PROSPECTUS
Filed pursuant to Rule 424(b)(3)
SEC File Nos. 333-58335 and 333-58335-01
UCBH TRUST CO.
OFFER TO EXCHANGE ITS
SERIES B 9.375% CAPITAL SECURITIES
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY)
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
SERIES A 9.375% CAPITAL SECURITIES
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
UCBH HOLDINGS, INC.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON NOVEMBER 23, 1998, UNLESS EXTENDED.
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UCBH Trust Co., a trust created under the laws of the state of Delaware
(the 'Trust'), hereby offers, upon the terms and subject to the conditions set
forth in this prospectus (as the same may be amended or supplemented from time
to time, the 'Prospectus') and in the accompanying Letter of Transmittal (which
together constitute the 'Exchange Offer'), to exchange up to and including
$30,000,000 aggregate Liquidation Amount of its Series B 9.375% Capital
Securities (the 'Exchange Capital Securities'), which have been registered under
the Securities Act of 1933, as amended (the 'Securities Act'), pursuant to a
Registration Statement (as defined herein) of which this Prospectus constitutes
a part, for a like Liquidation Amount of its outstanding Series A 9.375% Capital
Securities (the 'Original Capital Securities'), of which $30,000,000 aggregate
Liquidation Amount is outstanding. Pursuant to the Exchange Offer, UCBH
Holdings, Inc., a Delaware corporation (the 'Company'), is also offering to
exchange (i) its guarantee of payments of cash distributions and payments on
liquidation of the Trust or redemption of the Exchange Capital Securities (the
'Exchange Guarantee') for a like guarantee in respect of the Original Capital
Securities (the 'Original Guarantee') and (ii) its Series B 9.375% Junior
Subordinated Deferrable Interest Debentures due May 1, 2028 (the 'Exchange
Junior Subordinated Debentures') for its Series A 9.375% Junior Deferrable
Interest Debentures due May 1, 2028 (the 'Original Junior Subordinated
Debentures'), in an aggregate principal amount corresponding to the aggregate
Liquidation Amount of Original Capital Securities accepted for exchange, which
Exchange Guarantee and Exchange Junior Subordinated Debentures also have been
registered under the Securities Act. The Original Capital Securities, the
Original Guarantee and the Original Junior Subordinated Debentures are
collectively referred to herein as the 'Original Securities' and the Exchange
Capital Securities, the Exchange Guarantee and the Exchange Junior Subordinated
Debentures are collectively referred to herein as the 'Exchange Securities.'
(Continued on next page)
This Prospectus and the Letter of Transmittal are first mailed to all
holders of Original Capital Securities on or about October 21, 1998.
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SEE 'RISK FACTORS' BEGINNING ON PAGE 17 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER ORIGINAL CAPITAL
SECURITIES IN THE EXCHANGE OFFER.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 14, 1998.
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(Continued from the previous page)
The terms of the Exchange Securities are identical in all material respects
to the respective terms of the Original Securities, except that (i) the Exchange
Securities have been registered under the Securities Act and therefore will not
be subject to certain restrictions on transfer applicable to the Original
Securities, (ii) the Exchange Capital Securities will not provide for any
increase in the Distribution rate thereon, and (iii) the Exchange Junior
Subordinated Debentures will not provide for any liquidated damages thereon. See
'Description of Exchange Securities' and 'Description of Original Securities.'
The Exchange Capital Securities are being offered for exchange in order to
satisfy certain obligations of the Company and the Trust under the Capital
Securities Registration Rights Agreement, dated as of April 13, 1998 (the
'Capital Securities Registration Rights Agreement'), among the Company, the
Trust and each purchaser of the Original Capital Securities (the 'Purchasers').
In the event that the Exchange Offer is consummated, any Original Capital
Securities that remain outstanding after consummation of the Exchange Offer and
the Exchange Capital Securities issued in the Exchange Offer will vote together
as a single class for purposes of determining whether holders of the requisite
percentage in outstanding Liquidation Amount thereof have taken certain actions
or exercised certain rights under the Trust Agreement (as defined herein).
The Exchange Capital Securities and the Original Capital Securities
(together, the 'Capital Securities') represent undivided beneficial interests in
the assets of the Trust. The Company is the owner of all of the beneficial
interests represented by common securities of the Trust (the 'Common
Securities,' and together with the Capital Securities, the 'Trust Securities').
Wilmington Trust Company is the Property Trustee (the 'Property Trustee') of the
Trust. The Trust exists for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in the Junior Subordinated Debentures (as defined
herein). The Exchange Junior Subordinated Debentures will mature on May 1, 2028
(the 'Stated Maturity Date'). The Exchange Capital Securities will have a
preference over the Common Securities under certain circumstances with respect
to cash distributions and amounts payable on liquidation, redemption or
otherwise. See 'Description of Exchange Capital Securities--Subordination of
Common Securities.'
As used herein, (i) the 'Indenture' means the Indenture, dated as of April
17, 1998, as amended and supplemented from time to time, between the Company and
Wilmington Trust Company, as Trustee (the 'Debenture Trustee'), relating to the
Junior Subordinated Debentures and (ii) the 'Trust Agreement' means the Amended
and Restated Declaration of Trust relating to the Trust, dated as of April 17,
1998, among the Company, as Sponsor, Wilmington Trust Company, as Property
Trustee, and the Administrative Trustees named therein (collectively, with the
Property Trustee, the 'Issuer Trustees') and the holders, from time to time, of
undivided beneficial interests in the assets of the Trust. In addition, as the
context may require, (i)'Junior Subordinated Debentures' includes the Original
Junior Subordinated Debentures and the Exchange Junior Subordinated Debentures
and (ii) 'Guarantee' includes the Original Guarantee and the Exchange Guarantee.
Holders of the Exchange Capital Securities as of October 15, 1998 will be
entitled to receive cumulative cash distributions arising from the payment of
interest on the Exchange Junior Subordinated Debentures, accumulating from April
17, 1998, payable semi-annually in arrears on May 1 and November 1 of each year,
commencing November 1, 1998, at the annual rate of 9.375% of the Liquidation
Amount of $1,000 per Exchange Capital Security ('Distributions'). So long as no
Debenture Event of Default (as defined herein) has occurred and is continuing,
the Company has the right to defer payments of interest on the Exchange Junior
Subordinated Debentures for a period not exceeding ten (10) consecutive
semi-annual periods to each deferral period (each, an 'Extension Period'),
provided that an Extension Period must end on an Interest Payment Date (as
defined herein) and may not extend beyond the Stated Maturity Date. Upon the
termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period, subject to the
requirements set forth herein. If and for so long as interest payments on the
Exchange Junior Subordinated Debentures are so deferred, Distributions on the
Exchange Capital Securities also will be deferred, and the Company will not be
permitted, subject to certain exceptions described herein, to declare or pay any
cash distributions with respect to the Corporation's capital stock or to make
any payment with respect to debt securities of the Company that rank pari passu
with or junior to the Exchange Junior Subordinated Debentures. During an
Extension Period, interest on the Junior Subordinated Debentures will continue
to accrue (and the amount of Distributions to which holders of the Trust
Securities are entitled will continue to accumulate) at the rate of 9.375% per
annum, compounded semi-annually, and holders of the Trust Securities will be
required to
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include deferred interest income for United States federal income tax purposes
prior to the receipt of the cash attributable to such income on that income. See
'Description of Exchange Junior Subordinated Debentures-- Option to Extend
Interest Payment Date' and 'Federal Income Tax Consequences--Interest Income and
Original Issue Discount.'
The Company will, through the Guarantee, the Common Guarantee, the Trust
Agreement, the Junior Subordinated Debentures, and the Indenture, taken
together, fully, irrevocably and unconditionally, guarantee or will guarantee,
as the case may be, all of the Trust's obligations under the Trust Securities.
See 'Relationship Among the Exchange Capital Securities, the Exchange Junior
Subordinated Debentures and the Exchange Guarantee--Full and Unconditional
Guarantee.' The Exchange Guarantee and the Common Guarantee will guarantee
payments of Distributions and payments upon liquidation of the Trust or
redemption of the Trust Securities, but in each case only to the extent that the
Trust has funds legally available therefor and has failed to make such payments,
as described herein. See 'Description of Exchange Guarantee.' If the Company
fails to make a required payment on the Exchange Junior Subordinated Debentures,
the Trust will not have sufficient funds to make the related payments, including
Distributions, on the Trust Securities. The Exchange Guarantee and the Common
Guarantee will not cover any such payment when the Trust does not have
sufficient funds legally available therefor. In such event, a holder of Exchange
Capital Securities may institute a legal proceeding directly against the Company
to enforce its rights in respect of such payment. See 'Description of Exchange
Junior Subordinated Debentures--Enforcement of Certain Rights by Holders of
Exchange Capital Securities.' The obligations of the Company under the Exchange
Guarantee, the Common Guarantee and the Exchange Junior Subordinated Debentures
will be unsecured and will rank subordinate and junior in right of payment to
all Senior Indebtedness (as defined in 'Description of Exchange Junior
Subordinated Debentures-- Subordination'). The ability of the Company to make
required payments on the Exchange Junior Subordinated Debentures will depend, in
large part, on its receipt of dividends from the Bank, the wholly-owned
subsidiary of the Company. See 'Use of Proceeds' and 'Risk Factors--Ranking of
Subordinated Obligations Under the Exchange Guarantee and the Exchange Junior
Subordinated Debentures; Limitations on Sources of Funds.'
The Trust Securities will be subject to mandatory redemption in a Like
Amount (as defined herein): (i) in whole but not in part, on the Stated Maturity
Date upon repayment of the Exchange Junior Subordinated Debentures at a
redemption price equal to the principal amount of, plus accrued and unpaid
interest on, the Exchange Junior Subordinated Debentures (the 'Maturity
Redemption Price'); (ii) in whole but not in part, at any time prior to May 1,
2005 (the 'Initial Optional Prepayment Date'), contemporaneously with the
optional prepayment of the Exchange Junior Subordinated Debentures by the
Company, upon the occurrence and continuation of a Special Event (as defined
herein) at a redemption price equal to, for each Exchange Capital Security, the
Special Event Prepayment Price (as defined herein) for a corresponding $1,000
principal amount of Exchange Junior Subordinated Debenture (the 'Special Event
Redemption Price'); and (iii) in whole or in part, on or after the Initial
Optional Prepayment Date, contemporaneously with the optional prepayment by the
Company of all or part of the Exchange Junior Subordinated Debentures, at a
redemption price equal to, for each Exchange Capital Security to be redeemed,
the Optional Prepayment Price (as defined herein) for a corresponding $1,000
principal amount of Exchange Junior Subordinated Debentures (the 'Optional
Redemption Price'). Any of the Maturity Redemption Price, the Special Event
Redemption Price and the Optional Redemption Price may be referred to herein as
the 'Redemption Price.' See 'Description of Exchange Capital
Securities--Redemption.'
Subject to the Company having received any required regulatory approval,
the Exchange Junior Subordinated Debentures will be prepayable prior to the
Stated Maturity Date at the option of the Company; (i) on or after the Initial
Optional Prepayment Date, in whole or in part, at 100% of the principal amount
thereof, plus accrued and unpaid interest thereon to the date of prepayment (the
'Optional Prepayment Price'); or (ii) at any time prior to the Initial Optional
Prepayment Date, in whole but not in part, upon the occurrence and continuation
of a Special Event, at a prepayment price (the 'Special Event Prepayment Price')
equal to the Make-Whole Amount (as defined below). The 'Make-Whole Amount' shall
be equal to the greater of (a) 100% of the principal amount of the Exchange
Junior Subordinated Debentures or (b) the sum, as determined by a Quotation
Agent (as defined herein), of the present values of the remaining scheduled
payments of principal and interest on the Exchange Junior Subordinated
Debentures, discounted to the prepayment date on a semi-annual basis (assuming a
360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate
(as defined herein) plus, in the case of each of clauses (a) and (b), accrued
and unpaid interest thereon to the date of
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prepayment. Either of the Optional Prepayment Price or the Special Event
Prepayment Price may be referred to herein as the 'Prepayment Price.' See
'Description of Exchange Junior Subordinated Debentures--Optional Prepayment'
and '--Special Event Prepayment.'
The Company has the right at any time, including without limitation upon
the occurrence of a Tax Event (as defined herein) to terminate the Trust and,
after satisfaction of liabilities of creditors of the Trust as required by
applicable law, to cause a Like Amount of the Junior Subordinated Debentures to
be distributed to the holders of the Trust Securities in liquidation of the
Trust, subject to (i) the Company having received an opinion of counsel to the
effect that such distribution will not be a taxable event to holders of Exchange
Capital Securities and (ii) the receipt of any required regulatory approvals.
Unless the Junior Subordinated Debentures are distributed to the holders of the
Trust Securities, in the event of a liquidation of the Trust as described
herein, after satisfaction of liabilities to creditors of the Trust as required
by applicable law, the holders of the Trust Securities generally will be
entitled to receive $1,000 per Trust Security plus accumulated and unpaid
Distributions thereon to the date of payment. See 'Description of Exchange
Capital Securities--Liquidation of the Trust and Distribution of Exchange Junior
Subordinated Debentures.'
THE CAPITAL SECURITIES, INCLUDING THE EXCHANGE CAPITAL SECURITIES, MAY BE
TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000
(100 CAPITAL SECURITIES), OR ANY INTEGRAL MULTIPLE OF $1,000 LIQUIDATION AMOUNT
(1 CAPITAL SECURITY). ANY ATTEMPTED TRANSFER OF EXCHANGE CAPITAL SECURITIES IN A
BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE
VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE
DEEMED NOT TO BE THE HOLDER OF SUCH EXCHANGE CAPITAL SECURITIES FOR ANY PURPOSE,
INCLUDING BUT NOT LIMITED TO THE RECEIPT OF DISTRIBUTIONS ON SUCH EXCHANGE
CAPITAL SECURITIES, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO
INTEREST WHATSOEVER IN SUCH EXCHANGE CAPITAL SECURITIES.
The Trust is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance (the 'Staff') of the Securities and
Exchange Commission (the 'Commission') as set forth in the following
interpretive letters addressed to third parties in other transactions: Exxon
Capital Holdings Corporation (available May 13, 1988); Morgan Stanley & Co.
Incorporated (available June 5, 1991); K-III Communications Corporation
(available May 14, 1993); Shearman & Sterling (available July 2, 1993); and
Brown & Wood LLP (available February 7, 1997) (collectively, the 'Letters').
However, neither the Company nor the Trust has sought its own interpretive
letter and there can be no assurance that the Staff of the Commission would make
a similar determination with respect to the Exchange Offer as it has in the
Letters. Based on these interpretations by the Staff of the Commission, and
subject to the two immediately following sentences, the Company and the Trust
believe that Exchange Capital Securities issued pursuant to this Exchange Offer
in exchange for Original Capital Securities may be offered for resale, resold
and otherwise transferred by a holder thereof (other than a holder who is a
broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Capital
Securities are acquired in the ordinary course of such holder's business and
that such holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of the
Securities Act) of such Exchange Capital Securities. However, any holder of
Original Capital Securities who is an 'affiliate' of the Company or the Trust or
who intends to participate in the Exchange Offer for the purpose of distributing
Exchange Capital Securities, or any broker-dealer who purchased Original Capital
Securities from the Trust for resale pursuant to Rule 144A under the Securities
Act ('Rule 144A') or any other available exemption under the Securities Act, (i)
will not be able to rely on the interpretations of the Staff of the Commission
set forth in the Letters, (ii) will not be permitted or entitled to tender such
Original Capital Securities in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Original Capital Securities
unless such sale is made pursuant to an exemption from such requirements. In
addition, as described herein, if any broker-dealer holds Original Capital
Securities acquired for its own account as a result of market-making or other
trading activities and exchanges such Original Capital Securities for Exchange
Capital Securities, then such broker-dealer must deliver a prospectus meeting
the requirements of the Securities Act in connection with any resales of such
Exchange Capital Securities.
