amortized using the interest method over the estimated life of the securities.
Securities held-to-maturity -- Securities that management has the intent
and the Bank has the ability at the time of purchase or origination to hold
until maturity are classified as securities held-to-maturity. Securities in this
category are carried at amortized cost adjusted for accretion of discounts and
amortization of premiums using the interest method over the estimated life of
the securities. If a security has a decline in fair value below its amortized
cost that is other than temporary, then the security will be written down to its
new cost basis by recording a loss in the consolidated statements of operations.
FHLB stock -- This asset is owned due to regulatory requirements and is
carried at cost. This stock is pledged as collateral to secure FHLB advances.
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.
66
<PAGE>
Allowance for Loan Losses
Valuation allowances for losses on loans and real estate are provided on
both a specific and general basis. Specific and general valuation allowances are
increased by provisions charged to expense and decreased by charge-offs of loans
net of recoveries. Specific allowances are provided for impaired loans for which
the expected loss is measurable. General valuation allowances are provided based
on a formula which incorporates a number of factors, including economic trends,
industry experience, estimated collateral values, past loss experience, the
Bank's underwriting practices, and management's ongoing assessment of the credit
risk inherent in the asset portfolio. The Bank periodically reviews the
assumptions and formula by which additions are made to the specific and general
valuation allowances for losses in an effort to refine such allowance in light
of the current status of the factors described above.
While management uses the best information available to make the periodic
evaluations of specific and general valuation allowances, adjustments to both
allowances may be necessary if actual future economic conditions differ
substantially from the assumptions used in making such periodic evaluations.
Regulatory examiners may require the 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 Sale
Real estate acquired in settlement of loans is recorded at the date of
acquisition at fair value, less estimated disposition costs. Fair value is
determined based on recent appraisals or discounted cash flow calculations. 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.
Mortgage Banking Activities
Loans held for sale are carried at the lower of cost or market on an
aggregate basis. 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 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.
67
<PAGE>
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 statements of financial condition amounts of
net deferred tax assets or liabilities are recognized on the temporary
differences between the basis of assets and liabilities as measured by tax laws
and their financial statement basis, plus available tax operating loss
carryforwards and tax credit carryforwards, reduced by a valuation allowance for
that portion of tax assets not considered more likely than not to be realized.
Deferred income tax benefit is recognized for the change in net deferred tax
assets or liabilities, plus the valuation allowance change. Current income tax
(benefit) is the amount of total taxes currently payable (receivable).
Derivative and Hedging Activities
The 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.
Earnings per Share
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted 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.
Stock Option Plan
During 1999, the Company granted stock options and adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based compensation on the
date of grant. Alternatively, SFAS No. 123 allows entities to apply the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), and related interpretations, and provide pro
forma net earnings and pro forma earnings per share disclosures for stock option
grants made in 1999 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. The Company has elected to apply the
provisions of APB 25 and provide the pro forma disclosure provisions of SFAS No.
123.
68
<PAGE>
Goodwill
Goodwill, which represents the excess of purchase price over the fair
value of the net assets acquired, is amortized straight-line over its estimated
useful life of generally eight to fifteen years. On a periodic basis, the
Company reviews its goodwill for events or changes in circumstances that may
indicate that the estimated undiscounted future cash flows from these
acquisitions will be less than the carrying amount of the goodwill. If it
becomes probable that impairment exists, a reduction in the carrying amount is
recognized. Management does not believe that an impairment of its goodwill has
occurred. Goodwill, which is included in other assets was $7.2 million and
$774,000 at December 31, 1999 and 1998, respectively. Goodwill amortization
expense was $481,000, $68,000 and $0 for the years ended December 31, 1999, 1998
and 1997, respectively.
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 and Federal funds sold.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued statement of
Financing Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") as amended by SFAS 137. SFAS 133
establishes accounting and reporting standards for hedging and derivative
activities. Among other things, this statement requires that an entity recognize
all derivative instruments on the balance sheet as either an asset or liability,
and to account for these instruments at fair value. The adoption of SFAS 133 is
not expected to have a material impact on our results or operations or financial
position. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
Initial Public Offering
On May 15, 1998, the Company completed its Offering of its Common Stock.
An aggregate of 12,666,667 shares of Common Stock were sold to the public at an
Offering price of $13.75 per share, of which 8,866,667 shares were issued and
sold by the Company and 3,800,000 shares were sold by the existing stockholders
of the Company. In connection with the underwriting agreement executed by the
Company with the underwriters of the Offering, the Company granted the
underwriters an option to purchase up to an additional 1,900,000 shares of
Common Stock, on the same terms and conditions as in the Offering, solely to
cover over-allotments, if any. Such over-allotment option was exercised in full,
and on May 21, 1998, the Company and the original stockholders sold an
additional 1,330,000 shares and 570,000 shares, respectively. The Company did
not receive any proceeds from the sale of shares by the existing stockholders.
Reclassification
Certain amounts in prior years' consolidated 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 $10,449,000 and
$10,175,000 during each of the years ended December 31, 1999 and 1998,
respectively. The maximum outstanding balance at any month-end was $78,000,000
and $90,000,000 during 1999 and 1998, respectively. The weighted average
interest rate on such agreements was approximately 4.97%, 5.61% and 5.65% during
the years ended December 31, 1999, 1998 and 1997, respectively. The securities
pledged are held by a third-party institution.
69
<PAGE>
(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, 1999 and 1998 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
1999
--------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities issued by government agencies:
Due after five years to ten years ............................. $ 37,000 $ -- $ (2,798) $ 34,202
Corporate trust preferred:
Due after ten years ........................................... 259,177 -- (17,302) 241,875
Mortgage-backed securities ....................................... 439,739 237 (18,537) 421,439
SBA certificates ................................................. 64,747 257 (450) 64,554
Asset based securities ........................................... 9,907 -- (113) 9,794
---------- ---------- ---------- ----------
Total securities available-for-sale ........................ $ 810,570 $ 494 $ (39,200) $ 771,864
========== ========== ========== ==========
<CAPTION>
1998
--------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities issued by government agencies:
Due after five years to ten years ............................. $ 37,000 $ -- $ (23) $ 36,977
Corporate trust preferred:
Due after ten years ........................................... 334,814 -- (9,849) 324,965
Mortgage-backed securities ....................................... 588,081 35 (3,601) 584,515
SBA certificates ................................................. 46,345 33 (160) 46,218
Asset based securities ........................................... 12,308 -- (46) 12,262
---------- ---------- ---------- ----------
Total securities available-for-sale ........................ $1,018,548 $ 68 $ (13,679) $1,004,937
========== ========== ========== ==========
</TABLE>
Proceeds from sales of investments and mortgage-backed securities
available-for-sale were approximately $318,823,000, $514,841,000 and
$235,612,000 in each of the years ended December 31, 1999, 1998 and 1997,
respectively, and resulted in gross realized gains of approximately $204,000,
$1,847,000 and $1,714,000, respectively, and gross realized losses of
approximately $3,421,000, $165,000 and $439,000 in the years ended December 31,
1999, 1998 and 1997, respectively.