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Each holder of Original Capital Securities who wishes to exchange Original
Capital Securities for Exchange Capital Securities in the Exchange Offer will be
required to represent that (i) it is not an 'affiliate' of the Company or the
Trust, (ii) any Exchange Capital Securities to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Capital Securities, and (iv) if
such holder is not a broker-dealer, such holder is not engaged in, and does not
intend to engage in, a distribution (within the meaning of the Securities Act)
of such Exchange Capital Securities. In addition, the Company and the Trust may
require such holder, as a condition to such holder's eligibility to participate
in the Exchange Offer, to furnish to the Company and the Trust (or an agent
thereof) in writing information as to the number of 'beneficial owners' (within
the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the 'Exchange Act')), on behalf of whom such holder holds the Original Capital
Securities to be exchanged in the Exchange Offer. Each broker-dealer that
receives Exchange Capital Securities for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Original Capital Securities
for its own account as the result of market-making activities or other trading
activities and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Capital Securities. The Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act.
Based on the position taken by the Staff of the Commission in the Letters, the
Company and the Trust believe that broker-dealers who acquired Original Capital
Securities for their own accounts, as a result of market-making activities or
other trading activities ('Participating Broker-Dealers'), may fulfill their
prospectus delivery requirements with respect to the Exchange Capital Securities
received upon exchange of such Original Capital Securities (other than Original
Capital Securities which represent an unsold allotment from the initial sale of
the Original Capital Securities) with a prospectus meeting the requirements of
the Securities Act, which may be the prospectus prepared for an exchange offer
so long as it contains a description of the plan of distribution with respect to
the resale of such Exchange Capital Securities. Each broker-dealer that receives
Exchange Capital Securities for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Capital Securities. The Letter of Transmittal states that, by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an 'underwriter' within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Capital
Securities received in exchange for Original Capital Securities acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Trust and the Company have agreed that, ending on the close of
business on the 90th day following the Expiration Date (as defined herein), it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See 'Plan of Distribution.' However, a Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of Exchange Capital Securities received in exchange for Original Capital
Securities pursuant to the Exchange Offer must notify the Company or the Trust,
or cause the Company or the Trust to be notified, on or prior to the Expiration
Date, that it is a Participating Broker-Dealer. Such notice may be given in the
space provided for that purpose in the Letter of Transmittal or may be delivered
to Wilmington Trust Company (the 'Exchange Agent') at the address set forth
herein under 'The Exchange Offer--Exchange Agent.' Any Participating
Broker-Dealer who is an 'affiliate' of the Company or the Trust may not rely on
the Letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
See 'The Exchange Offer--Resales of Exchange Capital Securities.'
In that regard, each Participating Broker-Dealer who surrenders Original
Capital Securities pursuant to the Exchange Offer will be deemed to have agreed,
by execution of the Letter of Transmittal, that upon receipt of notice from the
Company or the Trust of the occurrence of any event or the discovery of any fact
that (i) makes any statement contained or incorporated by reference in this
Prospectus untrue in any material respect or (ii) causes this Prospectus to omit
to state a material fact necessary in order to make the statements contained or
incorporated by reference herein, in the light of the circumstances under which
they were made, not misleading, or upon the occurrence of certain other events
specified in the Registration Rights Agreement, such Participating Broker-Dealer
will suspend the sale of Exchange Capital Securities (or the Exchange Guarantee
or the Exchange Junior Subordinated Debentures, as applicable) pursuant to this
Prospectus until the Company or the Trust has amended or supplemented this
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented Prospectus to such Participating Broker-Dealer, or
the Company or the Trust has given notice that the sale of the Exchange Capital
Securities (or the Exchange Guarantee or the Exchange Junior
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Subordinated Debentures, as applicable) may be resumed, as the case may be. If
the Company or the Trust gives such notice to suspend the sale of the Exchange
Capital Securities (or the Exchange Guarantee or the Exchange Junior
Subordinated Debentures, as applicable), it shall extend the 90-day period
referred to above during which Participating Broker-Dealers are entitled to use
this Prospectus in connection with the resale of Exchange Capital Securities by
the number of days during the period from and including the date of the giving
of such notice to and including the date when Participating Broker-Dealers shall
have received copies of the amended or supplemented Prospectus necessary to
permit resales of the Exchange Capital Securities or to and including the date
on which the Company or the Trust has given notice that the sale of Exchange
Capital Securities (or the Exchange Guarantee or the Exchange Junior
Subordinated Debentures, as applicable) may be resumed, as the case may be.
Prior to the Exchange Offer, there has been only a limited secondary market
and no public market for the Original Capital Securities. The Exchange Capital
Securities will be a new issue of securities for which there currently is no
market. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchange Capital Securities. The Company and the
Trust do not intend to apply for listing of the Exchange Capital Securities on
any securities exchange or for inclusion in the Nasdaq Stock Market, the
electronic securities market operated by the National Association of Securities
Dealers, Inc. ('Nasdaq').
Any Original Capital Securities not tendered and accepted in the Exchange
Offer will remain outstanding and will be entitled to all the same rights and
will be subject to the same limitations applicable thereto under the Trust
Agreement (except for those rights which terminate upon consummation of the
Exchange Offer). Following consummation of the Exchange Offer, the holders of
Original Capital Securities will continue to be subject to all of the existing
restrictions upon transfer thereof and neither the Company nor the Trust will
have any further obligation to such holders (other than under certain limited
circumstances) to provide for registration under the Securities Act of the
Original Capital Securities held by them. To the extent that Original Capital
Securities are tendered and accepted in the Exchange Offer, a holder's ability
to sell untendered Original Capital Securities could be adversely affected. See
'Risk Factors--Consequences of a Failure to Exchange Original Capital
Securities.'
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF ORIGINAL CAPITAL SECURITIES ARE URGED TO READ THIS
PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING
WHETHER TO TENDER THEIR ORIGINAL CAPITAL SECURITIES PURSUANT TO THE EXCHANGE
OFFER.
Original Capital Securities may be tendered for exchange on or prior to
5:00 p.m., New York City time, on November 23, 1998 (such time on such date
being hereinafter called the 'Expiration Date'), unless the Exchange Offer is
extended by the Company or the Trust (in which case the term 'Expiration Date'
shall mean the latest date and time to which the Exchange Offer is extended).
Tenders of Original Capital Securities may be withdrawn at any time prior to the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
Liquidation Amount of Original Capital Securities being tendered for exchange.
However, the Exchange Offer is subject to certain events and conditions which
may be waived by the Company or the Trust and to the terms and provisions of the
Capital Securities Registration Rights Agreement. Original Capital Securities
may be tendered in whole or in part having an aggregate Liquidation Amount of
not less than $100,000 (100 Capital Securities) or any integral multiple of
$1,000 Liquidation Amount (one Capital Security) in excess thereof. The Company
has agreed to pay all expenses of the Exchange Offer. See 'The Exchange
Offer--Fees and Expenses.'
The Original Capital Securities provide, among other things, that, if a
registration statement relating to the Exchange Offer has not been filed with
the Commission by August 14, 1998 and declared effective by the Commission by
September 15, 1998, the Distribution rate borne by the Original Capital
Securities will increase by 0.25% until the Exchange Offer is consummated. Upon
consummation of the Exchange Offer, holders of Original Capital Securities will
not be entitled to any increase in the Distribution rate thereon or any further
registration rights under the Capital Securities Registration Rights Agreement,
except under limited circumstances. See 'Description of Original Securities.'
Neither the Company nor the Trust will receive any cash proceeds from the
issuance of the Exchange Capital Securities offered hereby. No dealer-manager is
being used in connection with this Exchange Offer. See 'Use of Proceeds' and
'Plan of Distribution.'
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information and the Company's Consolidated
Financial Statements, including the Notes thereto, appearing elsewhere in this
Prospectus.
The Company is a Delaware corporation and conducts business as a bank
holding company, the sole subsidiary of which is United Commercial Bank (the
'Bank'), a California state-chartered commercial bank. The Company's assets
consist primarily of all of the issued and outstanding common stock of the Bank.
Since its founding in 1974, the Company has grown to total assets of $1.91
billion, total deposits of $1.47 billion and stockholders' equity of $98.1
million at June 30, 1998. The Bank currently has 25 retail banking offices in
the state of California, located in areas with high concentrations of ethnic
Chinese, including the San Francisco Bay area (which includes Oakland), and the
Sacramento/Stockton and Los Angeles metropolitan areas. The Bank is the largest
financial institution focused on serving the ethnic Chinese market within
California.
Substantially all of the Bank's loans are secured by real property. At June
30, 1998, approximately $712.3 million, or 56% of the Bank's gross loan
portfolio was secured by residential properties (1-4 family), approximately
$334.2 million, or 26% of the Bank's gross loans were secured by commercial real
estate-multi-family mortgages, and $142.7 million, or 11% of the Bank's gross
loans were secured by commercial real estate-non-residential. The Bank's
deposits are obtained primarily from ethnic Chinese individuals and small and
medium sized businesses, business executives and professionals. As a result of
its focus on these deposit sources, at June 30, 1998, the Bank was able to
achieve a cost of funds approximately 60 basis points below the Eleventh
District Cost of Funds Index ('COFI'). Based upon June 30, 1997, Federal Deposit
Insurance Corporation ('FDIC') deposit market share data, the Bank believes it
has the leading deposit market share in the principal ethnic Chinese market
within Oakland and is among the leaders in deposit market share in the principal
ethnic Chinese markets within the San Francisco Bay area.
Through its network of banking offices, the Bank provides a wide range of
personal and commercial banking services to small and medium sized businesses,
business executives, professional and other individuals in the financial
services, professional services, real estate construction, computer and
semi-conductor manufacturing, and wholesale and retail trade industries. The
Bank offers a variety of deposit products, from traditional savings and business
accounts to the specialized services designed to serve the personal banking
needs of its customers. The Bank also engages in a full complement of lending
activities, including residential and commercial real estate, construction,
commercial and consumer credit facilities and working capital loans. The Bank
offers Chinese multilingual services to all of its customers.
Historically, the Bank operated as a traditional thrift engaged primarily
in mortgage banking activities and the origination of residential mortgages (1-4
family) which were generally pooled and sold in the secondary market, with loan
servicing rights retained. From time to time, the Bank sold its loan servicing
rights and also purchased agency servicing rights in connection with its
mortgage banking activities. Since 1993, the Bank has also specialized in the
origination of limited documentation residential mortgages (1-4 family). The
Bank has historically maintained a heavy concentration of assets with interest
rates based on COFI, which generally lags market interest rate changes and which
can suppress net interest margins during periods of rapidly escalating interest
rates. From 1993 to 1995, the Bank experienced a decline in earnings primarily
as a result of (i) depressed net interest margins due to COFI-indexed assets and
a larger volume of LIBOR-based borrowings; (ii) an increase in the Bank's
allowance for loan losses; and (iii) the competitive pressures in the mortgage
banking business. In addition, in 1996, the Bank's earnings were reduced by the
payment of a onetime $7.7 million Savings Association Insurance Fund ('SAIF')
recapitalization assessment.
From 1995 to June 1998, the Company experienced steady growth in its net
interest income. Notwithstanding this improvement in net interest income, the
Company's net income was adversely impacted by a $7.7 million SAIF
recapitalization assessment in 1996 and an $8.8 million provision for loan
losses during 1995. The $8.8 million provision for loan losses was $4.1 million
greater than the five year average provision for loan losses of $4.7 million and
was recorded to address the continued depressed California economy and real
estate market and to significantly increase the Company's overall level of
allowance for loan losses to over
7
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1.00% of gross loans. Without giving effect to the SAIF recapitalization
assessment, in 1996, the Company's net income would have amounted to $4.3
million as compared to the $306,000 actual net loss.
BALANCE SHEET RESTRUCTURING
In recent years, the mortgage banking industry became highly competitive
and, combined with the availability of more efficient delivery systems through
brokers and the Internet, the industry has experienced shrinking profit margins
and reduced loan servicing values. Higher levels of prepayment activity
resulting from the lower interest rate environment and the willingness of
lenders to offer mortgage loans with no points and, in many cases, no fees, have
reduced servicing values. To respond to these market factors and to improve its
long-term prospects, the Bank since 1995 has taken the following measures:
COFI Asset Reduction. In the fourth quarter of 1996, the Bank ceased all
COFI-based mortgage lending and began to reduce the Bank's COFI-based
mortgage-backed securities portfolio. From December 31, 1996 to June 30, 1998,
COFI-based loans have been reduced from 60.2% of the Bank's total gross loan
portfolio to 39.8%. From December 31, 1996 to June 30, 1998, total COFI exposure
has been reduced from 64.9% of the Bank's interest-earning assets to 40.2%.
Closure of Mortgage Banking Division. In 1997, the Bank closed its mortgage
banking division and ceased the origination of nonconventional mortgage loans
(i.e., loans insured by the Federal Housing Administration or partially
guaranteed by the Veterans Administration) for sale in the secondary market and
sold its agency loan servicing portfolio. While the Bank no longer engages in
the origination of nonconventional mortgage loans, the Bank continues to
originate conventional residential mortgage loans for portfolio retention and
conforming mortgage loans for resale in the secondary market through its retail
branching networks. See 'Business-- Lending Activities.'
Reduced Non-Performing Assets. The Bank reduced its non-performing assets
from $22.3 million as of December 31, 1995, to $9.3 million as of June 30, 1998.
Reduced Mismatched Borrowings. The Bank reduced its predominantly high cost
LIBOR-based borrowings (which were mismatched with COFI-based assets) from
$265.3 million at the beginning of 1995 to zero at December 31, 1996 and 1997.
As a result of the proceeds received by the Company and made available to the
Bank following the Private Offerings (as described herein), the Bank implemented
a plan to leverage such proceeds through purchases of investment grade
securities and municipal bonds and to fund such purchases with Federal Home Loan
Bank ('FHLB') advances and cash made available from the proceeds. At June 30,
1998, the Bank had entered into $298 million of borrowings to fund such asset
purchases. Included in these borrowings were $96 million of short-term
borrowings and $202 million of long-term borrowings. The Bank also entered into
certain interest rate cap agreements to reduce the Bank's exposure to rising
interest rates. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition.'
IMPLEMENTATION OF STRATEGY
In conjunction with the implementation of the balance sheet restructuring
described above which returned the Bank to profitability in 1996, excluding the
one-time SAIF recapitalization assessment, to further improve the Bank's
long-term prospects and to take advantage of the Bank's significant deposit
market share and the potential cross selling opportunities to the ethnic Chinese
and Asian communities within its market area, the Board of Directors adopted a
business strategy to shift the primary business focus of the Bank from a
traditional thrift to a full service commercial banking operation. To implement
its business strategy, the Bank took the actions and adopted the initiatives
outlined below.