At December 31, 1999 and 1998, 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>
1999 1998
--------------------------- ---------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Pledged against:
Securities sold under agreements to repurchase $420,531 $399,973 $397,488 $395,720
Advances from Federal Home Loan Bank ......... 68,896 67,779 178,797 177,434
Swap and corridor agreements ................. 65 65 142 139
Treasury tax and loan account ................ 13,698 12,840 804 820
-------- -------- -------- --------
$503,190 $480,657 $577,231 $574,113
======== ======== ======== ========
</TABLE>
70
<PAGE>
(4) Loans Held-for-Sale
Proceeds from sales of loans held-for-sale were approximately $94.1
million, $43.0 million and $88.7 million in each of the years ended December 31,
1999, 1998 and 1997, respectively. The sales resulted in gross realized gains of
approximately $49,000, $613,000 and $165,000 and no gross realized losses in
each of the years ended December 31, 1999, 1998 and 1997, respectively. Gains
from sales of servicing rights, including flow through and bulk sales of
servicing, were $3.2 million for the year ended December 31, 1997. In 1997 the
Company deferred gains totaling $5.3 million on the sales of servicing rights
for loans owned by the Bank. The unamortized balance of the deferred gain was
$2.1 million and $3.0 million at December 31, 1999 and 1998, respectively.
(5) Mortgage-Backed Securities Held-to-Maturity
The amortized cost, unrealized gains and losses, and estimated fair value
of mortgage-backed securities held-to- maturity at December 31, 1999 and 1998
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
1999........................ $ 4,326 $ 4 $ (56) $ 4,274
========== =========== ======== =========
1998........................ $ 6,282 $ 90 $ -- $ 6,372
========== =========== ======== =========
</TABLE>
Substantially all mortgage-backed securities are collateralized by
single-family residence secured loans. There were no sales of mortgage-backed
securities held-to-maturity in 1999 and 1998.
(6) Loans Receivable
A summary of loans receivable at December 31, 1999 and 1998 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Real estate loans
Single-family residential:
Fixed-rate .................................. $1,057,956 $1,150,414
Variable-rate ............................... 417,195 344,342
Multifamily, primarily variable-rate ............ 327,252 366,625
Commercial and industrial, primary variable-rate 420,919 206,402
Land, primarily fixed-rate ...................... 847 880
---------- ----------
Real estate loans ............................... 2,224,169 2,068,663
---------- ----------
Commercial business loans ....................... 159,740 62,665
Consumer loans .................................. 199,879 53,826
Secured by deposits ............................. 1,918 3,537
---------- ----------
All loans ................................... 2,585,706 2,188,691
Less:
Undistributed loan proceeds ................. 95,683 17,152
Unamortized net loan (premiums)/discounts and
deferred origination fees ................ 4,045 814
Deferred gain on servicing sold ............. 2,090 2,971
Allowance for loan losses (note 7) .......... 21,051 18,897
---------- ----------
$2,462,837 $2,148,857
========== ==========
</TABLE>
Nonaccrual loans were $3.2 million, $8.5 million and $9.9 million at
December 31, 1999, 1998 and 1997, respectively. If loans which were on
nonaccrual at December 31, 1999, 1998 and 1997 had performed in accordance with
their terms for the year or since origination, if shorter, interest income from
these loans would have been $372,000,
71
<PAGE>
$950,000 and $644,000, respectively. Interest collected on these loans for these
years was $140,000, $364,000 and $67,000, respectively.
The Company's variable-rate loans are indexed primarily to the COFI and
U.S. Treasury one-year and ten 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, 1999, the Company had loan applications pending to
originate loans of approximately $50,907,000. Other than pending loan
applications at year-end, the Bank had no additional outstanding commitments to
originate or purchase loans.
(7) Allowance for Loan Losses and Provision for Loan Losses
An analysis of the activity in the allowance for loan losses for each of
the years ended December 31, 1999, 1998 and 1997 is as follows (dollars in
thousands):
1999 1998 1997
-------- -------- --------
Balance at beginning of year ....... $ 18,897 $ 17,824 $ 23,280
Provision for loan losses .......... 4,747 2,000 2,046
Recoveries credited to the allowance 503 85 106
-------- -------- --------
24,147 19,909 25,432
Losses charged to the allowance .... (3,096) (1,012) (7,608)
-------- -------- --------
Balance at end of year ............. $ 21,051 $ 18,897 $ 17,824
======== ======== ========
The Bank's gross impaired loans were $7.2 million and $10.2 million as of
December 31, 1999 and 1998, respectively. The average impaired loans for the
years ended 1999, 1998 and 1997 were $9.6 million, $9.6 million, and $20.6
million, respectively. Gross impaired loans with a valuation allowance totaled
$2.8 million and gross impaired loans without a valuation allowance totaled $4.3
million at December 31, 1999. Interest income recognized related to these loans
was $465,000, $552,000 and $67,000 for 1999, 1998 and 1997, respectively.
The valuation allowance related to impaired loans was $969,000 and $1.6
million at December 31, 1999 and 1998, respectively, and is included in the
schedule of the allowance for loan losses described above.
Troubled debt restructurings totaled $6.5 million and $4.5 million as of
December 31, 1999 and 1998, respectively. The Bank has no commitments to lend
additional funds to borrowers whose loans were classified as troubled debt
restructurings at December 31, 1999.
72
<PAGE>
(8) Real Estate Held for Sale
Real estate at December 31, 1999 and 1998, consisted of the following
(dollars in thousands):
1999 1998
------- -------
Acquired in settlement of loans:
Single-family residential ................ $ 883 $ 2,723
Less allowance for losses ............. (37) --
------- -------
Acquired in settlement of loans .... $ 846 $ 2,723
======= =======
A summary of the components of the income from real estate operations in
each of the years ended December 31, 1999, 1998 and 1997 is as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Gross income from real estate operations .......... $ 338 $ 1,147 $ 3,372
Operating expenses ................................ 374 1,848 4,637
------- ------- -------
Loss from operations .......................... (36) (701) (1,265)
Gain on real estate sales ......................... 602 2,180 2,214
------- ------- -------
Gain from real estate operations .............. 566 1,479 949
Provisions for losses ............................. (53) -- (2,754)
------- ------- -------
Total income (loss) from real estate operations $ 513 $ 1,479 $(1,805)
======= ======= =======
</TABLE>
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, 1999, 1998 and 1997, respectively, is as follows (dollars in thousands):
Direct Real
Real Estate Estate
Acquired Investments Total
-------- ----------- -----
Balance, December 31, 1996 .............. $ 72 $ 6,516 $ 6,588
Provision for losses .................... 2,754 -- 2,754
Charge-offs ............................. (1,408) (370) (1,778)
------- ------- -------
Balance, December 31, 1997 .............. 1,418 6,146 7,564
Charge-offs ............................. (1,418) (6,146) (7,564)
------- ------- -------
Balance, December 31, 1998 ............. -- -- --
Provision for losses .................... 53 -- 53
Charge-offs ............................. (16) -- (16)
------- ------- -------
Balance, December 31, 1999 ............. $ 37 $ -- $ 37
======= ======= =======
73
<PAGE>
(9) Premises and Equipment
Premises and equipment at December 31, 1999 and 1998, consisted of the
following (dollars in thousands):
1999 1998
-------- --------
Land ............................................... $ 521 $ 521
Buildings .......................................... 999 967
Furniture, fixtures and equipment .................. 16,125 13,969
Leasehold improvements ............................. 5,857 6,308
-------- --------
23,502 21,765
Less accumulated depreciation and amortization ..... (16,397) (14,553)
-------- --------
$ 7,105 $ 7,212
======== ========
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
$3.0 million, $2.6 million and $2.2 million, net of sublease income of
approximately $164,000, $166,000 and $353,000, in each of the years ended
December 31, 1999, 1998 and 1997, respectively.