Management. The Bank realigned senior management responsibilities, and
hired commercial banking officers and Small Business Administration ('SBA')
business banking officers with lending experience in the Bank's market area. See
'Management of the Company and the Bank.'
Established Commercial Banking Division. In 1996, to take advantage of the
opportunities in the Bank's targeted markets, the Bank established its
commercial banking division to offer an array of commercial bank services and
products to its customers particularly focused on the ethnic Chinese
communities. Since its establishment, the commercial banking division has
originated approximately $110.1 million in commercial loan
8
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commitments and had $98.7 million in outstanding loans as of June 30, 1998. As
of June 30, 1998, the division had a current committed pipeline of approximately
$129 million. To support its commercial banking activities, the Bank acquired a
commercial banking data processing system to replace a system designed for
thrift institutions. The new system provides customer profitability reports,
account analysis and other commercial banking management tracking and reporting
mechanisms. The installation of this new system was completed in February 1998.
The Bank installed software to enhance commercial real estate loan marketing and
development. The PC based system provides key information on substantially all
commercial real estate transactions in the Bank's market area in California. The
software provides information instrumental to identifying lending and
refinancing opportunities, screening potential credit opportunities and
evaluating collateral values to facilitate efficient solicitation of borrowers
and related depository relationships from commercial and multi-family property
owners. The Bank opened a commercial, construction and SBA lending office in
Pasadena, California during the second quarter of 1998. In addition to other
personnel, the Bank has hired a team of three experienced SBA business banking
officers to staff the Pasadena office. These officers were previously affiliated
with one of the leading lenders focusing on SBA lending to Asians.
Core Deposit Solicitation. To further develop the Bank's core deposit base,
the Bank is evaluating the establishment of mini-branches in or adjacent to
Asian supermarkets in selected target market areas. By continuing to emphasize
multilingual services at its automated teller machines ('ATMs'), through its
telephone banking system and by its customer service and loan officers, the Bank
expects to continue to further expand its presence in the Asian, and
specifically the ethnic Chinese, markets in California. At June 30, 1998, less
than 2% of the Bank's deposits were held by customers located outside the United
States. In addition, as of such date, the 100 depositors with the largest
aggregate average deposit balances comprised less than 10% of the Bank's total
deposits. The Bank also expects to increase its business accounts as the
commercial lending portfolio grows and correspondent account relationships are
established.
Capital Enhancement. On April 17, 1998, the Company completed a $140.0
million placement of its Common Stock and a $30.0 million placement of 9.375%
Capital Securities through UCBH Trust Co. (together the 'Private Offerings').
The Private Offerings were consummated pursuant to Rule 506 of Regulation D,
Regulation S and Rule 144A under the Securities Act. At March 31, 1998, the
Company's stockholders' equity was $64.6 million, or 4.2% of total assets. Prior
to the Private Offerings, management of the Company entered into an agreement to
buy out the interests of the two owners of the Company, in conjunction with the
private placement of Common Stock. Chief Investments Limited and United Holdings
Int'l, Ltd. (the 'Selling Shareholders') owned in the aggregate, prior to the
buyout, 100% of the Common Stock of the Company and 100% of the Company's Senior
Debt (the 'Notes') totaling $20.6 million, including accrued interest. In
connection with the Private Offerings, the Company exchanged 329 shares of its
common stock (1,974,000 shares giving effect to the 6000:1 stock split on April
17, 1998) for the Notes and subsequently used $120.0 million of the proceeds of
the Private Offerings to redeem all shares of common stock then outstanding,
including those shares of common stock issued to the Selling Shareholders in
exchange for the Notes (the 'Redemption'). As a result of the Redemption, the
Selling Shareholders are no longer affiliated with the Company or the Bank. The
Company then issued 9,333,333 shares of common stock, par value $.01 per share
(the 'Common Stock') to purchasers in the Private Offering. Following the
Private Offerings and the Redemption, the Company's stockholders' equity
increased to $98.1 million at June 30, 1998 and the Company's consolidated Tier
1 capital increased from $63.9 million at December 31, 1997 to $128.2 million at
June 30, 1998. See 'Supervision and Regulation--Bank Holding Company and Bank
Regulation--The Bank--Capital Requirements.'
Charter Conversion. In the first quarter of 1998, the Bank changed its name
to United Commercial Bank to reflect the Bank's new emphasis on providing
commercial banking services to its customers. As part of its strategy to shift
its business focus from mortgage banking to commercial banking, the Bank
converted to a California-chartered commercial bank and the Company became a
bank holding company on July 31, 1998.
As a result of the measures taken to effect the Bank's shift in its primary
business focus from mortgage banking to commercial banking, and the
implementation of its strategic initiatives, management believes that the Bank
is and will continue to be well positioned to take advantage of the
opportunities in its market area and particularly in the growing ethnic Chinese
market in California.
9
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The Company, as a bank holding company, is subject to examination and
regulation by the Federal Reserve Bank of San Francisco. The Bank, as a
state-chartered commercial bank, is subject to comprehensive regulation and
examination by the Department of Financial Institutions ('DFI') as its primary
regulator and by the FDIC, which administers the SAIF which insures the Bank's
deposits to the maximum extent permitted by law. The Bank is a member of the
FHLB of San Francisco, which is one of the 12 regional banks which comprise the
FHLB system. The Bank is further subject to regulations of the Board of
Governors of the Federal Reserve System ('Federal Reserve Board') governing
reserves required to be maintained against deposits and certain other matters.
See 'Supervision and Regulation.'
The Company's executive offices are located at 711 Van Ness Avenue, San
Francisco, California 94102 and its main telephone number is (415) 928-0700.
THE EXCHANGE OFFER
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The Exchange Offer..................... Up to and including $30,000,000 aggregate Liquidation Amount of Exchange
Capital Securities are being offered in exchange for a like aggregate
Liquidation Amount of Original Capital Securities. Original Capital
Securities may be tendered for exchange in whole or in part in a
Liquidation Amount of $100,000 (100 Capital Securities) or any integral
multiple of $1,000 (one Capital Security) in excess thereof. The Company
and the Trust are making the Exchange Offer in order to satisfy their
obligations under the Capital Securities Registration Rights Agreement
relating to the Original Capital Securities. For a description of the
procedures for tendering Original Capital Securities, see 'The Exchange
Offer--Procedures for Tendering Original Capital Securities.'
Expiration Date........................ 5:00 p.m., New York City time, on November 23, 1998 unless the Exchange
Offer is extended by the Company and the Trust (in which case the
Expiration Date will be the latest date and time to which the Exchange
Offer is extended). See 'The Exchange Offer--Terms of the Exchange
Offer.'
Conditions to the Exchange Offer....... The Exchange Offer is subject to certain conditions, which may be waived
by the Company and the Trust in their sole discretion. The Exchange
Offer is not conditioned upon any minimum Liquidation Amount of Original
Capital Securities being tendered. See 'The Exchange Offer--Conditions
to the Exchange Offer.'
Terms of the Exchange Offer............ The Company and the Trust reserve the right in their sole and absolute
discretion, subject to applicable law, at any time and from time to
time, (i) to delay the acceptance of the Original Capital Securities,
(ii) to terminate the Exchange Offer if certain specified conditions
have not been satisfied, (iii) to extend the Expiration Date of the
Exchange Offer and retain all Original Capital Securities tendered
pursuant to the Exchange Offer, subject, however, to the right of
holders of Original Capital Securities to withdraw their tendered
Original Capital Securities, (iv) to waive any condition, or (v) amend
the terms of the Exchange Offer, subject to the Capital Securities
Registration Rights Agreement, in any respect. See 'The Exchange
Offer--Terms of the Exchange Offer.'
Withdrawal Rights...................... Tenders of Original Capital Securities may be withdrawn at any time
prior to the Expiration Date by delivering a written notice of such
withdrawal to the Exchange Agent in conformity with certain
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10
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<S> <C>
procedures as set forth herein under 'The Exchange Offer-- Withdrawal
Rights.'
Procedures for Tendering Original
Capital Securities................... Certain brokers, dealers, commercial banks, trust companies and other
nominees (each, a 'Custodian') who hold Original Capital Securities
through The Depository Trust Company ('DTC') must effect tenders by book
entry transfer through DTC's Automated Tender Offer Program ('ATOP').
Beneficial owners of Original Capital Securities registered in the name
of a Custodian are urged to contact such Custodian promptly if they wish
to tender Original Capital Securities pursuant to the Exchange Offer.
Tendering holders of Original Capital Securities that do not use ATOP
must complete and sign a Letter of Transmittal in accordance with the
instructions contained therein and forward the same by mail, facsimile
transmission or hand delivery, together with any other required
documents, to the Exchange Agent, either with the certificates of the
Original Capital Securities to be tendered or in compliance with the
specified procedures for guaranteed delivery of Original Capital
Securities. Tendering holders of Original Capital Securities that use
ATOP will, by so doing, acknowledge that they are bound by the terms of
the Letter of Transmittal. See 'The Exchange Offer--Procedures for
Tendering Original Capital Securities.'
Letters of Transmittal and certificates representing Original Capital
Securities should not be sent to the Company or the Trust. Such
documents should only be sent to the Exchange Agent.
Resales of Exchange Capital
Securities........................... The Company and the Trust are making the Exchange Offer in reliance on
the position of the Staff of the Commission as set forth in the Letters.
However, neither the Company nor the Trust has sought its own
interpretive letter and there can be no assurance that the Staff of the
Commission would make a similar determination with respect to the
Exchange Offer as it has in such interpretive letters to third parties.
Based on these interpretations by the Staff of the Commission, and
subject to the two immediately following sentences, the Company and the
Trust believe that Exchange Capital Securities issued pursuant to this
Exchange Offer in exchange for Original Capital Securities may be
offered for resale, resold and otherwise transferred by a holder thereof
(other than a holder who is a broker-dealer) without further compliance
with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Capital Securities are
acquired in the ordinary course of such holder's business and that such
holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of
the Securities Act) of such Exchange Capital Securities. However, any
holder of Original Capital Securities who is an 'affiliate' of the
Company or the Trust or who intends to participate in the Exchange Offer
for the purpose of distributing the Exchange Capital Securities, or any
broker-dealer who purchased the Original Capital Securities from the
Trust for resale pursuant to Rule 144A or any other available exemption
under the Securities Act, (i) will not be able to rely on the
interpretations of the Staff of the Commission set forth in the Letters,
(ii) will not be permitted or entitled to tender such Original Capital
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11
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<S> <C>
Securities in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act
in connection with any sale or other transfer of such Original Capital
Securities unless such sale is made pursuant to an exemption from such
requirements. In addition, as described herein, if any broker-dealer
holds Original Capital Securities acquired for its own account as a
result of market-making or other trading activities and exchanges such
Original Capital Securities for Exchange Capital Securities, then such
broker-dealer must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of such Exchange Capital
Securities.
Each holder of Original Capital Securities who wishes to exchange
Original Capital Securities for Exchange Capital Securities in the
Exchange Offer will be required to represent that (i) it is not an
'affiliate' of the Company or the Trust, (ii) any Exchange Capital
Securities to be received by it are being acquired in the ordinary
course of its business, (iii) it has no arrangement or understanding
with any person to participate in a distribution (within the meaning of
the Securities Act) of such Exchange Capital Securities, and (iv) if
such holder is not a broker-dealer, such holder is not engaged in, and
does not intend to engage in, a distribution (within the meaning of the
Securities Act) of such Exchange Capital Securities. Each broker-dealer
that receives Exchange Capital Securities for its own account in
exchange for Original Capital Securities, where such Original Capital
Securities were acquired by such broker-dealer as a result of market-
making activities or other trading activities, must acknowledge that it
will deliver a prospectus meeting the requirements of the Exchange Act
in connection with any resale of such Exchange Capital Securities. See
'Plan of Distribution.' The Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an 'underwriter' within the meaning of the
Securities Act. Based on the position taken by the Staff of the
Commission in the Letters, the Company and the Trust believe that
Participating Broker-Dealers who acquired Original Capital Securities
for their own accounts as a result of market-making activities or other
trading activities may fulfill their prospectus delivery requirements
with respect to the Exchange Capital Securities received upon exchange
of such Original Capital Securities (other than Original Capital
Securities that represent an unsold allotment from the initial sale of
the Original Capital Securities) with a prospectus meeting the
requirements of the Securities Act, which may be the prospectus prepared
for an exchange offer so long as it contains a description of the plan
of distribution with respect to the resale of such Exchange Capital
Securities. Accordingly, this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of Exchange Capital Securities
received in exchange for Original Capital Securities where such Original
Capital Securities were acquired by such Participating Broker-Dealer for
its own account as a result of market-making or other trading
activities. Subject to certain provisions set forth in the Capital
Securities Registration Rights Agreement and to the limitations
described herein under 'The Exchange Offer-Resales of Exchange Capital
Securities,' the Company and the Trust have agreed that this
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<S> <C>
Prospectus, as it may be amended or supplemented from time to time, may
be used by a Participating Broker-Dealer in connection with resales of
such Exchange Capital Securities for a period ending 90 days after the
Expiration Date (subject to extension under certain limited
circumstances) or, if earlier, when all such Exchange Capital Securities
have been disposed of by such Participating Broker-Dealer. See 'Plan of
Distribution.' Any Participating Broker-Dealer who is an 'affiliate' of
the Company or the Trust may not rely on the Letters and must comply
with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. See 'The
Exchange Offer--Resales of Exchange Capital Securities.'
Exchange Agent......................... The Exchange Agent with respect to the Exchange Offer is Wilmington
Trust Company. The address, and telephone and facsimile number of the
Exchange Agent are set forth in 'The Exchange Offer--Exchange Agent' and
in the Letter of Transmittal.
Use of Proceeds........................ Neither the Company nor the Trust will receive any cash proceeds from
the issuance of the Exchange Capital Securities offered hereby. See 'Use
of Proceeds.'
Certain U.S. Federal Income Tax
Considerations....................... The exchange of Original Capital Securities for Exchange Capital
Securities should not be a taxable exchange for U.S. federal income tax
purposes, and holders should not recognize any taxable gain or loss or
any interest income as a result of such exchange. See 'Federal Income
Tax Consequences--Exchange of Capital Securities.'
ERISA Considerations................... Holders of Original Capital Securities should review the information set
forth under 'ERISA Considerations' prior to tendering Original Capital
Securities in the Exchange Offer.
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THE EXCHANGE CAPITAL SECURITIES
<TABLE>
<S> <C>
Securities Offered..................... Up to and including $30,000,000 aggregate Liquidation Amount of Exchange
Capital Securities (Liquidation Amount $1,000 per Exchange Capital
Security) will have been registered under the Securities Act. The
Exchange Capital Securities will be issued, and the Original Capital
Securities were issued, under the Trust Agreement. The Exchange Capital
Securities and any Original Capital Securities that remain outstanding
after consummation of the Exchange Offer will vote together as a single
class for purposes of determining whether holders of the requisite
percentage in outstanding Liquidation Amount thereof have taken certain
actions or exercised certain rights under the Trust Agreement. See
'Description of Exchange Capital Securities-- Voting Rights; Amendment
of the Trust Agreement.' The terms of the Exchange Capital Securities
are identical in all material respects to the terms of the Original
Capital Securities, except that the Exchange Capital Securities have
been registered under the Securities Act, will not be subject to certain
restrictions on transfer applicable to the Original Capital Securities
and will not provide for any increase in the Distribution Rate thereon.