Approximate minimum lease commitments under noncancellable operating
leases at December 31, 1999 are as follows (dollars in thousands): `
Year Gross Sublease Net
- ------------------ -------- -------- --------
2000.............. $ 3,596 $ 152 $ 3,444
2001.............. 3,242 76 3,166
2002.............. 2,892 -- 2,892
2003.............. 2,340 -- 2,340
2004.............. 2,295 -- 2,295
Thereafter........ 6,961 -- 6,961
-------- ------- --------
$ 21,326 $ 228 $ 21,098
======== ======= ========
74
<PAGE>
(10) Deposits
Deposits at December 31, 1999 and 1998 consisted of the following (dollars
in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------ -------------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Transaction accounts:
Checking accounts......................... $ 214,113 1.08% $ 166,807 1.26%
Passbook accounts......................... 134,377 3.33 139,800 3.60
Money market accounts..................... 152,899 4.37 126,396 4.20
---------- ----------
Transaction accounts.................... 501,389 2.69 433,003 2.88
---------- ----------
Term certificates:
3-month................................... 6,857 3.71 6,951 3.83
6-month................................... 52,922 4.47 60,323 4.86
12-month.................................. 627,514 5.21 594,717 5.46
18-month.................................. 35,897 5.13 44,502 5.43
24-month.................................. 72,003 5.30 57,988 6.28
36-month.................................. 11,580 5.64 11,079 5.71
48-month.................................. 775 5.54 1,176 5.93
60-month.................................. 17,967 5.84 16,145 5.88
$100,000 and over......................... 320,433 5.27 316,278 5.54
---------- ----------
Term certificates....................... 1,145,948 5.19 1,109,159 5.49
---------- ----------
$1,647,337 4.43% $1,542,162 4.76%
========== ==== ========== ====
</TABLE>
Term certificates of deposit outstanding by scheduled maturity date at
December 31, 1999 are as follows (dollars in thousands):
Weighted
Amount Average Rate
------ ------------
Due within 3 months............... $ 405,847 5.00%
Due within 3 to 6 months.......... 317,785 5.03
Due within 6 to 9 months.......... 129,261 5.16
Due within 9 to 12 months......... 154,671 5.61
Due within 12 to 24 months........ 117,644 5.70
Due within 24 to 36 months....... 9,678 5.78
Due after 36 months............... 11,062 5.64
----------
Total............................. $1,145,948 5.19%
========== =====
The components of deposit interest expense in each of the years ended
December 31, 1999, 1998 and 1997 are as follows (dollars in thousands):
1999 1998 1997
-------- -------- --------
Checking accounts .......................... $ 2,218 $ 2,107 $ 1,635
Passbook and money market accounts ......... 10,516 10,679 10,841
Term certificates -- under $100,000 ........ 47,347 45,217 44,852
Term certificates -- $100,000 and over ..... 12,415 12,132 10,124
-------- -------- --------
72,496 70,135 67,452
Interest forfeitures on early withdrawals .. (205) (208) (205)
-------- -------- --------
$ 72,291 $ 69,927 $ 67,247
======== ======== ========
75
<PAGE>
(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 $381.1 million
and $364.0 million outstanding reverse repurchase agreements at December 31,
1999 and 1998, respectively.
The maximum repurchase liability balances outstanding at any month-end
during the years ended December 31, 1999 and 1998 were approximately $480.2
million and $658.4 million, respectively. The average balances outstanding
during each of the years ended December 31, 1999 and 1998 were approximately
$417.6 million and $385.5 million, 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.
The scheduled maturities and weighted average interest rates of securities
sold under agreements to repurchase at December 31, 1999 and 1998 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Year of maturity:
2000..................................... $ 150,000 5.94% $ 129,000 5.71%
2001..................................... 71,109 6.57 -- --
2002..................................... 60,000 5.83 135,000 5.79
2003..................................... 50,000 5.34 50,000 5.34
2008..................................... 50,000 5.10 50,000 5.10
--------- ---------
$ 381,109 5.85% $ 364,000 5.61%
========= ==== ========= ====
</TABLE>
Certain of these borrowings are subject to call provisions.
(12) Advances from the FHLB
Advances from the FHLB at December 31, 1999 and 1998 were collateralized
by mortgage-backed agency securities and mortgage loans with a current principal
balance of approximately $1.7 billion and $1.9 billion, respectively, and by the
required investment in the stock of the FHLB with a carrying value at December
31, 1999 and 1998 of approximately $66.6 million and $63.2 million,
respectively.
At December 31, 1999, the Bank had an available total collateralized line
of credit of approximately $1.1 billion with the FHLB. Based on current
securities and loans pledged, the Company had $14 million of unused line of
credit as of December 31, 1999 with the FHLB.
76
<PAGE>
The scheduled maturities and weighted average interest rates of advances
at December 31, 1999 and 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------- ----------------------------
Weighted Weighted
Year of Maturity Amount Average Rate Amount Average Rate
---------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
1999......... $ -- --% $ 14,000 4.77%
2000......... 613,700 4.98 185,000 5.69
2001......... -- -- 25,000 5.68
2002......... -- -- 139,000 5.44
2003......... 200,000 5.08 525,000 5.17
2008 310,000 5.53 310,000 5.53
---------- ----------
$1,123,700 5.15% $1,198,000 5.38%
========== ==== ========== ====
</TABLE>
During the fourth quarter of 1999 the Bank sold $199 million of FHLB
advances. The sales resulted in a gain of $6.7 million, which was reported as an
extraordinary item. Certain of these FHLB advances are subject to call
provisions. FHLB advances totaling $290 million were called and refinanced in
January 2000.
(13) Other Borrowings
On June 1, 1995, the Company issued $10,000,000 par of unsecured Senior
Notes (the "Notes") in conjunction with a reorganization of the Company. The
Notes contained an initial pay rate and accrual rate of 7% and 10.75%,
respectively, and the accrual rate increased to 11.15% on June 30, 1997. The
difference between the pay rate and accrual rate was deferred and compounded
annually at the accrual rate commencing on June 30, 1996. Included in the
balance of the senior note was $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.
The Company used $11.4 million of public offering proceeds to prepay the
$10.0 million of senior notes (plus accrued interest through May 15, 1998).
In 1999 the Company secured a $10 million line of credit from a third
party commercial Bank for operations and the repurchase of the Company's
outstanding stock to be effected from time to time in open market or privately-
negotiated transactions. As of December 31, 1999, $4.7 million of the line of
credit had been utilized. The average interest rate for the loan was 9.5%. A
commitment fee of $50,000 was paid for the loan, of $5,000 of which was
amortized as of December 31, 1999.
(14) Income Taxes
The Company, including the Bank and its subsidiaries (except for PPCCP),
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. While the
senior debt was outstanding at the Company, the payment by the Bank was limited
to the amount of the consolidated tax liability.
PPCCP has elected to be treated as a REIT for Federal income tax purposes
and intends to comply with the provisions of the Code, as amended. Accordingly,
PPCCP is not subject to Federal income tax to the extent it distributes its
income to shareholders (other than Bank) and as long as certain asset, income
and stock ownership tests are met in accordance with the Code. As PPCCP
qualifies as a REIT for Federal income tax purposes, no provision for income
taxes is included for the earnings of PPCCP that were distributed to outside
stockholders.
77
<PAGE>
The income tax (benefit) for the years ended December 31, 1999, 1998, and
1997 consist of the following (dollars in thousands):
1999 1998 1997
-------- -------- --------
Current:
Federal ...................... $ 244 $ -- $ 154
State ........................ 17 8 62
-------- -------- --------
Total current ............ 261 8 216
-------- -------- --------
Deferred:
Federal ...................... (4,761) (16,398) (4,715)
-------- -------- --------
Total tax benefit ........ $ (4,500) $(16,390) $ (4,499)
======== ======== ========
Deferred tax assets are initially recognized for NOLs and tax credit
carryforwards and differences between the financial statement carrying amount
and the tax bases of assets and liabilities which will result in future
deductible amounts. A valuation allowance is then established to reduce that
deferred tax asset to the level at which "it is more likely than not" that the
tax benefits will be realized. A taxpayer's ability to realize the tax benefits
of deductible temporary differences and operating loss or credit carryforwards
depends on having sufficient taxable income of an appropriate character within
the carryback and carryforward periods. Sources of taxable income that may allow
for the realization of tax benefits include (i) taxable income in the current
year or prior years that is available through carryback, (ii) future taxable
income that will result from the reversal of existing taxable temporary
differences, and (iii) future taxable income generated by future operations.
Based on the 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, 1999.
Below is a reconciliation of the expected federal income taxes (benefit)
to the consolidated effective income taxes (benefit) for the noted periods:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Statutory federal income tax rate ............ 35% 35% 35%
======== ======== ========
Expected federal income taxes (benefit) ..... $ 9,021 $ (783) $ 2,556
Increases (reductions) in income taxes
resulting from:
State franchise tax, net of federal benefit 11 4 40
Adjustments to deferred taxes
fully offset by valuation allowance ... 4,645 -- --
Change in the valuation allowance ......... (18,178) (15,569) (7,006)
PPCCP nontaxable earnings ................. 8 (79) (301)
Other ..................................... (7) 37 212
-------- -------- --------
$ (4,500) $(16,390) $ (4,499)
======== ======== ========
</TABLE>
78
<PAGE>
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:
1999 1998
-------- --------
(Dollars in Thousands)
Deferred Tax Assets:
Provision for losses on loans and
real estate ........................................ $ 9,926 $ 12,417
Tax gains on sales of loans, net of deferred gains ..... 2,017 1,989
Recognition of interest on nonperforming loans for tax . 6,644 6,355
Accrued interest on deposits recognized for book
but deferred for tax ............................... 949 1,187
REMIC Income ........................................... 6,660 5,973
Miscellaneous temporary deductible differences ......... 1,558 940
Available NOL carryforwards ............................ 53,693 58,176
AMT tax credit carryforwards ........................... 1,693 1,432
-------- --------
Total deferred tax assets .......................... 83,140 88,469
-------- --------
Deferred tax liabilities:
Mark to market as adjusted ............................. (13,056) (5,399)
Stock dividends from FHLB .............................. (6,000) (4,429)
Miscellaneous temporary taxable differences ............ (247) (247)
Federal tax effect of state temporary differences ...... (2,470) (3,610)
-------- --------
Total deferred tax liabilities ...................... (21,773) (13,685)
-------- --------
Deferred tax assets, net of deferred tax liabilities ... 61,367 74,784
Less deferred tax asset valuation allowance ........ (30,001) (48,179)
-------- --------
Net deferred tax assets ................................ $ 31,366 $ 26,605
======== ========
The Federal NOL carryforwards expire as follows (dollars in thousands):
Year Total
------------------------------------------------- --------
2001............................................. $ 5,635
2002............................................. 2
2003............................................. 24,444
2004............................................. 26
--------
Pre-1992 originated net operating losses......... 30,107
2008............................................. 5,917
2009............................................. 14,706
2010............................................. 78,436
2011............................................. 5,061
2013............................................. 7,097
--------
Post - 1992 originated net operating losses...... 111,217
2018............................................. 12,086
--------
Post-May, 1998 originated net operating losses... 12,086
--------
Total............................ $153,410
========
The Company had Federal and California AMT credit carryforwards of
approximately $1.7 million as of December 31, 1999 and $1.4 million as of
December 31, 1998. These carryforwards are available to reduce future regular
federal income taxes and California franchise taxes, if any, over an indefinite
period.
In 1992, issuance of preferred stock resulted in a change in control as
defined under Section 382 of the Code. As a result, any usage of NOL
carryforwards created in 1992 and prior years is limited to approximately $7.7
million
79
<PAGE>
per year. The total NOL carryforwards created in 1992 and prior years is
approximately $30.1 million. Any unused limitation is available in subsequent
years until expiration. The amount of the unused limitation carryover available
from the 1992 change in control in 2000 and thereafter is approximately $30.1
million.
During May of 1998, the Offering resulted in a second change in control as
defined under Section 382 of the Code. As a result, any usage of NOL
carryforwards created prior to May, 1998 (but post 1992) is limited to
approximately $21.3 million per year. The total NOL carryforwards created prior
to May, 1998 (but post 1992) is approximately $111.2 million. Any unused
limitation is available in subsequent years until expiration. The amount of the
unused limitation carryover available from the May, 1998 change in control in
2000 is approximately $33 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 and Earnings Per Share
Prior to consummation of the Offering and the exchange of preferred stock
for Common Stock, there were 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 were owned by the Material Stockholders (the
"Bishop Estate", BIL Securities" and "Arbur"). In connection with the Offering,
the Outstanding Preferred Stock was exchanged for shares of Common Stock. An
aggregate of 3,152,064 shares of Common Stock was outstanding prior to
consummation of the Offering, which gives effect to the conversion of the
Outstanding Preferred Stock into Common Stock and the 32:1 stock split.
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. No
dividends have been declared or paid on Common Stock. In 1998, the Company paid
a $19.4 million preferred stock dividend in connection with the Offering.
(16) Stock Options
In April 1999, the stockholders of the Company approved the 1999 Stock
Option Plan (the "1999 Plan"), which authorized for granting up to 985,500
options to officers and key employees of the Company. Options under the 1999
Plan have a life of 10 years and vest over three years. All 985,500 options were
granted in January 1999.
In September 1999, the Board of Directors of the Company approved the 2000
Stock Incentive Plan (the "2000 Plan"), which authorized for granting up to
991,822 shares of options to officers, directors, and key employees of the
Company. In September 1999, 479,250 options were granted. The 2000 Plan is
subject to stockholder approval, and accordingly is accounted for as a variable
plan until such approval is obtained. Options under the 2000 Plan have a life of
10 years and vest over 1 year.