See 'The Exchange Offer--Purpose and Effect of the Exchange Offer,'
'Description of Exchange Capital Securities' and 'Description of
Original Securities.'
Distribution Dates..................... May 1 and November 1 of each year, commencing on November 1, 1998.
Extension Periods...................... So long as no Debenture Event of Default (as defined herein) has
occurred and is continuing, Distributions on Exchange Capital Securities
will be deferred for the duration of any Extension Period elected by the
Company with respect to the payment of interest on the Exchange Junior
Subordinated Debentures. No Extension Period will exceed ten (10)
consecutive semi-annual periods, end on a date other than an Interest
Payment Date or extend beyond the Stated Maturity Date. During an
Extension Period, the holders of Exchange Capital Securities will be
required to include deferred interest income in their gross income for
United States federal income tax purposes in advance of any
corresponding cash distributions. See 'Description of Exchange Junior
Subordinated Debentures--Option to Extend Interest Payment Date' and
'Federal Income Tax Consequences--Interest Income and Original Issue
Discount.'
Ranking................................ The Exchange Capital Securities will rank pari passu, and payments
thereon will be made pro rata, with the Original Capital Securities and
the Common Securities, except as described under 'Description of
Exchange Capital Securities--Subordination of Common Securities.' The
Exchange Junior Subordinated Debentures will rank pari passu with the
Original Junior Subordinated Debentures and all other junior
subordinated debentures (if any) issued by the Company (the 'Other
Debentures'), which are issued and sold (if at all) to other trusts
established by the Company (if any), in each case similar to the Trust
('Other Trusts'), and will constitute unsecured obligations of the
Company and will rank subordinate and junior in right of payment to all
Senior Indebtedness (as defined herein) to the extent and in the manner
set forth in the Indenture. The Exchange Guarantee will rank pari passu
with the Original Guarantee and all other guarantees (if any)
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14
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issued by the Company with respect to Capital Securities (if any) issued
by Other Trusts ('Other Guarantees') and will constitute an unsecured
obligation of the Company and will rank subordinate and junior in right
of payment to all Senior Indebtedness to the extent and in the manner
set forth in the Exchange Guarantee, including the Bank's deposit
liabilities. See 'Description of Exchange Guarantee.' In addition,
because the Company is a holding company, the Exchange Junior
Subordinated Debentures and the Exchange Guarantee will be effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries, including the Bank's deposit liabilities. See 'Description
of Exchange Junior Subordinated Debentures-- Subordination.'
Redemption............................. The Trust Securities will be subject to mandatory redemption in a Like
Amount: (i) in whole but not in part, on the Stated Maturity Date upon
repayment of the Junior Subordinated Debentures; (ii) in whole but not
in part, at any time prior to May 1, 2005, contemporaneously with the
optional prepayment of the Junior Subordinated Debentures by the Company
upon the occurrence and continuation of a Special Event (as defined
herein); and (iii) in whole or in part, on or after May 1, 2005,
contemporaneously with the optional prepayment by the Company of all or
part of the Junior Subordinated Debentures, at the Optional Redemption
Price. See 'Description of Exchange Capital Securities-- Redemption' and
'Description of Exchange Junior Subordinated Debentures--Special Event
Prepayment.'
ERISA Considerations................... Prospective purchasers must carefully consider the restrictions on
purchase set forth under 'ERISA Considerations.'
Transfer Restrictions.................. The Exchange Capital Securities will be issued, and may be transferred,
only in blocks having a Liquidation Amount of not less than $100,000
(100 Capital Securities) or any integral multiple of $1,000 Liquidation
Amount (one Exchange Capital Security) in excess thereof. See
'Description of Exchange Capital Securities--Restrictions on Transfer.'
Any such transfer of Exchange Capital Securities in a block having a
Liquidation Amount of less than $100,000 shall be deemed to be void and
of no legal effect whatsoever.
Absence of Market for the Capital
Securities........................... The Exchange Capital Securities will be a new issue of securities for
which there currently is no market. Accordingly, there can be no
assurance as to the development or liquidity of any market for the
Exchange Capital Securities. The Trust and the Company do not intend to
apply for listing of the Exchange Capital Securities on any securities
exchange or for quotation through the Nasdaq Stock Market. See 'Plan of
Distribution.'
Risk Factors........................... For a discussion of certain factors to be considered by prospective
investors, see 'Risk Factors.'
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to the
consolidated financial position of the Company as of December 31, 1997 and 1996,
and operating data for the fiscal years ended December 31, 1997, 1996 and 1995
have been derived from, and should be read in conjunction with, and is qualified
in its entirety by, the audited Consolidated Financial Statements and Notes
thereto of the Company presented elsewhere in this Prospectus. The selected
consolidated financial data with respect to the Company's consolidated financial
position as of December 31, 1995, 1994 and 1993 and operating data for the years
ended December 31, 1994 and 1993 have been derived from the audited Consolidated
Financial Statements of the Company, which are not presented herein. The data
presented at June 30, 1998 and for the six months ended June 30, 1998 and 1997
were derived from unaudited consolidated financial statements and reflect, in
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such interim
periods. The results of operations for the six months ended June 30, 1998 are
not necessarily indicative of the results of operations that may be expected for
the year ended December 31, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION AND OTHER DATA:
Total assets.............................. $ 1,910,379 $1,561,650 $1,474,617 $1,521,699 $1,522,412 $1,456,892
Net loans................................. 1,258,944 1,202,095 1,054,686 1,011,909 965,668 878,001
Securities (1)............................ 575,310 270,103 343,739 429,005 467,426 491,278
Deposits.................................. 1,474,270 1,468,987 1,393,125 1,311,604 1,168,031 1,032,868
Borrowings................................ 298,000 -- -- 128,600 265,341 309,975
Long-term debt to affiliates.............. -- 20,060 16,736 13,000 13,500 14,000
Stockholders' equity...................... 98,109 62,552 54,344 55,457 59,350 58,440
Non-performing assets..................... 9,296 10,266 21,096 22,287 16,347 29,006
Ratio of equity to assets................. 5.14% 4.01% 3.69% 3.64% 3.90% 4.01%
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
--------------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- -------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income.......................... $58,191 $52,106 $107,591 $102,964 $99,034 $87,079 $90,203
Interest expense......................... 33,759 30,690 64,252 63,955 70,196 53,621 48,724
------- ------- -------- -------- ------- ------- -------
Net interest income...................... 24,432 21,416 43,339 39,009 28,838 33,458 41,479
Provision for loan losses................ 1,401 132 1,154 1,476 8,777 3,206 8,898
------- ------- -------- -------- ------- ------- -------
Net interest income after provision for
loan losses............................ 23,031 21,284 42,185 37,533 20,061 30,252 32,581
Noninterest income....................... 1,732 1,165 3,094 3,397 3,767 8,603 17,897
SAIF recapitalization assessment......... -- -- -- 7,716(2) -- -- --
Noninterest expense...................... 17,294 15,945 32,190 33,697 30,142 35,603 38,677
------- ------- -------- -------- ------- ------- -------
Income (loss) before taxes............... 7,469 6,504 13,089 (483) (6,314) 3,252 11,801
Income tax expense (benefit)............. 3,070 2,677 5,790 (177) (3,406) 772 5,281
------- ------- -------- -------- ------- ------- -------
Net income (loss)........................ $ 4,399 $ 3,827 $ 7,299 $ (306)(2) $(2,908) $ 2,480 $ 6,520
------- ------- -------- -------- ------- ------- -------
------- ------- -------- -------- ------- ------- -------
OPERATING RATIOS AND OTHER DATA:
Return (loss) on average assets.......... 0.54% 0.51% 0.47% (0.02)% (0.19)% 0.17% 0.45%
Return (loss) on average equity.......... 11.50 13.15 12.33 (0.48) (4.89) 3.45 9.50
Interest rate spread..................... 2.95 2.78 2.71 2.58 1.85 2.29 3.17
Net interest margin...................... 3.13 2.93 2.89 2.68 1.96 2.36 2.85
Efficiency ratio(3)(4)................... 66.10 70.61 69.33 79.46(3) 92.45 84.65 65.14
Noninterest expense to average
assets(4).............................. 2.14 2.11 2.08 2.23(2) 1.98 2.40 2.69
ASSET QUALITY DATA:
Non-performing assets to total assets.... 0.49% 0.66% 0.66% 1.43% 1.46% 1.07% 1.99%
Non-performing loans to total gross
loans.................................. 0.71 0.84 0.81 1.83 2.00 1.17 1.79
Allowance for loan losses to total gross
loans.................................. 1.04 1.05 1.00 1.10 1.34 0.78 0.90
Allowance for loan losses to
non-performing loans................... 145.84 124.36 123.22 59.98 66.88 66.67 54.83
Net charge-offs to average gross loans... 0.05 0.06 0.06 0.34 0.26 0.41 0.96
BANK REGULATORY CAPITAL RATIOS:
Tier 1 risk-based capital................ 12.35% 9.85% 9.90% 9.41% 9.21% 9.95% 9.84%
Total risk-based capital................. 13.61 11.11 11.15 10.67 10.47 10.95 10.93
Core (leverage).......................... 6.56 5.12 5.37 4.90 4.50 4.80 4.72
Tangible................................. 6.56 5.12 5.37 4.90 4.50 4.77 4.68
</TABLE>
- ------------------
(1) Includes available-for-sale securities and held-to-maturity securities.
(2) During 1996, the Company's net income was adversely affected by the one-time
SAIF recapitalization assessment which was recognized by the Bank during the
third quarter of the year. Without giving effect to the SAIF
recapitalization assessment, the Company's net income would have amounted to
$4.3 million for 1996.
(3) Represents noninterest expense divided by the aggregate of net interest
income before provision for loan losses and noninterest income.
(4) During the year ended December 31, 1996, such ratios exclude the one-time
SAIF recapitalization assessment. Including the SAIF recapitalization
assessment, the Bank's efficiency ratio and noninterest expense to average
assets would amount to 97.66% and 2.74%, respectively.
16
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RISK FACTORS
Prospective investors should carefully review the information contained
elsewhere in this Prospectus and should particularly consider the following
matters. Information contained in this Prospectus contains 'forward-looking
statements' which can be identified by the use of forward-looking terminology
such as 'believes,' 'expects,' 'may,' 'will,' 'should,' 'projected,'
'contemplates' or 'anticipates' or the negative thereof or other variations
thereon or comparable terminology. No assurance can be given that the future
results covered by the forward-looking statements will be achieved. The
following matters constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors, such
as the general state of the economy, could also cause actual results to vary
materially from the future results covered in such forward-looking statements.
RISKS RELATED TO THE EXCHANGE CAPITAL SECURITIES
Subordinate Ranking of Obligations Under the Exchange Guarantee and the
Exchange Junior Subordinated Debentures; Limitations on Sources of Funds. The
obligations of the Company under the Exchange Guarantee issued by it for the
benefit of the holders of Exchange Capital Securities, as well as under the
Exchange Junior Subordinated Debentures are unsecured and rank subordinate and
junior in right of payment to all Senior Indebtedness to the extent and in the
manner set forth in the Exchange Guarantee and the Indenture, respectively. No
payment may be made of the principal of or premium, if any, or interest on the
Junior Subordinated Debentures, or in respect of any redemption, retirement,
purchase or other acquisition of any of the Junior Subordinated Debentures, at
any time when (i) there shall have occurred and be continuing a default in any
payment in respect of any Senior Indebtedness, or there has been an acceleration
of the maturity thereof because of a default, or (ii) in the event of the
acceleration of the maturity of the Junior Subordinated Debentures, until
payment has been made on all Senior Indebtedness. Because the Company is a
holding company, the right of the Company to participate in any distribution of
assets of any subsidiary upon such subsidiary's liquidation or reorganization or
otherwise (and thus the ability of holders of the Exchange Capital Securities to
benefit indirectly from such distribution) is subject to the prior claims of
creditors of that subsidiary (including depositors, in the case of the Bank),
except to the extent that the Company may itself be recognized as a creditor of
that subsidiary. At June 30, 1998, the subsidiaries of the Company had total
liabilities (excluding liabilities owed to the Company) of $1.75 billion.
Accordingly, the Exchange Junior Subordinated Debentures effectively will be
subordinated to all existing and future liabilities of the Company's
subsidiaries (including the Bank's deposit liabilities, which aggregated $1.47
billion at June 30, 1998) and holders of Exchange Junior Subordinated Debentures
should look only to the assets of the Company for payments on the Exchange
Junior Subordinated Debentures. The Exchange Guarantee will constitute an
unsecured obligation of the Company and will rank subordinate and junior in
right of payment to all Senior Indebtedness in the same manner as the Exchange
Junior Subordinated Debentures. None of the Indenture, the Exchange Guarantee or
the Trust Agreement places any limitation on the amount of secured or unsecured
debt, including Senior Indebtedness, that may be incurred by the Company or any
of its subsidiaries. See 'Description of Exchange Guarantee--Status of the
Exchange Guarantee' and 'Description of Exchange Junior Subordinated
Debentures--General' and '--Subordination.'
The ability of the Trust to pay amounts due on the Exchange Capital
Securities is solely dependent upon the Company making payments on the Exchange
Junior Subordinated Debentures as and when required.
The Company is a holding company and almost all of the operating assets of
the Company are owned by the Company's subsidiaries. The Company relies
primarily on dividends from the Bank to meet its obligations for payment of
principal and interest on its outstanding debt obligations and corporate
expenses. There are regulatory limitations on the payment of dividends directly
or indirectly to the Company from the Bank. As of June 30, 1998, under
applicable regulations of the State of California, the total capital available
for payment of dividends by the Bank to the Company was approximately $9.5
million. However, the California Commissioner of the DFI has the power to
prohibit any act, including the payment of dividends, if such act would reduce
the Bank's capital to a point that, in its opinion, would render the Bank
undercapitalized and thus constitute an unsafe or unsound banking practice. In
addition to restrictions on the payment of dividends, the Bank is subject to
certain
17
<PAGE>
restrictions imposed by federal law on any extensions of credit to, and certain
other transactions with, the Company and certain other affiliates, and on
investments in stock or other securities thereof. Such restrictions prevent the
Company and such other affiliates from borrowing from the Bank unless the loans
are secured by various types of collateral. Further, such secured loans, other
transactions and investments by the Bank are generally limited in amount as to
the Company and as to each of such other affiliates to 10% of the Bank's capital
and surplus and as to the Company and all of such other affiliates to an
aggregate of 20% of the Bank's capital and surplus.
Option to Extend Interest Payment Period; Tax Consequences; Market Price
Consequences. So long as no Debenture Event of Default (as defined herein)
shall have occurred and be continuing, the Company has the right under the
Indenture to defer payments of interest on the Junior Subordinated Debentures at
any time or from time to time for a period not exceeding ten (10) consecutive
semi-annual periods with respect to each Extension Period, provided that no
Extension Period shall end on a date other than an Interest Payment Date or
extend beyond the Stated Maturity Date. As a consequence of any such deferral,
semi-annual Distributions on the Trust Securities by the Trust will be deferred
(and the amount of Distributions to which holders of the Trust Securities are
entitled will accumulate Additional Distributions thereon at the rate of 9.375%
per annum, compounded semi-annually, but not exceeding the interest rate then
accruing on the Junior Subordinated Debentures) from the relevant payment date
for such Distributions during any such Extension Period. During the pendency of
any Extension Period, the Company generally will be prohibited from declaring or
paying dividends on the Company's capital stock, including the Common Stock. See
'Description of Exchange Capital Securities-- Distributions.'