80
<PAGE>
The following is a summary of transactions in 1999:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Option Price
------ ------------
<S> <C> <C>
Options outstanding, January 1, 1999 .............. -- --
Options granted ................................... 1,465,000 $12.20
Options exercised ................................. -- --
Options canceled .................................. -- --
--------- ------
Options outstanding, December 31, 1999 ............ 1,465,000 $12.20
========= ======
</TABLE>
<TABLE>
<CAPTION>
Weighted-
average
Number Remaining Number of
Outstanding Contractual Life Weighted Exercisable Weighted
Exercise December 31, Options Average December 31, Average
Price 1999 Outstanding Exercise Price 1999 Exercise Price
----- ---- ----------- -------------- ---- --------------
<S> <C> <C> <C> <C> <C>
$9.00 479,250 9.8 $9.00 -- $9.00
$13.75 985,500 9.1 $13.75 -- $13.75
</TABLE>
Had compensation cost for the Company's Stock Option program been
determined based on the fair value at the grant dates for awards under both
Plans consistent with the method of Statement of Financial Standards No. 123,
Accounting for Stock Based Compensation, the Company's net earnings and earnings
per share would have been reduced to the pro forma amounts indicated below.
(Dollars in thousands, except per share amounts).
1999
----
Net earnings:
As reported ......................................... $ 33,475
Pro forma ........................................... $ 32,393
Earnings per share basic & diluted:
As reported ......................................... $ 1.63
Pro forma ........................................... $ 1.58
The fair value of each option granted in 1999 was estimated on December
31, 1999 using the Black-Scholes option-pricing model, and was computed based on
the following weighted average assumptions.
<TABLE>
<CAPTION>
1999 Plan 2000 Plan
--------- ---------
<S> <C> <C>
Dividend yield............................................ 0.00% 0.00%
Expected volatility....................................... 39.0% 39.0%
Risk-free interest rate................................... 6.435% 6.435%
Expected life at December 31, 1999........................ 5 years 5 years
Remaining contractual life at December 31, 1999........... 9.1 years 9.8 years
Number of options outstanding at December 31, 1999........ 985,500 479,250
</TABLE>
81
<PAGE>
(17) Other Capital Transactions
On September 2, 1998, the Company announced an initial stock repurchase
program of up to 1 million shares, or approximately five percent, of the
Company's outstanding Common Stock, to be effected from time to time in open-
market or privately-negotiated transactions. The repurchased shares are held as
treasury stock and may be used for general corporate purposes. Through December
31, 1998, the Company repurchased 835,000 shares pursuant to this program for a
total purchase price of $8.3 million. On January 4, 1999, the Company's Board of
Directors authorized an additional repurchase of up to 1 million shares, or
approximately five percent, of the Company's outstanding Common Stock. For the
year ended December 31, 1999 the Company purchased an additional 1,100,200
shares pursuant to the previous authorizations for a total purchase price of
$10.4 million. The additional repurchased shares will also be held as treasury
stock and used for general corporate purposes.
(18) Derivatives and Hedging Activities
Hedging costs, net, for each of the years ended December 31, 1999, 1998
and 1997 consists of the following (dollars in thousands):
1999 1998 1997
---- ---- ----
Interest paid on swaps, net of interest received ....... $ -- $ -- $ 2
Amortization of cost of caps, floors and
corridors, net of interest received ................. 146 214 265
---- ---- ----
$146 $214 $267
==== ==== ====
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 LIBOR, one-month
LIBOR and COFI which were 6.00%, 5.82% and 4.85%, respectively, at December 31,
1999.
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,
1999 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Contract Amount Average Strike Price Average Limit Rate
--------------- -------------------- ------------------
<S> <C> <C> <C>
2000.................... $ 12,000 6.38% 8.13%
2001.................... 20,000 6.64 8.24
----------
$ 32,000 6.54% 8.20%
========= ===== ====
</TABLE>
(19) 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
82
<PAGE>
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, 1999 and 1998 (dollars in thousands):
1999 1998
------- -------
Change in benefit obligation:
Projected benefit obligation, beginning of year .... $ 6,248 $ 5,727
Interest cost ...................................... 419 397
Amendments ......................................... (246) --
Benefits paid ...................................... (120) (106)
Actuarial loss (gain) .............................. (879) 230
------- -------
Projected benefit obligation, end of year .......... 5,422 6,248
------- -------
Change in plan assets:
Plan assets, beginning of year ..................... 5,716 5,082
Actual return on plan assets ....................... 618 715
Employer contribution .............................. -- 25
Benefits paid ...................................... (120) (106)
------- -------
Plan assets, end of year ........................... 6,214 5,716
------- -------
Funded status ...................................... 793 (531)
Unrecognized prior service costs ................... (246) --
Unrecognized (gain) loss ........................... 131 1,157
------- -------
Net amount recognized .............................. 678 626
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost (accrued benefit liability) ... 678 (531)
Accumulated comprehensive income ................... -- 1,157
------- -------
Net amount recognized .............................. 678 626
------- -------
Components of net periodic benefit cost:
Interest cost on projected benefit obligation ...... 419 396
Expected return on Plan assets ..................... (505) (456)
Amortization of unrecognized (gain) / loss ......... 34 35
------- -------
Pension income ..................................... $ (52) $ (25)
======= =======
The assumptions used in the accounting were:
Discount rate ...................................... 8.00% 6.75%
Expected long-term rate of return on assets ........ 9.00% 9.00%
Pension income was approximately $52,000, $25,000 and $2,000 for the
year's ended December 31,1999, 1998 and 1997, respectively. 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 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 $191,000, $76,000 and $144,000 of expense
83
<PAGE>
related to the 401(k) plan, with no discretionary contributions in each of the
years ended December 31, 1999, 1998 and 1997, respectively.
(20) 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. See Note 26 for a discussion
of litigation related to the Company's goodwill litigation.
(21) 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, 1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ...... $ 21,582 $ 21,582 $ 46,401 $ 46,401
Securities available-for-sale .. 771,864 771,864 1,004,937 1,004,937
Mortgage-backed securities
held-to-maturity ............ 4,326 4,274 6,282 6,372
Loans receivable ............ 2,462,837 2,407,999 2,148,857 2,160,238
FHLB stock .................. 66,643 66,643 63,150 63,150
Financial liabilities:
Deposits ....................... 1,647,337 1,643,102 1,542,162 1,539,645
Securities sold under agreements
to repurchase ............... 381,109 380,641 364,000 373,402
Advances from the FHLB ...... 1,123,700 1,107,045 1,198,000 1,219,404
Other borrowings ............... 4,621 4,621 -- --
Financial instruments:
Interest rate corridors ........ 120 (72) 266 (236)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each type of financial instrument:
o Cash and Cash Equivalents - The carrying amount approximates
the fair value for cash and short-term investments.
o Securities Available-for-Sale - Fair value is based on quoted
market prices or dealer quotes.
84
<PAGE>
o Mortgage-Backed Securities - Fair value is based on quoted
market prices or dealer quotes.
o 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.
o FHLB Stock - The carrying amount of FHLB Stock approximates
its fair value.
o Deposit - The fair values of Checking accounts, passbook
accounts and money market accounts withdrawable on demand
without penalty are, by definition, equal to the amount
withdrawable on demand at the reporting date, which is their
carrying amount. The fair value of term certificates of
deposit, all of which are fixed maturity bearing a fixed-rate
of interest, is estimated by discounting future projected cash
flows at interest rates approximating interest rates currently
offered by the Bank for similar types of certificates of
deposit for similar remaining terms to maturity.
o Securities Sold under Agreements to Repurchase - The fair
value is estimated by discounting projected future cash flows
at the current interest rates available to the Bank for
Securities Sold Under Agreements to Repurchase with similar
terms for similar remaining terms to maturity.
o Other Borrowings - The carrying amount of other borrowings
approximates its fair value.
o Advances from the FHLB - The fair value is estimated by
discounting projected future cash flows at the current advance
interest rates available to the Bank for FHLB advances with
similar terms for similar remaining terms to maturity.
o Interest Rate Corridors - The fair values of interest rate
corridors are based upon dealer quotes or estimated using
option pricing models utilizing current market consensus
assumptions for interest rate caps and corridors of similar
terms and strike or floor prices for the same remaining term
to maturity.