Prior to the termination of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed ten (10) consecutive semi-annual periods,
end on a date other than an Interest Payment Date or to extend beyond the Stated
Maturity Date. Upon the termination of any Extension Period and the payment of
all interest then accrued and unpaid on the Junior Subordinated Debentures
(together with interest thereon at the annual rate of 9.375%, compounded semi-
annually, to the extent permitted by applicable law), the Company may elect to
begin a new Extension Period, subject to the above requirements. There is no
limitation on the number of times that the Company may elect to begin an
Extension Period. See 'Description of Exchange Capital
Securities--Distributions' and 'Description of Exchange Junior Subordinated
Debentures--Option to Extend Interest Payment Date.'
The Company has no current plan to exercise its right to defer payments of
interest on the Junior Subordinated Debentures. However, should the Company
exercise its right to defer payments of interest on the Junior Subordinated
Debentures, each holder of Trust Securities will be required to accrue income
(as original issue discount ('OID')) in respect of the deferred stated interest
allocable to its Trust Securities for United States federal income tax purposes,
which will be allocated but not distributed to holders of Trust Securities. As a
result, each holder of Capital Securities will recognize income for United
States federal income tax purposes in advance of the receipt of cash and will
not receive the cash related to such income from the Trust if the holder
disposes of the Capital Securities prior to the record date for the payment of
Distributions thereafter. See 'Federal Income Tax Consequences--Interest Income
and Original Issue Discount' and '--Sales of Exchange Capital Securities.'
Should the Company elect to exercise its right to defer payments of
interest on the Junior Subordinated Debentures in the future, the market price
of the Capital Securities is likely to be affected. A holder that disposes of
its Capital Securities during an Extension Period, therefore, might not receive
the same return on its investment as a holder that continues to hold its Capital
Securities. In addition, the Company's right to defer payments of interest on
the Junior Subordinated Debentures may cause the market price of the Capital
Securities to be more volatile than the market prices of other securities on
which OID accrues and that are not subject to such deferrals.
Possibility of Special Event Redemption. Upon the occurrence and
continuation of a Special Event, including a Tax Event or a Regulatory Capital
Event (in each case as defined under 'Description of Exchange Junior
Subordinated Debentures--Special Event Prepayment' and when referred to together
(the 'Special Event')), prior to the Initial Optional Prepayment Date, the
Company will have the right to prepay the Junior Subordinated Debentures in
whole (but not in part) at the Special Event Prepayment Price within 90 days
18
<PAGE>
following the occurrence of such Special Event and therefore cause a mandatory
redemption of the Trust Securities at the Special Event Redemption Price. The
exercise of such right is subject to the Company having received any required
regulatory approval. See 'Description of Exchange Capital Securities--
Redemption.'
Possibility of Liquidation Distribution of Exchange Junior Subordinated
Debentures. The Company has the right at any time to terminate the Trust and,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, to cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust. The exercise of
such right is subject to: (i) the Company having received an opinion of counsel
to the effect that such distribution will not be a taxable event to the holders
of Exchange Capital Securities; and (ii) receipt of any required regulatory
approval. Under current United States federal income tax law, a distribution of
Exchange Junior Subordinated Debentures upon the dissolution of the Trust would
not be a taxable event to holders of the Exchange Capital Securities. Upon the
occurrence of a Special Event, a dissolution of the Trust in which holders of
the Capital Securities receive cash would be a taxable event to such holders.
See 'Federal Income Tax Consequences--Receipt of Exchange Junior Subordinated
Debentures or Cash Upon Liquidation of the Trust.'
Under current United States federal income tax law and interpretations, and
assuming the Trust is classified as a grantor trust for such purposes, a
distribution of the Junior Subordinated Debentures upon a liquidation of the
Trust should not be a taxable event to holders of the Capital Securities.
However, if a Special Event were to occur which would cause the Trust to be
subject to United States federal income tax with respect to income received or
accrued on the Junior Subordinated Debentures, a distribution of the Junior
Subordinated Debentures by the Trust could be a taxable event to the Trust and
the holders of the Capital Securities. See 'Federal Income Tax
Consequences--Receipt of Exchange Junior Subordinated Debentures or Cash Upon
Liquidation of the Trust.'
Right to Shorten the Stated Maturity of Exchange Junior Subordinated
Debentures. The Company has the right at any time to shorten the maturity of
the Exchange Junior Subordinated Debentures to a date not earlier than May 1,
2005, and thereby cause the Exchange Capital Securities to be redeemed on such
earlier date. The exercise of such right is subject to the Company having
received prior regulatory approval if then required under applicable capital
guidelines or policies. See 'Description of Exchange Junior Subordinated
Debentures-- Redemption.'
Limitations on Direct Actions Against the Company and on Rights Under the
Guarantee. The Exchange Guarantee will guarantee to the holders of the Exchange
Capital Securities the following payments, to the extent not paid by or on
behalf of the Trust: (i) any accumulated and unpaid Distributions required to be
paid on the Exchange Capital Securities, to the extent that the Trust has funds
legally available therefor at such time, (ii) the applicable Redemption Price
with respect to the Exchange Capital Securities called for redemption, to the
extent that the Trust has funds legally available therefor at any such time, and
(iii) upon a voluntary or involuntary dissolution, winding-up or liquidation of
the Trust (unless the Exchange Junior Subordinated Debentures are distributed to
holders of the Exchange Capital Securities), the lesser of (a) the aggregate of
the Liquidation Amount and all accumulated and unpaid Distributions to the date
of payment, to the extent that the Trust has funds on hand available therefor at
such time and (b) the amount of assets of the Trust remaining available for
distribution to holders of the Exchange Capital Securities after satisfaction of
liabilities to creditors of the Trust as required by applicable law.
The holders of not less than a majority in aggregate Liquidation Amount of
the Exchange Capital Securities will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Guarantee
Trustee (as defined herein) in respect of the Exchange Guarantee or to direct
the exercise of any trust power conferred upon the Guarantee Trustee under the
Exchange Guarantee. Any holder of the Exchange Capital Securities may institute
a legal proceeding directly against the Company to enforce its rights under the
Exchange Guarantee without first instituting a legal proceeding against the
Trust, the Guarantee Trustee or any other person or entity. If the Company were
to default on its obligation to pay amounts payable under the Exchange Junior
Subordinated Debentures, the Trust would not have sufficient funds for the
payment of Distributions or amounts payable on redemption of the Exchange
Capital Securities or otherwise, and, in such event, holders of the Exchange
Capital Securities would not be able to rely upon the Exchange Guarantee for
payment of such amounts. Instead, in the event a Debenture Event of Default
shall have occurred and be
19
<PAGE>
continuing and such event is attributable to the failure of the Company to pay
principal (or premium, if any) on interest (including Additional Sums (as
defined below) and Compounded Interest (as defined below), if any), on the
Exchange Junior Subordinated Debentures on the payment date on which such
payment is due and payable, then a holder of Exchange Capital Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of the principal of (or premium, if any) or interest
(including Additional Sums and Compounded Interest, if any) on such Exchange
Junior Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Exchange Capital Securities of such holder (a 'Direct
Action'). Notwithstanding any payments made to a holder of Exchange Capital
Securities by the Company in connection with a Direct Action, the Company shall
remain obligated to pay the principal of (and premium, if any) and interest
(including Additional Sums and Compounded Interest, if any) on the Exchange
Junior Subordinated Debentures, and the Company shall be subrogated to the
rights of the holder of such Exchange Capital Securities with respect to
payments on the Exchange Capital Securities to the extent of any payments made
by the Company to such holder in any Direct Action. Except as described herein,
holders of Exchange Capital Securities will not be able to exercise directly any
other remedy available to the holders of the Exchange Junior Subordinated
Debentures or to assert directly any other rights in respect of the Exchange
Junior Subordinated Debentures. See 'Description of Exchange Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders of Exchange Capital
Securities,' '--Debenture Events of Default' and 'Description of Exchange
Guarantee.' The Trust Agreement provides that each holder of Capital Securities
by acceptance thereof agrees to the provisions of the Indenture. Wilmington
Trust Company is Guarantee Trustee and holds the Guarantee and will hold the
Exchange Guarantee for the benefit of the holders of the Capital Securities.
Wilmington Trust Company is also Property Trustee and Debenture Trustee under
the Indenture. Wilmington Trust Company is Delaware Trustee under the Trust
Agreement.
Limited Voting Rights of Holders of Capital Securities. Holders of Capital
Securities will generally have limited voting rights relating only to the
modification of the Exchange Capital Securities, the dissolution, winding-up or
liquidation of the Trust, and the exercise of the Trust's rights as holder of
Exchange Junior Subordinated Debentures. Holders of Exchange Capital Securities
will not be entitled to vote to appoint, remove or replace the Property Trustee
or the Delaware Trustee, and such voting rights are vested exclusively in the
holder of the Common Securities except upon the occurrence of certain events
described herein. In no event will the holders of the Exchange Capital
Securities have the right to vote to appoint, remove or replace the
Administrative Trustees; such voting rights are vested exclusively in the holder
of the Common Securities. The Property Trustee, the Administrative Trustees and
the Company may amend the Trust Agreement without the consent of holders of
Exchange Capital Securities to ensure that the Trust will be classified for
United States federal income tax purposes as a grantor trust, even if such
action adversely affects the interests of such holders. See 'Description of
Exchange Capital Securities--Voting Rights; Amendment of the Trust Agreement'
and '--Removal of Issuer Trustees.'
Trading Price of the Exchange Capital Securities May Not Reflect Value of
Accrued but Unpaid Interest. The Exchange Capital Securities may trade at a
price that does not fully reflect the value of accrued but unpaid interest with
respect to the underlying Exchange Junior Subordinated Debentures. A holder who
uses the accrual method of accounting for tax purposes (and a cash method
holder, if the Junior Subordinated Debentures are deemed to have been issued
with OID) and who disposes of its Exchange Capital Securities between record
dates for payments of distributions thereon will be required to include accrued
but unpaid interest on the Exchange Junior Subordinated Debentures through the
date of disposition in income as ordinary income (i.e., interest or, possible,
OID), and to add such amount to its adjusted tax basis in its share of the
underlying Exchange Junior Subordinated Debentures deemed disposed of. To the
extent the selling price is less than the holder's adjusted tax basis (which
will include all accrued but unpaid interest), a holder will recognize a capital
loss. Subject to certain limited exceptions, capital losses cannot be applied to
offset ordinary income for United States federal income tax purposes. See
'Federal Income Tax Consequences--Interest Income and Original Issue Discount'
and '--Sales of Capital Securities.'
Consequences of a Failure to Exchange Original Capital Securities. The
Original Capital Securities have not been registered under the Securities Act or
any state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in
20
<PAGE>
each case in compliance with certain other conditions and restrictions. Original
Capital Securities that remain outstanding after consummation of the Exchange
Offer will continue to bear a legend reflecting such restrictions on transfer.
In addition, upon consummation of the Exchange Offer, holders of Original
Capital Securities that remain outstanding will not be entitled to any rights to
have such Original Capital Securities registered under the Securities Act or to
any similar rights under the Capital Securities Registration Rights Agreement
(subject to certain limited exceptions). The Company and the Trust do not intend
to register under the Securities Act any Original Capital Securities that remain
outstanding after consummation of the Exchange Offer (subject to such limited
exceptions, if applicable). To the extent that Original Capital Securities are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Original Capital Securities could be adversely affected.
The Exchange Capital Securities and any Original Capital Securities that
remain outstanding after consummation of the Exchange Offer will vote together
as a single class for purposes of determining whether holders of the requisite
percentage in outstanding Liquidation Amount thereof have taken certain actions
or exercised certain rights under the Trust Agreement. See 'Description of
Exchange Securities--Description of Exchange Capital Securities--Voting Rights;
Amendment of the Trust Agreement.'
The Original Capital Securities provide, among other things, that, if a
registration statement relating to the Exchange Offer has not been filed with
the Commission by August 14, 1998 and declared effective by the Commission by
September 15, 1998, the Distribution rate borne by the Original Capital
Securities will increase by 0.25% until the Exchange Offer is consummated. Upon
consummation of the Exchange Offer, holders of Original Capital Securities will
not be entitled to any increase in the Distribution rate thereon or any further
registration rights under the Capital Securities Registration Rights Agreement,
except under limited circumstances. See 'Description of Original Securities.'
Absence of Public Market And Restrictions on Resale. The Original Capital
Securities were issued to, and the Company believes such securities are
currently owned by, a relatively small number of beneficial owners. The Original
Capital Securities have not been registered under the Securities Act and will be
subject to restrictions on transferability if they are not exchanged for the
Exchange Capital Securities. Although the Exchange Capital Securities may be
resold or otherwise transferred by the holders (who are not affiliates of the
Company or the Trust) without compliance with the registration requirements
under the Securities Act, they will constitute a new issue of securities with no
established trading market. Capital Securities may be transferred by the holders
thereof only in blocks having a Liquidation Amount of not less than $100,000
(100 Capital Securities), or any integral multiple of $1,000 Liquidation Amount
(one Capital Security) in excess thereof. In addition, any market-making
activity, should it develop, will be subject to the limits imposed by the
Securities Act and the Exchange Act and may be limited during the Exchange
Offer. Accordingly, no assurance can be given that an active public or other
market will develop for the Capital Securities, or as to the liquidity of, or
the trading market for, the Exchange Capital Securities. If an active public
market does not develop, the market price and liquidity of the Exchange Capital
Securities may be adversely affected.
If a public trading market develops for the Exchange Capital Securities,
future trading prices will depend on many factors, including, among other
things, prevailing interest rates, the financial condition and results of
operations of the Company and the market for similar securities. Depending on
these and other factors, the Exchange Capital Securities may trade at a
discount.
Notwithstanding the registration of the Exchange Capital Securities in the
Exchange Offer, holders who are 'affiliates' (as defined under Rule 405 of the
Securities Act) of the Company or the Trust may publicly offer for sale or
resell the Exchange Capital Securities only in compliance with the provisions of
Rule 144 under the Securities Act.
Each broker-dealer that receives Exchange Capital Securities for its own
account in exchange for Original Capital Securities, where such Original Capital
Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Capital Securities.
See 'Plan of Distribution.'
Risk of Failure to Follow Exchange Offer Procedures. Subject to conditions
set forth under 'The Exchange Offer--Conditions to the Exchange Offer,' issuance
of the Exchange Capital Securities in exchange for Original Capital Securities
pursuant to the Exchange Offer will be made only after a timely receipt by the
21
<PAGE>
Trust of a book-entry confirmation evidencing the tender of such Original
Capital Securities through ATOP or certificates representing such Original
Capital Securities, a properly completed and duly executed Letter of
Transmittal, with any required signature guarantees, and all other required
documents. See 'The Exchange Offer--Acceptance for Exchange and Issuance of
Exchange Capital Securities' and '--Procedures for Tendering Original Capital
Securities.' Therefore, holders of the Original Capital Securities desiring to
tender such Original Capital Securities in exchange for Exchange Capital
Securities should allow sufficient time to ensure timely delivery. Neither the
Company nor the Trust is under any duty to give notification of defects or
irregularities with respect to the tenders of Original Capital Securities for
exchange.
INCREASED LENDING RISKS ASSOCIATED WITH EXPANSION INTO COMMERCIAL BANKING
ACTIVITIES
At June 30, 1998, $334.2 million, or 26.3% of the Bank's gross loans
consisted of multi-family loans. In addition, with the change in the Bank's
business strategy and focus on commercial banking activities, the Bank's
commercial real estate loans, construction loans and commercial business loans
are expected to increase. Loans secured by apartment buildings and other
multi-family properties and loans secured by commercial real estate properties
are generally larger and involve a greater degree of risk than residential
mortgage (1-4 family) loans. Because payments on loans secured by multi-family
and commercial real estate properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to the then prevailing conditions in the real estate
market or the economy. Moreover, construction financing is generally considered
to involve a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the Bank may be confronted with a project, when completed, having a
value which is insufficient to assure full repayment.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more readily
ascertainable, commercial business loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Furthermore, any collateral securing such loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
Although the Bank seeks to minimize the above risks through its
underwriting and credit administration policies, there can be no assurance that
such risks would not materialize, in which event the Company's result of
operations, financial condition and prospects could be materially adversely
affected.
INTEREST RATE RISK
The Bank's earnings depend largely on the relationship between its cost of
funds, primarily deposits, and the yield on earning assets. This relationship,
known as the interest spread, is subject to fluctuation and is affected by
economic and competitive factors which influence market interest rates, the
volume and mix of interest-earning assets and interest-bearing liabilities, and
the level of non-performing assets. Fluctuations in market interest rates affect
the demand of customers for the Bank's products and services. The Bank is
subject to interest rate risk to the degree that its interest-bearing
liabilities reprise or mature more slowly or more rapidly or on a different
basis than its interest-earning assets. Given the Bank's current volume and mix
of interest-bearing liabilities and interest-earning assets, the Bank's interest
rate spread could be expected to decrease during periods of rising and falling
interest rates. Although the Bank believes its current level of interest rate
sensitivity is reasonable, significant fluctuations in interest rates may have
an adverse effect on the Bank's results of operations. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations--Market
Risk and Net Portfolio Value.'
22
<PAGE>
RISKS ASSOCIATED WITH LEVERAGING STRATEGY
As a result of the proceeds received by the Company and made to be
available to the Bank following the Private Offerings, the Bank implemented a
plan to leverage such proceeds through the purchase of U.S. Government agency
mortgage-backed securities, investment grade securities, investment grade
municipal bonds and investment grade residential mortgage (1-4 family)
securities and to fund such purchases through short- and long-term secured
borrowings, advances from the FHLB and from cash made available from the
proceeds. Such plan is consistent with the Bank's asset and liability management
policy and was approved by the Bank's Credit Policy and Investment Committee. In
connection with this strategy, the Bank will remain classified as a 'well
capitalized' institution for regulatory capital purposes. If market rates of
interest fluctuate in such a manner that the Company is unable to earn a
positive spread as a result of its leverage strategy, the Company's net interest
margin and net earnings will be adversely affected in future periods. Through
June 30, 1998, the Bank purchased approximately $325 million of such assets and
entered into $202 million of long-term borrowings.
POTENTIAL ADVERSE CREDIT QUALITY
A significant source of risk for the Company arises from the possibility
that losses will be sustained because borrowers, guarantors and related parties
may fail to perform in accordance with the terms of their loan agreements. The
Company has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for loan
losses, that management believes are appropriate to minimize this risk by
assessing the likelihood of nonperformance, tracking loan performance and
diversifying the Bank's credit portfolio. Such policies and procedures, however,
may not prevent unexpected losses that could materially adversely affect the
Company's results of operations. Maintenance of a high credit quality of new
commercial loans is also key in achieving its strategic goals.
The Bank's loan portfolio is predominantly secured by real estate.
Conditions in the real estate markets in which the collateral for the Bank's
mortgage loans are located strongly influence the level of the Bank's non-
performing loans and its results of operations. Real estate values are affected
by, among other things, changes in general or local economic conditions, changes
in governmental rules or policies, the availability of loans to potential
purchasers, and acts of nature. Declines in real estate markets have in the past
and may continue to negatively impact the value of the collateral securing the
loans and the Company's results of operations. See 'Business--Lending
Activities--Loan Portfolio.' As of June 30, 1998, the Bank had $9.3 million in
non-performing assets.
RISKS ASSOCIATED WITH LIMITED DOCUMENTATION LENDING
The Bank specializes in a limited documentation mortgage loan product for
loans secured by single family residential properties. This product serves a
particular niche of borrowers willing to pay a premium, in the form of higher
interest rates and larger down payments, in exchange for more expedient loan
processing by virtue of providing less income and less asset information. These
limited documentation mortgage loans, however, involve a higher degree of risk
as there is limited verified knowledge of the borrower's level of income or
ability to service the indebtedness which, in turn, may result in a higher rate
of default. As of June 30, 1998, $502.8 million, or 70.6% of the residential
mortgages (1-4 family) were low documentation loans. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Loan Portfolio.'
NO ASSURANCES AS TO THE ADEQUACY OF ALLOWANCE FOR LOAN LOSSES
The Bank's allowance for loan losses is maintained at a level considered
adequate by management to absorb inherent losses in its loan portfolio. The
amount of inherent loan losses which could be ultimately realized is susceptible
to changes in economic, operating and other conditions, including changes in
interest rates, that could be beyond the Bank's control. Such losses could
exceed current estimates. Although management believes that the Bank's allowance
for loan losses is adequate, there can be no assurance that the allowance will
prove sufficient to cover actual loan losses should such losses be realized. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
23
<PAGE>
EXTERNAL FACTORS WITH POTENTIAL TO ADVERSELY AFFECT ASSET QUALITY
The economy in the Bank's primary market area and the real estate market in
particular have suffered from the effects of a recession in the first half of
this decade. Some of the effects of the recession were declines in property
values and decreased demand for goods and services. These conditions may have
had an adverse impact on the ability of certain borrowers to perform under the
original terms of their obligations to the Bank. The Bank's loan portfolio is
predominantly secured by real estate. The Bank's properties and substantially
all of the real and personal property securing loans in the Bank's portfolio are
located in California. The real estate securing loans has been in the past and
may in the future be adversely affected by market conditions in California. In
addition to market fluctuations, California is prone to earthquakes, flooding
and other natural disasters. The Bank faces the risk that many of its borrowers
may experience uninsured property damage, sustained interruption of their
businesses or loss of their jobs from earthquakes, floods or other disasters. As
a result, these borrowers may be unable to repay their loans in accordance with
their original terms and the collateral for such loans may decline significantly
in value. There can be no assurance that the allowance for loan losses will be
adequate to cover losses resulting from such external factors.
RISKS RELATED TO GOVERNMENT REGULATION AND MONETARY POLICY
The banking business is subject to extensive federal and state supervision
and regulation. Such regulations limit the manner in which the Company and the
Bank conduct their respective businesses, undertake new investments and
activities and obtain financing. These regulations are designed primarily for
the protection of the deposit insurance funds and consumers, and not to benefit
holders of the Company's securities. As a result of the conversion of the
Company to a bank holding company and the Bank to a state-chartered bank, the
scope and degree of regulatory oversight changed. Among other things are
statutory and regulatory limitations on the amount of dividends which could be
paid to the Company by the Bank which are different from the restrictions which
applied to the Bank under the Office of Thrift Supervision (the 'OTS')
regulations. Bank regulatory agencies also have authority to prohibit banks from
engaging in activities that, in their respective opinions, constitute unsafe or
unsound practices in conducting its business. It is possible, depending upon the
financial condition of the Bank and other factors, that the FDIC or the DFI
could assert that the payment of dividends or other payments by the Bank might,
under some circumstances, be such an unsafe or unsound practice.
Financial institution regulation has been the subject of significant
legislation in recent years, and may be the subject of further significant
legislation in the future, none of which is in the control of the Company or the
Bank. Significant new laws or changes in, or repeals of, existing laws may cause
the Company's results of operations to differ materially. Further, federal
monetary policy, particularly as implemented through the Federal Reserve Board
significantly affects credit conditions for the Company, primarily through open
market operations in United States government securities, the discount rate for
bank borrowings and reserve requirements. A material change in any of these
conditions would have a material impact on the Bank, and therefore the Company's
results of operations.
COMPETITION
The banking and financial services industry in California generally, and in
the Bank's market areas specifically, is highly competitive. The increasingly
competitive environment results from changes in regulation, changes in
technology and product delivery systems, and the consolidation among financial
services providers. The Bank competes for loans, deposits and customers for
financial services with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, insurance companies,
finance companies, money market funds, credit unions, and other nonbank
financial service providers. Many of these competitors are much larger in total
assets and capitalization, have greater access to capital markets and offer a
broader array of financial services than the Bank. To compete with the other
financial services providers, the Bank relies on local promotional activities,
personal relationships established by officers, directors and employees with its
customers, and specialized services tailored to meet its customers' needs.
The Bank competes for deposits from the ethnic Chinese markets with other
banks catering to the Asian community. The Bank believes that it has two major
competitors that are targeting the ethnic Chinese markets.
24
<PAGE>
Such institutions have branch locations in many of the same neighborhoods as the
Bank, provide similar loan, savings and financial services, and market their
services in similar Asian publications and media in California.
DEPENDENCE ON ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION IN MARKET AREA
The Bank's operations are located in Northern and Southern California and
are concentrated primarily in the San Francisco Bay area (including Oakland) and
the Sacramento/Stockton and Los Angeles metropolitan areas, with specific
emphasis on communities with a high concentration of ethnic Chinese individuals
and businesses. As a result of these geographic concentrations, the Bank's
results depend largely upon economic conditions in these areas. A deterioration
in economic conditions in the Bank's market could have a material adverse impact
on the quality of the Bank's loan portfolio and the demand for its products and
services, and accordingly, the Company's results of operations. See
'Business--Market Area.'
RISK OF ADVERSE ACCOUNTING TREATMENT OF PRIVATE OFFERINGS
Based upon the representations of each offeree in the Private Offerings
('Offeree') that such Offeree was not acting in concert with any other Offeree,
it is the Company's understanding that as a result of the Private Offerings and
the Redemption, generally accepted accounting principles will not require the
Company to revalue the assets and liabilities of the Company in the Company's
Consolidated Financial Statements to reflect consummation of the Private
Offerings and the Redemption. In the event that some or all of the Offerees were
deemed to be acting in concert, there is a substantial likelihood that generally
accepted accounting principles would require a step-up in accounting basis
(analogous to the purchase method of accounting for business combinations) with
respect to the Private Offerings and the Redemption. If a change in accounting
basis were required, the Company's assets and liabilities would be reflected on
the Company's consolidated financial statements based on their estimated fair
values at the consummation date and goodwill would be recorded to the extent
that the consideration paid to the Selling Shareholders in the Redemption
exceeds the aggregate net fair value of the Company's net assets. In addition,
if a step-up in accounting basis were required, it is likely that generally
accepted accounting principles, the Commission's requirements and the Bank's
primary regulator would likely require such adjustments to be 'pushed down' and
reflected in the Bank's financial statements. The requirement for push-down of
accounting basis could have a material adverse effect on the ability of the Bank
to pay dividends to the Company. In addition, the amortization of any goodwill
recorded as a result of such accounting treatment would significantly reduce the
earnings of the Bank in future periods and could adversely impact the ability of
the Bank to pay dividends to the Company. The Company received a report from its
independent accountants, PricewaterhouseCoopers LLP, as to the application of
accounting principles which concludes that consummation of the Private Offerings
and Redemption as described herein did not require the Company to revalue the
assets and liabilities of the Company in the Company's Consolidated Financial
Statements and, therefore, did not trigger the recognition of goodwill by the
Company or the Bank. The Company recorded no gains or losses in its financial
records as a result of the consummation of the Private Offerings and the
Redemption.
It is uncertain whether, notwithstanding the Company's understanding of
generally accepted accounting principles and receipt of the report from
PricewaterhouseCoopers LLP referenced above, the Bank's primary regulator would
require the push-down of accounting basis with respect to the Bank's financial
statements. The Company has not discussed with the Bank's primary regulator
whether it would require such treatment. If such regulator were to require the
push-down of accounting basis with respect to the Bank's financial statements,
such accounting treatment could have the effects described above. Accordingly,
in considering an investment in the Company, potential purchasers should take
into account the possibility that the push-down of accounting basis with respect
to the Bank's financial statements may be required.
DEPENDENCE ON KEY MANAGEMENT PERSONNEL
The Company's success depends substantially on certain members of its
senior management, in particular the following officers of the Bank: Thomas S.
Wu, President and Chief Executive Officer; Jonathan H. Downing, Senior Vice
President, Chief Financial Officer and Treasurer; Sylvia Loh, Senior Vice
President and Director of Commercial Banking; Louis E. Barbarelli, Senior Vice
President and Director of Operations and Systems; Cecilia Lai, Senior Vice
President and Director of Retail Banking; and William T. Goldrick, Senior Vice
25
<PAGE>
President and Chief Credit Officer. The Company's business and financial
condition could be materially adversely affected by the loss of the services of
any such individuals. Ms. Loh joined the Bank as the head of commercial banking
in February 1996. The success of her department is vital to the success of the
shift in the Bank's business focus to commercial banking. The Company does not
maintain 'key man' life insurance with respect to any of the foregoing officers.
See 'Management of the Company and the Bank.'
ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY AND GENERATE EARNINGS
The Bank's ability to achieve its strategic goal and shift its business
focus to commercial banking largely depends on its ability to: fund a
significant amount of commercial real estate loans and commercial business
loans, including SBA loans; originate intermediate fixed-rate residential
mortgage loans (1-4 family); and significantly increase the Bank's commercial
deposit and demand accounts. During the year ended December 31, 1997, the Bank
originated $23.7 million of commercial real estate loans, $28.7 million of
commercial business loans and $3.3 million of SBA loans. During the six months
ended June 30, 1998, the Bank originated $35.3 million of commercial real estate
loans, $23.3 million of commercial business loans, and $2.5 million of SBA
loans. At June 30, 1998 the Bank had in its pipeline $98.4 million of commercial
real estate loans, $21.1 million of commercial business loans and $9.4 million
of SBA loans. Given the competitive environment for loan originations, consumer
demand for fixed-rate 30-year loans and the array of alternative cash
investments available to consumers, there are no assurances that the Bank will
be able to achieve its strategic business goals.
The implementation of the Bank's strategic goals places demands on the
Bank's management personnel as well as its systems, other personnel control
systems, asset quality, earnings, policies and procedures. There can be no
assurance that the Bank will be able to make all adjustments necessary or to
employ and retain personnel with adequate training and experience to achieve its
strategic goals or to manage the Bank's growth and expansion. The failure to
achieve its strategic goals could have a material adverse effect on the
Company's results of operations, financial condition and prospects.
YEAR 2000 COMPLIANCE RISKS
The Federal Financial Institutions Examination Council (the 'FFIEC'),
through the bank regulatory agencies, has issued compliance guidelines requiring
financial institutions to develop and implement plans for addressing Year 2000
issues relevant to their operations. The Bank has implemented a detailed Year
2000 plan, as required by the FFIEC guidelines, to evaluate Year 2000 compliance
of its computer systems and the equipment which supports the operations of the
Bank. Also included in this Year 2000 plan is a detailed review of the readiness
of the Bank's service providers, vendors, major fund providers, major borrowers
and companies with which the Bank has material investments for Year 2000 issues.