(22) 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 1 capital (as defined in the regulations)
to risk-weighted assets (as
85
<PAGE>
defined), and of Tier 1 leverage capital (as defined) to adjusted tangible
assets (as defined). Management believes, as of December 31, 1999, that the Bank
met all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain a minimum total risk-based ratio of 10%, Tier 1 risk-based ratio of 6%
and Tier 1 leverage ratio of 5%. There are no conditions or events since that
notification that management believes have changed the institution's category.
While all insured institutions are required by OTS regulations to meet
these minimum regulatory capital requirements, the Bank has regulatory
Assistance Agreements which were entered into with the FSLIC as part of the
Company's purchase of the Bank in 1987, and which provides for an additional
$118.9 million of regulatory capital at December 31, 1999. Until the passage of
FIRREA, the Bank met all capital requirements by including the additional
Assistance Agreement capital amount in regulatory capital.
The position of the OTS was and continues to be that under FIRREA,
Assistance Agreements which provide additional regulatory capital, and/or
capital forbearances are no longer in effect as of December 7, 1989. The OTS
notified the Bank in 1990 that the additional Assistance Agreement capital
amounts cannot be included in meeting the FIRREA capital requirements, and as a
result thereof the OTS believed the Bank did not meet minimum FIRREA capital
requirements. Management disagreed, and still disagrees, with the OTS, and
attempted to preserve all of its rights and remedies under the Assistance
Agreements. At December 31, 1999, the Bank met all minimum FIRREA regulatory
capital requirements without inclusion of the additional Assistance Agreement
capital amounts.
To preserve its rights under the Assistance Agreement, in 1993 the 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.
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 earnings 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.
86
<PAGE>
At December 31, 1999 and 1998, 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, 1999
--------------------------------------------------------------
Tangible Tier 1 Tier 1 Risk- Total Risk-
Without Additional Assistance Agreement Capital Capital Leverage Based Based Capital
- ----------------------------------------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C>
Stockholders' equity/GAAP capital .......... $ 184,108 $ 184,108 $ 184,108 $ 184,108
Adjustment for unrealized losses on
securities available-for-sale .......... 38,706 38,706 38,706 38,706
Deduction for disallowed deferred
tax assets ............................. (17,285) (17,285) (17,285) (17,285)
Deduction for intangible assets ............ (7,405) (7,405) (7,405) (7,405)
Minority interest in subsidiary ............ 33,250 33,250 33,250 33,250
--------- --------- --------- ---------
Total Tier 1 capital ....................... 231,374 231,374 231,374 231,374
Includable allowance for loan losses ....... -- -- -- 18,341
--------- --------- --------- ---------
Total capital .......................... 231,374 231,374 231,374 249,715
Minimum capital requirement ................ 51,193 136,514 83,520 167,040
--------- --------- --------- ---------
Regulatory capital excess .................. $ 180,181 $ 94,860 $ 147,854 $ 82,675
========= ========= ========= =========
Capital ratios:
Regulatory as reported ................... 6.78% 6.78% 11.08% 11.96%
Minimum capital ratio .................... 1.50 4.00 4.00 8.00
--------- --------- --------- ---------
Regulatory capital excess ................ 5.28% 2.78% 7.08% 3.96%
========= ========= ========= =========
With Additional Assistance Agreement Capital
Regulatory capital as adjusted ........... $ 350,274 $ 350,274 $ 350,274 $ 368,615
Minimum capital requirement (per above) .. 51,193 136,514 83,520 167,040
--------- --------- --------- ---------
Regulatory capital excess ................ $ 299,081 $ 213,760 $ 266,754 $ 201,575
========= ========= ========= =========
<CAPTION>
Regulatory Capital/Standard as of December 31, 1998
--------------------------------------------------------------
Tangible Tier 1 Tier 1 Risk- Total Risk-
Without Additional Assistance Agreement Capital Capital Leverage Based Based Capital
- ----------------------------------------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C>
Stockholders' equity/GAAP capital .......... $ 179,357 $ 179,357 $ 179,357 $ 179,357
Adjustment for unrealized losses on
securities available-for-sale ............ 13,609 13,609 13,609 13,609
Deduction for disallowed deferred
tax assets ............................... (15,024) (15,024) (15,024) (15,024)
Deduction for intangible assets ............ (1,119) (1,119) (1,119) (1,119)
Minority interest in subsidiary ............ 33,250 33,250 33,250 33,250
--------- --------- --------- ---------
Total Tier 1 capital ....................... 210,073 210,073 210,073 210,073
Includable allowance for loan losses ....... -- -- -- 16,143
--------- --------- --------- ---------
Total capital ............................ 210,073 210,073 210,073 226,216
Minimum capital requirement ................ 49,983 133,288 73,189 146,378
--------- --------- --------- ---------
Regulatory capital excess .................. $ 160,090 $ 76,785 $ 136,884 $ 79,838
========= ========= ========= =========
Capital ratios:
Regulatory as reported ................... 6.30% 6.30% 11.48% 12.36%
Minimum capital ratio .................... 1.50 4.00 4.00 8.00
--------- --------- --------- ---------
Regulatory capital excess ................ 4.80% 2.30% 7.48% 4.36%
========= ========= ========= =========
With Additional Assistance Agreement Capital
Regulatory capital as adjusted ............. $ 331,873 $ 331,873 $ 331,873 $ 348,017
Minimum capital requirement (per above) .... 49,983 133,288 73,189 146,378
--------- --------- --------- ---------
Regulatory capital excess .................. $ 281,890 $ 198,585 $ 258,684 $ 201,639
========= ========= ========= =========
</TABLE>
87
<PAGE>
(23) Condensed Financial Information of PBOC Holdings, Inc.:
The condensed unconsolidated balance sheets of the Company at December 31,
1999 and 1998, were as follows:
1999 1998
-------- --------
(Dollars in Thousands)
Assets
Cash ......................................... $ 148 $ 1,804
Investment in subsidiary ..................... 184,108 179,357
Other assets ................................. 2 --
-------- --------
Total assets ............................. $184,258 $181,161
======== ========
Liabilities and Stockholder's Equity
Liabilities:
Accrued expenses and other liabilities ... $ 180 $ 555
Other borrowings - line of credit ........ 4,621 --
-------- --------
Total liabilities .................... 4,801 555
Total stockholders' equity ................... 179,457 180,606
-------- --------
Total liabilities and stockholder's equity $184,258 $181,161
======== ========
The condensed unconsolidated statements of operations of the Company for
the years ended December 31, 1999, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Income:
Cash dividends from subsidiary ................ $ 5,000 $ 200 $ 2,100
Interest income ............................... 11 259 --
-------- -------- --------
5,011 459 2,100
Expense:
Interest on other borrowings .................. 19 445 1,272
General and administrative expenses ........... 537 284 30
Other expense ................................. 6 64 --
-------- -------- --------
562 793 1,302
-------- -------- --------
Earnings (loss) before undistributed earnings
of subsidiary .............................. 4,449 (334) 798
Equity in undistributed earnings of subsidiary 29,026 11,237 10,144
-------- -------- --------
Net earnings .................................. $ 33,475 $ 10,903 $ 10,942
======== ======== ========
</TABLE>
The Company relies upon the Bank for dividends to support its operations.