As of September 13, 1998, the Bank has met all current target objectives of the
Year 2000 plan, and management believes that it will continue to meet all future
target objectives in accordance with the terms of the plan.
To date, the Bank has not identified any system which presents a material
risk of not being Year 2000 ready in a timely fashion or for which a suitable
alternative cannot be implemented. However, as the Bank progresses with its Year
2000 conversion, the Bank may identify systems which do present a material risk
of Year 2000 disruption. Such disruption may include, among other things, the
inability to process and underwrite loan applications, to credit deposits and
withdrawals from customer accounts, to credit loan payments or track
delinquencies, to properly reconcile and record daily activity or to engage in
similar normal banking activities. Additionally, if the Bank's commercial
customers are not Year 2000 compliant and suffer adverse effects on their
operations, their ability to meet their obligations to the Bank could be
adversely affected.
The failure of the Bank to identify systems which require Year 2000
conversion that are critical to the Bank's operations or the failure of the Bank
or others with which the Bank does business to become Year 2000 ready in a
timely manner could have a material adverse impact on the Bank's financial
condition and results of operations. Moreover, to the extent that the risks
posed by the Year 2000 problem are pervasive in data processing and transmission
and communications services worldwide, the Bank cannot predict with any
certainty that its operations will remain materially unaffected after January 1,
2000 or on dates preceding this date at which time post-January 1, 2000 dates
become significant within the Bank's systems. For further discussion of the
26
<PAGE>
Bank's Year 2000 compliance efforts, see 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000.'
RISK OF ADVERSE TAX DETERMINATION
In 1997, the IRS concluded an examination of the income tax returns of the
Company for the tax years 1993 through 1995. The audit resulted in the Company
making cash payments and writing down the deferred tax assets of the Company.
Such cash payments and write-downs amounted to $500,000 in the aggregate, which
approximated the book allowances provided by the Company for this eventuality.
The IRS audit focused generally on the Company's Notes, which, until canceled in
the Redemption, were held by the Selling Shareholders (who were then affiliates
of the Company and the Bank) and, more specifically, on the appropriateness of
the Company's interest expense deductions during 1993, 1994 and 1995.
Notwithstanding the conclusion of the IRS's audit and the resulting cash
payments and write-downs, no assurance can be made that the IRS will not
reexamine the Company's tax returns and further challenge the validity of the
Notes and the related interest expense deductions which could result in
additional income tax payments and/or write-downs. Although the settlement with
the IRS confirmed the treatment of the Notes as debt rather than equity, there
can be no assurance that the IRS will not reexamine the appropriateness of the
characterization of the Notes as debt with respect to the tax years subsequent
to 1995. The Notes were retired in April 1998 in conjunction with the
consummation of the Redemption. As of June 30, 1998, the Company's consolidated
financial statements reflect deferred tax assets of approximately $2.6 million
which represent interest expense deductions that the Company will take in its
1998 tax return. During the first quarter of 1998, the California Franchise Tax
Board ('FTB') notified the Company of its intention to review the consolidated
tax returns of the Company and the Bank for the four years ended December 31,
1996. As of July 31, 1998, the FTB had begun the review but had made no
disclosures to the Company regarding the scope of the examination nor time
frames in which they believed the examination would be completed. In the opinion
of management, any additional assessments that may result from such examination
will not have a material effect on the financial condition of the Company.
USE OF PROCEEDS
Neither the Company nor the Trust will receive any cash proceeds from the
issuance of the Exchange Capital Securities. In consideration for issuing the
Exchange Capital Securities in exchange for Original Capital Securities as
described in this Prospectus, the Trust will receive Original Capital Securities
in like Liquidation Amount. The Original Capital Securities surrendered in
exchange for the Exchange Capital Securities will be retired and canceled.
Net proceeds from the Private Offerings were approximately $157.7 million
after deducting the commission of the Placement Agent and estimated offering and
other expenses payable by the Company. The Company used $120.0 million on the
net proceeds to repurchase all of the then outstanding common stock, including
those shares of Common Stock received by the Selling Shareholders in exchange
for the Notes, and is using the remainder of the net proceeds for other general
corporate purposes. All of the proceeds from the sale of the Capital Securities
were invested by the Trust in the Junior Subordinated Debentures.
27
<PAGE>
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
The following table sets forth the ratios of earnings to combined fixed
charges of the Company on a consolidated basis for the respective periods
indicated.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
-------------- ----------------------------------------------------
1998 1997 1997 1996 1996(1) 1995 1994 1993
----- ----- ----- ----- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratios of Earnings to Combined Fixed Charges:
Excluding interest on deposits............. 3.98x 4.85x 6.59x 1.25x 2.90x 0.68x 1.30x 1.97x
Including interest on deposits............. 1.22x 1.21x 1.24x 1.02x 1.14x 0.93x 1.09x 1.28x
</TABLE>
- ------------------
(1) Represents the respective fixed charge ratios excluding the SAIF
recapitalization assessment.
For purposes of computing the ratios of earnings to combined fixed charges,
earnings represent net income plus applicable income taxes and fixed charges.
Fixed charges, excluding interest on deposits, include gross interest expense
other than on deposits. Fixed charges, including gross interest on deposits,
include all interest expense.
ACCOUNTING TREATMENT OF CAPITAL SECURITIES
For financial reporting purposes, the Trust is treated as a subsidiary of
the Company and, accordingly, the accounts of the Trust will be included in the
Consolidated Financial Statements of the Company. The Capital Securities will be
presented as a separate line item in the consolidated balance sheet of the
Company under the caption 'Guaranteed preferred beneficial interests in the
Company's junior subordinated debentures,' and appropriate disclosures about the
Capital Securities, the Guarantee and the Junior Subordinated Debentures will be
included in the notes to Consolidated Financial Statements. For financial
reporting purposes, the Company will record Distributions payable on the Capital
Securities as interest expense in the consolidated statements of operations.
Future Consolidated Financial Statements of the Company audited by the
Company's independent accountants will include a footnote to the financial
statements stating that (i) the Trust is wholly-owned, (ii) the sole assets of
the Trust are the Junior Subordinated Debentures (specifying the principal
amount, interest rate and maturity date of such Junior Subordinated Debentures),
and (iii) the back-up obligations, in the aggregate, constitute a full and
unconditional guarantee by the Company of the obligations of the Trust under the
Capital Securities. The Trust will not provide separate audited financial
statements.
28
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
The following consolidated statement of operations with respect to the
Company's operations for the years ended December 31, 1997, 1996 and 1995 have
been derived from the audited Consolidated Financial Statements and notes
thereto of the Company appearing elsewhere in this Prospectus. This information
should be read in conjunction with such Consolidated Financial Statements and
the notes thereto. The following consolidated statements of operation with
respect to the Company's operations for the six months ended June 30, 1998 and
1997 have been derived from unaudited financial data, and, in the opinion of
management, reflect all adjustments, consisting of normal recurring adjustments,
which are necessary to present fairly the results for such interim periods. The
results of operations for the six months ended June 30, 1998 are not necessarily
indicative of the results of operations that may be expected for the year ending
December 31, 1998.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------ ---------------------------------
1998 1997 1997 1996 1995
------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest on loans........................................ $47,954 $41,197 $ 86,141 $ 78,711 $72,742
Interest on funds sold and securities purchased under
agreements to resell................................... 471 1,081 2,760 1,417 398
Interest on investment and mortgage-backed securities.... 9,766 9,828 18,690 22,836 25,894
------- ------- -------- -------- -------
Total interest income.................................. 58,191 52,106 107,591 102,964 99,034
------- ------- -------- -------- -------
Interest expense:
Interest on deposits..................................... 31,254 28,999 61,513 59,273 56,038
Interest on short-term borrowings........................ 66 798 294 998 6,550
Interest on guaranteed preferred beneficial interests in
junior subordinated debentures......................... 570 -- -- -- --
Interest on long-term borrowings......................... 1,270 -- 620 2,044 5,867
Interest on long-term debt to affiliates................. 599 893 1,825 1,640 1,741
------- ------- -------- -------- -------
Total interest expense................................. 33,759 30,690 64,252 63,955 70,196
------- ------- -------- -------- -------
Net interest income.................................... 24,432 21,416 43,339 39,009 28,838
Provision for loan losses.................................. 1,401 132 1,154 1,476 8,777
------- ------- -------- -------- -------
Net interest income after provision for loan losses.... 23,031 21,284 42,185 37,533 20,061
------- ------- -------- -------- -------
Noninterest income:
Commercial banking fees.................................. 565 429 977 421 92
Service charges on deposit accounts...................... 544 482 888 615 566
Gain on sale of loans, securities and servicing rights... 307 (530) 155 1,200 1,137
Loan servicing income.................................... 292 526 601 680 272
Miscellaneous income..................................... 24 258 473 481 1,700
------- ------- -------- -------- -------
Total noninterest income............................... 1,732 1,165 3,094 3,397 3,767
------- ------- -------- -------- -------
Noninterest expenses:
Personnel................................................ 8,247 7,169 14,087 14,875 12,000
Occupancy................................................ 2,447 2,306 4,811 4,754 4,355
Data processing.......................................... 1,180 979 2,059 1,859 1,696
Furniture and equipment.................................. 1,170 852 1,902 1,814 1,357
Deposit insurance........................................ 457 1,142 1,798 3,519 3,051
SAIF recapitalization assessment......................... -- -- -- 7,716 --
Communication............................................ 201 172 400 383 317
Professional fees and contracted services................ 902 882 2,342 1,551 1,303
Foreclosed assets expense................................ (3) 393 671 686 2,785
Miscellaneous expense.................................... 2,693 2,050 4,220 4,256 3,278
------- ------- -------- -------- -------
Total noninterest expense.............................. 17,294 15,945 32,190 41,413 30,142
------- ------- -------- -------- -------
Income (loss) before taxes................................. 7,469 6,504 13,089 (483) (6,314)
Income tax expense (benefit)............................... 3,070 2,677 5,790 (177) (3,406)
------- ------- -------- -------- -------
Net income (loss)...................................... $ 4,399 $ 3,827 $ 7,299 $ (306) $(2,908)
------- ------- -------- -------- -------
------- ------- -------- -------- -------
</TABLE>
(See notes to the consolidated financial statements appearing elsewhere herein)
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the section entitled 'Risk Factors' and
elsewhere in this Prospectus. The following discussion and analysis is intended
to provide details of the results of operations of the Company for the six
months ended June 30, 1998 and 1997 and for the years ended December 31, 1997,
1996 and 1995 and financial condition at June 30, 1998 and at December 31, 1997
and 1996. The following discussion should be read in conjunction with the
information set forth in the Company's Consolidated Financial Statements and
notes thereto and other financial data included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
General. Currently, the Company's primary source of income is net interest
income, which is the difference between interest income from interest-earning
assets and interest paid on interest-bearing liabilities such as deposits and
other borrowings used to fund those assets. The Company's net interest income is
affected by changes in the volume of interest-earning assets and
interest-bearing liabilities as well as by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds. The Company also generates noninterest income, including
commercial banking fees and other transactional fees and seeks to generate
additional fees in connection with the shift in its business focus to commercial
banking. The Company's noninterest expenses consist primarily of personnel,
occupancy, and furniture and equipment expenses and other operating expenses.
The Company's results of operations are affected by its provision for loan
losses and may also be significantly affected by other factors including general
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory agencies.
Net Income. For the six months ended June 30, 1998, net income was $4.4
million, an increase of $572,000, or 14.9% from the six months ended June 30,
1997. The increase in earnings during the six months ended June 30, 1998
resulted primarily from the increased net interest income which resulted from
the larger average balance sheet, the improved loan yield, and the increase in
noninterest income. The improvement in noninterest income resulted primarily
from the Bank recording no loss on the sale of securities and loans in the six
months ended June 30, 1998 compared with a loss of $530,000 in the same period
of the preceding year. Partially offsetting these improvements in net income was
the increased provision for loan losses which was made as a result of the growth
in the loan portfolio and the increase in personnel expenses primarily related
to the expansion of the commercial banking division and incentive accruals
recorded during the first half of 1998 and nonrecurring expenses related to the
computer system conversion. For the year ended December 31, 1997, net income was
$7.3 million, an increase of $7.6 million from a net loss of $306,000 for the
year ended December 31, 1996. For the year ended December 31, 1995, the
Company's operations resulted in a loss of $2.9 million. The Company's
annualized return on average assets was 0.54% for the six months ended June 30,
1998, compared with 0.51% for the six months ended June 30, 1997. Annualized
return on average assets was 0.47% for the year ended December 31, 1997,
compared to (0.02%) and (0.19%) for the years ended December 31, 1996 and 1995,
respectively. The Company's annualized return on average equity was 11.50% and
13.15% for the six months ended June 30, 1998 and 1997, respectively and 12.33%,
(0.48%) and (4.89%) for the years ended December 31, 1997, 1996 and 1995,
respectively.
From 1995 to June 30, 1998, the Company experienced steady growth in its
net interest income. Notwithstanding this improvement in net interest income,
the Company's net income was adversely impacted by a $7.7 million SAIF
recapitalization assessment in 1996 and an $8.8 million provision for loan
losses during 1995. The $8.8 million provision for loan losses in 1995 was $4.1
million greater than the five year average provision for loan losses of $4.7
million and was recorded to address the continued depressed California economy
and real estate market and to significantly increase the Company's overall level
of allowance for loan losses to over 1.00% of gross loans. Without giving effect
to the SAIF recapitalization assessment, in 1996, the Company's net income would
have amounted to $4.3 million as compared to the $306,000 actual net loss.
30
<PAGE>
The increase in net income for the six months ended June 30, 1998 from the
six months ended June 30, 1997 was partially due to the increase in net interest
income which resulted from an increase in the average loans outstanding and an
increase in the average yield on loans resulting from the growth in the
commercial loan portfolio. The net income also increased during this period due
to the Bank not incurring any losses on the disposition of loans or securities,
whereas the Bank realized a loss of $530,000 for the disposition of such assets
in the six months ended June 30, 1997 in conjunction with its COFI reduction
program and the write-down of impaired loans. Partially offsetting the increases
to net income resulting from the foregoing were increases in the provision for
loan losses and increases in noninterest expense.
The provision for loan losses increased from $132,000 in the first six
months of 1997 to $1.4 million in the same period of 1998. The increased
provision in 1998 related to the increased growth in the loan portfolio during
the first half of 1998 and the increase in the commercial loan portfolio during
this period. As of June 30, 1998, the $13.2 million allowance for loan losses
represented 1.04% of gross loans. Noninterest expenses were $17.3 million for
the first six months of 1998, an increase of $1.4 million, or 8.5%, from the
corresponding period of the prior year. Personnel expenses increased to $8.2
million during the first six months of 1998 compared with $7.2 million for the
corresponding period of the previous year due to the addition of commercial
banking personnel during 1997 and incentive accruals recorded during the first
half of 1998. Included in the expenses for the first half of 1998 were $400,000
of expenses associated with the name change of the Bank to United Commercial
Bank and $200,000 of severance pay accruals for an outsourced audit function.
The increase in net income for the year ended December 31, 1997 from the
year ended December 31, 1996 was due to an increase in net interest income to
$43.3 million from $39.0 million, as discussed below, and a reduction in deposit
insurance expense to $1.8 million from $11.2 million, which includes the SAIF
assessment discussed below. In 1996, the Company paid a $7.7 million onetime
SAIF recapitalization assessment levied by the FDIC on SAIF-insured deposits to
fully capitalize the SAIF. During 1997, the Company's deposit insurance premium
was reduced to 9.4 basis points of deposits as a result of the Bank reaching the
'well capitalized' core capital ratio of 5.0%. Effective January 1, 1998, the
deposit insurance premium was further reduced to 6.4 basis points of deposits.