Absent these dividends, the Company must rely upon its stockholders to support
its activities. The ability of the Bank to pay dividends is dependent upon its
ability to maintain minimum capital requirements and profitability.
88
<PAGE>
The condensed unconsolidated statements of cash flows of the Company for
the years ended December 31, 1999, 1998 and 1997 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Cash flows from operations activities:
Net earnings ......................................... $ 33,475 $ 10,903 $ 10,942
Adjustment to reconcile net loss to net cash
used in operating activities:
(Decrease) increase in accrued expenses .............. (325) 544 (33)
Increase (decrease) in accrued interest payable ...... 3 257 (393)
Increase in other assets ............................. (2) -- --
Equity in undistributed (earnings) of subsidiary ..... (29,026) (11,237) (10,144)
--------- --------- ---------
Net cash provided by operating
activities ..................................... 4,125 467 372
Cash flows from financing activities:
Proceeds from Offering ............................... -- 129,611 --
Net change in other borrowings ....................... 4,621 (11,370) --
Capital investment in subsidiary ..................... -- (89,307) --
Purchases of treasury stock .......................... (10,402) (8,308) --
Retirement of preferred stock ........................ -- (5) --
Dividends paid ....................................... -- (19,439) --
Cash contributions to additional paid-in capital ..... -- -- 21
Payment on senior debt ............................... -- -- (285)
--------- --------- ---------
Net cash provided by (used in) financing activities (5,781) 1,182 (264)
--------- --------- ---------
Net decrease (increase) in cash and cash equivalents . (1,656) 1,649 108
Cash and cash equivalents at beginning of year ....... 1,804 155 47
--------- --------- ---------
Cash and cash equivalents at end of year ............. $ 148 $ 1,804 $ 155
========= ========= =========
</TABLE>
89
<PAGE>
(24) Quarterly Results of Operations - Unaudited
The following table presents the unaudited results of operations by
quarter for 1999 and 1998:
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
1999
Total interest income ........................ $ 53,783 $ 55,793 $ 59,558 $ 61,294
Total interest expense ....................... 39,001 39,770 41,634 41,272
-------- -------- -------- --------
Net interest income .......................... 14,782 16,023 17,924 20,022
Provision for loan losses .................... 1,050 1,050 1,200 1,447
-------- -------- -------- --------
Net interest income after provision for
loan losses ............................. 13,732 14,973 16,724 18,575
Gain (loss) on sale of investment securities . 121 76 3 (3,417)
Other income ................................. 820 631 1,113 545
Operating expenses ........................... 8,476 8,865 10,023 10,759
-------- -------- -------- --------
Earnings (loss) before income tax benefit .... 6,197 6,815 7,817 4,944
Income tax benefit ........................... 1,000 1,000 1,500 1,000
-------- -------- -------- --------
Earnings before minority interest and
extraordinary item ...................... 7,197 7,815 9,317 5,944
Minority interest ....................... (869) (869) (869) (869)
-------- -------- -------- --------
Earnings before extraordinary item ........... 6,328 6,946 8,448 5,075
Extraordinary item -gain on sale of
FHLB advances ........................... -- -- -- 6,678
-------- -------- -------- --------
Net earnings available to common
stockholders ............................ $ 6,328 $ 6,946 $ 8,448 $ 11,753
======== ======== ======== ========
Earnings per common share, basic and
diluted, before extraordinary item ...... $ 0.30 $ 0.34 $ 0.41 $ 0.26
======== ======== ======== ========
Earnings per common share, basic and diluted . $ 0.30 $ 0.34 $ 0.41 $ 0.58
======== ======== ======== ========
1998
Total interest income ........................ $ 38,944 $ 37,149 $ 51,979 $ 52,801
Total interest expense ....................... 28,771 30,787 40,647 40,153
-------- -------- -------- --------
Net interest income .......................... 10,173 6,362 11,332 12,648
Provision for loan losses .................... 450 450 450 650
-------- -------- -------- --------
Net interest income after provision for
loan losses ............................. 9,723 5,912 10,882 11,998
Gain on sale of mortgage-backed
securities .............................. 323 -- 937 422
Other income ................................. 535 2,411 851 957
Operating expenses ........................... 7,680 23,240 6,999 9,043
-------- -------- -------- --------
Earnings (loss) before income taxes benefit .. 2,901 (14,917) 5,671 4,334
Income tax benefit ........................... -- 9,390 -- 7,000
-------- -------- -------- --------
Earnings before minority interest ............ 2,901 (5,527) 5,671 11,334
Minority interest ............................ (869) (869) (869) (869)
-------- -------- -------- --------
Net earnings (loss) .......................... 2,032 (6,396) 4,802 10,465
Dividends on preferred stock ................. 1,451 709 -- --
-------- -------- -------- --------
Earnings (loss) available to common
stockholders ............................ $ 581 $ (7,105) $ 4,802 $ 10,465
======== ======== ======== ========
Earnings (loss) per common share,
basic and diluted ....................... $ 0.18 $ (0.57) $ 0.22 $ 0.50
======== ======== ======== ========
</TABLE>
90
<PAGE>
(25) Goodwill Litigation and Shareholder Rights Agreement
As discussed in Note (22) above, the Company and the Bank have filed a
lawsuit against the United States Government with regard to supervisory and
accounting goodwill which were eliminated by FIRREA. To date, there have been no
material settlement discussions to resolve the litigation and no trial date has
been set. While the outcome of the lawsuit cannot be determined at this time,
management believes that, based on the advice of outside legal counsel, that the
Company's and the Bank's positions have substantial merit.
In May, 1998, a former preferred stockholder of the Company and the Bank
filed a lawsuit against the Company, the Bank and certain other parties seeking
to participate in any recovery against the government in the goodwill
litigation. The Company intends to defend this action vigorously.
In connection with the IPO, the Company, the Bank and each of the Material
Stockholders (i.e., the Bishop Estate, BIL Securities and Arbur) entered into a
Shareholder Rights Agreement (the "Agreement") which entitles the Material
Stockholders to 95% of any recovery against the government in the goodwill
litigation. The remaining 5% will be retained by the Company and/or the Bank. As
defined in the Agreement, the litigation recovery to be distributed will equal
cash payments received by the Company and/or Bank in the litigation, after
deduction of legal and other expenses incurred in the litigation and any income
tax liability of the Company or Bank incurred as a result of the recovery.
The Agreement provides that the Material Stockholder's claim to 95% of any
litigation recovery by the Company or Bank is documented in the form of goodwill
participation rights. To the extent the Company is prohibited from distributing
a recovery payment, or any portion thereof, or cannot do so because the Bank is
prohibited from making a distribution to the Company, the Company shall, upon
the written request of any Material Stockholder, issue to such Material
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 (the "Recovery Payment
Preferred"). The Company shall issue the Recovery Payment Preferred upon
surrender to the Company of such Material Stockholder's rights. The stated value
of each share of Recovery Payment Preferred shall be $1,000. The holders of the
Recovery Payment Preferred shall be entitled to receive cumulative preferential
cash dividends payable quarterly at a fixed-rate per share of 9 3/4% per annum.
As long as any Recovery Payment Preferred remains outstanding, no dividend
shall be declared or paid on the Company's Common Stock and no shares of Common
Stock shall be redeemed or purchased by the Company unless all cumulative
dividends on all outstanding shares of Recovery Payment Preferred have been
paid. In the event of any dissolution, liquidation or winding up of the affairs
of the 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, an amount equal to $1,000 per share, plus an amount
equal to all dividends accrued and unpaid on each share of Recovery Payment
Preferred.
The Company shall have the right, at its option, to redeem at any time the
Recovery Payment Preferred Stock, in whole or in part, upon payment in cash with
respect to each share of Recovery Payment Preferred redeemed at $1,000 per
share, plus an amount equal to all dividends accrued and unpaid thereon to the
date fixed for redemption.
The Agreement also established a Litigation Committee of the Company's
Board of Directors which will oversee the goodwill litigation and related
litigation with the former preferred stockholder and make final decisions
relating to any dismissal, settlement or termination of the litigation. The
Agreement further provides that the Material Stockholders shall indemnify the
Company and/or the Bank for 95% of the liability incurred by the Company or Bank
in any claim by the former preferred stockholder or other parties which seeks in
whole or in part any amounts recovered by the Company and/or the Bank in the
goodwill litigation and for 100% of the liability incurred by the Company or the
Bank in any claim by a party other then the Company or the Bank that challenges
the validity or binding effect of the Agreement.
91
<PAGE>
(26) Subsequent Event
On January 31, 2000, the Bank acquired The Bank of Hollywood. The
acquisition will be treated as a purchase for accounting purposes. The purchase
of the Bank of Hollywood will increase the Bank's total assets by $157.4
million, including $64.4 million of net loans and $145.1 million of deposits.
The Bank will also record an addition to it's goodwill account of $15.3 million
for the purchase of the Bank of Hollywood to be amortized on a straight-line
basis over 15 years.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 24, 2000
from pages two to eight, and 13 and 14. Such Proxy Statement was filed with the
SEC on March 23, 2000 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information relating to Directors and Executive Compensation is
incorporated herein by reference to the Registrant's Proxy Statement from pages
five to 13, and 17.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement from pages 15 and 16.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement from
page 18.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Document filed as part of this Report.
(1) The Consolidated Financial Statements are contained herein as listed
on the "Index" on page 57 hereof.
(2) All schedules for which provision is made in the applicable accounting
regulation of the SEC are omitted because they are not applicable or the
required information is included in the Consolidated Financial Statements or
notes thereto.
92
<PAGE>
(3) (a) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
No. Description
- --- -----------
3.1 Amended and Restated Certificate of Incorporation of PBOC Holdings,
Inc.1/
3.2 Bylaws of PBOC Holdings, Inc. 1/
4 Stock Certificate of PBOC Holdings, Inc.2/
10.1 Employment Agreement between PBOC Holdings, Inc., People's Bank of
California and Rudolf P. Guenzel1/
10.2 Employment Agreement between PBOC Holdings, Inc., People's Bank of
California and J. Michael Holmes1/
10.3 Employment Agreement between PBOC Holdings, Inc., People's Bank of
California and William W. Flader1/
10.4 Employment Agreement between the People's Bank of California and
Doreen J. Blauschild2/
10.5 Deferred Compensation Plan1/
10.6 Grantor Trust1/
10.7 Shareholder Rights Agreement1/
10.8 Stockholders' Agreement1/
10.9 1999 Stock Option Plan3/
21 Subsidiaries of the Registrant - Reference is made to "ITEM 1.
BUSINESS" for the Required information
23.1 Consent of KPMG LLP
27 Financial Data Schedule
- ----------
1/ Incorporated by reference from the Registrant's Form 10-K for the fiscal
year ended December 31, 1998 as filed on March 22, 1999 (File No.
000-24215).
2/ Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-48397) filed by the Registrant with the SEC on March
20, 1998, as amended.
3/ Incorporated by reference from the Registrant's Proxy Statement on
Schedule 14A as filed on March 22, 1999 (File No. 000-24215).
(3)(b) Reports filed on Form 8-K.
None.
93
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By: /s/ Rudolf P. Guenzel
---------------------------------------
Rudolf P. Guenzel
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Rudolf P. Guenzel
- ---------------------------------------------------
Rudolf P. Guenzel,
President and Chief Executive Officer and Director
(Principal Executive Officer) March 20, 2000
/s/ J. Michael Holmes
- ---------------------------------------------------
J. Michael Holmes
Senior Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer) and Director March 20, 2000
/s/ Murray Kalis
- ---------------------------------------------------
Murray Kalis
Director March 20, 2000
/s/ Randall O. Chang
- ---------------------------------------------------
Randall O. Chang
Director March 20, 2000
/s/ Robert W. MacDonald
- ---------------------------------------------------
Robert W. MacDonald
Director, Chairman of the Board March 20, 2000
/s/ John F. Davis
- ---------------------------------------------------
John F. Davis
Director March 20, 2000
94
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
PBOC Holdings, Inc.:
We consent to incorporation by reference in the Registration Statement
No. 333-93107 on Form S-8 of PBOC Holdings, Inc. of our report dated January 31,
2000, with respect to the consolidated statements of financial condition of PBOC
Holdings, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of earnings, other comprehensive earnings
(loss), changes in stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1999, which report appears in the
December 31, 1999 annual report on Form 10-K of PBOC Holdings, Inc.
/s/ KPMG LLP
KPMG LLP
Los Angeles, California
March 22, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0001057672
<NAME> PBOC HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,582
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 771,864
<INVESTMENTS-CARRYING> 4,326
<INVESTMENTS-MARKET> 4,274
<LOANS> 2,483,888
<ALLOWANCE> 21,051
<TOTAL-ASSETS> 3,398,228
<DEPOSITS> 1,647,337
<SHORT-TERM> 763,700
<LIABILITIES-OTHER> 66,625
<LONG-TERM> 741,109
0
0
<COMMON> 219
<OTHER-SE> 179,238
<TOTAL-LIABILITIES-AND-EQUITY> 3,398,228
<INTEREST-LOAN> 166,595
<INTEREST-INVEST> 58,587
<INTEREST-OTHER> 5,246
<INTEREST-TOTAL> 230,428
<INTEREST-DEPOSIT> 72,291
<INTEREST-EXPENSE> 161,677
<INTEREST-INCOME-NET> 68,751
<LOAN-LOSSES> 4,747
<SECURITIES-GAINS> (3,217)
<EXPENSE-OTHER> 38,123
<INCOME-PRETAX> 25,773
<INCOME-PRE-EXTRAORDINARY> 30,273
<EXTRAORDINARY> 6,678
<CHANGES> 0
<NET-INCOME> 36,951
<EPS-BASIC> 1.63
<EPS-DILUTED> 1.63
<YIELD-ACTUAL> 6.75
<LOANS-NON> 3,178
<LOANS-PAST> 0
<LOANS-TROUBLED> 6,470
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 18,897
<CHARGE-OFFS> 3,096
<RECOVERIES> 503
<ALLOWANCE-CLOSE> 21,051
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</TABLE>