The reduction in the net loss for the year ended December 31, 1996 from the
year ended December 31, 1995 was due to the increase in net interest income to
$39.0 million from $28.8 million, as discussed below, and a reduction in the
provision for loan losses. In 1995, management increased the allowance for loan
losses from 0.78% of gross loans to 1.34% of gross loans to address the
continued depressed California economy and real estate market and to
significantly increase the Company's overall allowance for loan losses to over
1.00% of gross loans. The total provision for loan losses of $1.5 million in
1996 compares with a provision of $8.8 million in 1995. As a result of the
increase in net interest income and the reduction in the provision for loan
losses, the net loss of the Company was $306,000 for the year ended December 31,
1996 compared to a loss of $2.9 million for the year ended December 31, 1995,
notwithstanding the $7.7 million SAIF recapitalization assessment recognized in
1996.
Net Interest Income and Net Interest Margin. The net interest margin
improved to 3.13% for the six months ended June 30, 1998 as compared to 2.93%
for the six months ended June 30, 1997. At June 30, 1998, the net interest
margin was 2.90%, reflecting the impact of the new assets acquired in
conjunction with the leverage strategy. While the leverage strategy reduces this
ratio, the strategy is accretive to net income and earnings per share. For the
six months ended June 30, 1998, net interest income was $24.4 million, an
increase of $3.0 million, or 14.1%, from $21.4 million for the six months ended
June 30, 1997.
Net interest income increased in the first six months of 1998 primarily as
a result of (i) the increase in average loans outstanding to $1.23 billion from
$1.08 billion, (ii) the increase in the average yield on loans to 7.80% in the
first half of 1998 from 7.66% for the same period in the preceding year, (iii)
the reduction in the average balance of lower yielding COFI securities to $280.9
million from $352.0 million and their replacement with higher yielding loans,
and (iv) the purchase of $321 million of securities in conjunction with the
leveraging strategy during the second quarter of 1998, with an average yield of
6.91%.
The net interest margin improved to 2.89% for the year ended December 31,
1997, compared to 2.68% for the year ended December 31, 1996 and 1.96% for the
year ended December 31, 1995. For the year ended December 31, 1997, net interest
income was $43.3 million, an increase of $4.3 million, or 11.0% from
31
<PAGE>
$39.0 million for the year ended December 31, 1996. Net interest income for the
year ended December 31, 1996 increased $10.2 million, or 35.3% from $28.8
million for the year ended December 31, 1995.
Net interest income increased in 1997 primarily as a result of (i) the
increase in average loans outstanding to $1.12 billion from $1.04 billion, (ii)
the reduction in the average balance of lower yielding securities to $326.7
million from $390.4 million and their replacement with higher yielding loans,
(iii) the reduction of average borrowings to $16.6 million from $49.8 million
and their replacement with lower costing deposits, and (iv) a reduction in
non-interest-earning assets to $45.7 million from $60.0 million partially due to
the sale or reclassification of non-performing assets.
Net interest income increased to $39.0 million in 1996 from $28.8 million
in 1995, or 35.3%, primarily as a result of (i) the increase in average loans
outstanding to $1.04 billion from $1.0 billion, (ii) an increase in the average
yield on loans to 7.60% from 7.25% as a result of upward repricing of the Bank's
COFI-based loan portfolio, (iii) the reduction of average borrowings to $49.8
million from $194.4 million and their replacement with lower costing deposits,
and (iv) a decrease in the average rate paid on deposit accounts from 4.57% to
4.37%.
32
<PAGE>
The following tables present condensed average balance sheet information
for the Company, together with interest rates earned and paid on the various
sources and uses of funds for each of the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
AT 1998 1997
JUNE 30, ---------------------------------- ----------------------------------
1998 INTEREST AVERAGE INTEREST AVERAGE
---------- AVERAGE INCOME OR YIELD/ AVERAGE INCOME OR YIELD/
YIELD/COST BALANCE EXPENSE COST BALANCE EXPENSE COST
---------- ---------- --------- ------- ---------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1)...................... 7.82% $1,228,933 $ 47,954 7.85% $1,075,423 $ 41,197 7.66%
Securities.................... 6.31 312,287 9,766 6.25 345,272 9,828 5.69
Other......................... -- 16,825 471 5.60 40,026 1,081 5.40
---------- --------- ---------- ---------
Total interest-earning assets... 7.34 1,578,375 58,191 7.47 1,460,720 52,106 7.13
Noninterest-earning assets...... -- 61,557 -- -- 50,790 -- --
---------- --------- ---------- ---------
Total assets.................... 7.16 $1,619,602 58,191 7.19 $1,511,510 52,106 6.89
--- ---------- --------- ------- ---------- --------- -------
---------- ----------
Interest-bearing liabilities:
Deposits:
NOW and checking............ 1.09 $ 79,691 433 1.09 $ 77,570 411 1.06
Money market accounts....... 3.31 21,398 286 2.67 21,953 260 2.36
Passbook accounts........... 2.26 211,834 2,391 2.26 214,892 2,472 2.30
Time deposits............... 5.11 1,108,121 28,144 5.08 1,048,346 25,856 4.93
---------- --------- ---------- ---------
Total deposits................ 4.41 1,421,045 31,254 4.40 1,362,761 28,999 4.26
---------- --------- ---------- ---------
Borrowings.................... 5.64 47,022 1,336 5.68 29,077 798 5.49
Guaranteed preferred
beneficial interests in
junior subordinated
debentures.................. 9.38 12,160 570 9.38 -- -- --
Long-term debt to
affiliates.................. -- 11,970 599 10.01 17,868 893 10.00
---------- --------- ---------- ---------
Total interest-bearing
liabilities................... 4.71 1,492,021 33,759 4.52 1,409,706 30,690 4.35
--- ---------- --------- ------- ---------- --------- -------
Noninterest-bearing deposits.... 37,180 32,041
Other noninterest-bearing
liabilities................... 13,725 11,567
Stockholders' equity............ 76,501 58,196
---------- ----------
Total liabilities and
stockholders' equity.......... $1,619,602 $1,511,510
---------- ----------
---------- ----------
Net interest income/net interest
rate spread(2)................ 2.63% $ 24,432 2.95% $ 21,416 2.78%
--- --------- ------- --------- -------
--- --------- ------- --------- -------
Net interest-earning assets/net
interest margin(3)............ 2.90% $ 86,354 3.13% $ 51,138 2.93%
--- ---------- ------- ---------- -------
--- ---------- ------- ---------- -------
Ratio of interest-earning assets
to interest-bearing
liabilities................... 1.06x 1.06x 1.04x
--- ---------- ----------
--- ---------- ----------
</TABLE>
- ------------------
(1) Non-accrual loans are included in the table for computation purposes, but
the foregone interest on such loans is excluded.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
33
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- ---------------------------------- -----------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST
AVERAGE INCOME OR YIELD/ AVERAGE INCOME OR YIELD/ AVERAGE INCOME OR
BALANCE EXPENSE COST BALANCE EXPENSE COST BALANCE EXPENSE
---------- --------- ------- ---------- --------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1).................... $1,123,356 $ 86,141 7.67% $1,036,025 $ 78,711 7.60% $1,002,662 $ 72,742
Securities.................. 326,728 18,690 5.72 390,381 22,836 5.85 460,165 25,894
Other....................... 48,944 2,760 5.64 26,516 1,417 5.34 6,864 398
---------- --------- ---------- --------- ---------- ---------
Total interest-earning
assets...................... 1,499,028 107,591 7.18 1,452,922 102,964 7.09 1,469,691 99,034
Noninterest-earning assets... 45,664 -- 60,014 -- 56,164 --
---------- --------- ---------- --------- ---------- ---------
Total assets................. $1,544,692 107,591 6.97 $1,512,936 102,964 6.81 $1,525,855 99,034
---------- --------- ------- ---------- --------- ------- ---------- ---------
---------- ---------- ----------
Interest-bearing liabilities:
Deposits:
NOW and checking.......... $ 78,737 875 1.11 $ 77,710 826 1.06 $ 75,285 781
Money market accounts..... 21,397 517 2.42 23,583 561 2.38 27,732 654
Passbook accounts......... 212,943 4,834 2.27 207,512 4,772 2.30 215,604 4,797
Time deposits............. 1,090,320 55,287 5.07 1,047,019 53,114 5.07 908,783 49,806
---------- --------- ---------- --------- ---------- ---------
Total deposits.............. 1,403,397 61,513 4.38 1,355,824 59,273 4.37 1,227,404 56,038
---------- --------- --------- ---------
Borrowings.................. 16,551 914 5.52 49,813 3,042 6.11 194,365 12,417
Long-term debt to
affiliates................ 18,398 1,825 9.92 14,868 1,640 11.03 13,250 1,741
---------- --------- ---------- --------- ---------- ---------
Total interest-bearing
liabilities................. 1,438,346 64,252 4.47 1,420,505 63,955 4.53 1,435,019 70,196
--------- ------- --------- ------- ---------- ---------
Noninterest-bearing
deposits.................... 33,780 23,981 16,191
Other noninterest-bearing
liabilities................. 13,358 13,638 15,358
Stockholders' equity......... 59,208 54,812 59,287
---------- ---------- ----------
Total liabilities and
stockholders' equity........ $1,544,692 $1,512,936 $1,525,855
---------- ---------- ----------
---------- ---------- ----------
Net interest income/net
interest rate spread(2)..... $ 43,339 2.71% $ 39,009 2.58% $ 28,838
--------- ------- --------- ------- ---------
--------- ------- --------- ------- ---------
Net interest-earning
assets/net interest
margin(3)................... $ 60,682 2.89% $ 32,417 2.68% $ 34,672
---------- ------- ---------- ------- ----------
---------- ------- ---------- ------- ----------
Ratio of interest-earning
assets to interest-bearing
liabilities................. 1.04x 1.02x 1.02x
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
AVERAGE
YIELD/
COST
-------
<S> <C>
Interest-earning assets:
Loans(1).................... 7.25%
Securities.................. 5.63
Other....................... 5.80
Total interest-earning
assets...................... 6.74
Noninterest-earning assets...
Total assets................. 6.49
-------
Interest-bearing liabilities:
Deposits:
NOW and checking.......... 1.04
Money market accounts..... 2.36
Passbook accounts......... 2.22
Time deposits............. 5.48
Total deposits.............. 4.57
Borrowings.................. 6.39
Long-term debt to
affiliates................ 13.14
Total interest-bearing
liabilities................. 4.89
-------
Noninterest-bearing
deposits....................
Other noninterest-bearing
liabilities.................
Stockholders' equity.........
Total liabilities and
stockholders' equity........
Net interest income/net
interest rate spread(2)..... 1.85%
-------
-------
Net interest-earning
assets/net interest
margin(3)................... 1.96%
-------
-------
Ratio of interest-earning
assets to interest-bearing
liabilities.................
</TABLE>
- ------------------
(1) Non-accrual loans are included in the table for computation purposes, but
the foregone interest on such loans is excluded.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
34
<PAGE>
The following table represents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. Information is provided for each major component of
interest-earning assets and interest-bearing liabilities with respect to: (i)
changes in volume (changes in volume multiplied by prior rate); (ii) changes
attributable to rate (changes in rate multiplied by prior volume); and (iii) the
net change. The changes attributable to both volume and rate have been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, 1998 COMPARED TO THE DECEMBER 31, 1997 COMPARED TO FOR THE YEAR ENDED
SIX MONTHS ENDED JUNE 30, THE DECEMBER 31, 1996 COMPARED TO THE
1997 YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
----------------------------- ------------------------------ ---------------------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
------------------ ----------------- -------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------ ------- ------ ------ ---- ------ ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans.................... $5,977 $ 780 $6,757 $6,690 $740 $7,430 $2,468 $3,501 $ 5,969
Securities............... 1,901 (1,963) (62) (3,651) (495) (4,146) (4,137) 1,079 (3,058)
Other.................... (651) 41 (610) 1,261 82 1,343 1,049 (30) 1,019
------ ------- ------ ------ ---- ------ ------ ------ -------
Total interest income on
interest-earning
assets................... 7,228 (1,143) 6,086 4,300 327 4,627 (620) 4,550 3,930
------ ------- ------ ------ ---- ------ ------ ------ -------
Interest expense:
Deposits
NOW and checking
accounts............. 11 11 23 11 38 49 26 19 45
Money market
accounts............. (6) 32 26 (53) 9 (44) (99) 6 (93)
Passbook accounts...... (35) (46) (81) 122 (60) 62 (249) 224 (25)
Time deposits.......... 1,503 784 2,288 2,196 (23) 2,173 6,473 (3,165) 3,308
Borrowings............... 509 29 538 (1,861) (267) (2,128) (8,850) (525) (9,375)
Guaranteed preferred
beneficial interests in
junior subordinated
debentures............. 570 -- 570 -- -- -- -- -- --
Long-term debt to
affiliates............. (295) 1 (294) 264 (79) 185 126 (227) (101)
------ ------- ------ ------ ---- ------ ------ ------ -------
Total interest expense on
interest-bearing
liabilities.............. 2,258 813 3,070 679 382 297 (2,573) (3,668) (6,241)
------ ------- ------ ------ ---- ------ ------ ------ -------
Increase in net interest
income................... $4,970 $(1,955) $3,016 $3,621 $709 $4,330 $1,953 $8,218 $10,171
------ ------- ------ ------ ---- ------ ------ ------ -------
------ ------- ------ ------ ---- ------ ------ ------ -------
</TABLE>
35
<PAGE>
Provision For Loan Losses. The provision for loan losses reflects
management's judgment of the current period cost associated with credit risk
inherent in the Company's loan portfolio. Specifically, the provision for loan
losses represents the amount charged against current period earnings to achieve
an allowance for loan losses that in management's judgment is adequate to absorb
losses inherent in the Company's loan portfolio.
For the six months ended June 30, 1998, the provision for loan losses was
$1.4 million, an increase of $1.3 million from the $132,000 provision for the
six months ended June 30, 1997. The allowance for loan losses as of June 30,
1998, as a percentage of total gross loans and as a percentage of non-performing
loans, was 1.04% and 145.8%, respectively, compared to 1.05% and 124.4%,
respectively at June 30, 1997. The Bank experienced a significant improvement in
asset quality during 1997 as improvements in the California economy occurred.
For example, the Bank experienced a 50% reduction in nonaccrual loans in 1997.
As management monitors the Bank's loan portfolio on a continuous basis, the
provisions for loan losses in the 1997 periods reflected this portfolio
improvement as it occurred and was identified. In 1998, provisions for loan
losses were increased to keep pace with the growth in the Bank's loan portfolio,
and in particular, growth in commercial loan products. The Bank's allowance
methodology provides higher loss factors for commercial loan products than for
residential mortgage (1-4 family) loans.
For the year ended December 31, 1997, the provision for loan losses was
$1.2 million, a decrease of $303,000, or 20.0% from the $1.5 million provision
for the year ended December 31, 1996. The allowance for loan losses at December
31, 1997, as a percentage of total gross loans and as a percentage of
non-performing loans was 1.00% and 123.2%, respectively, compared to 1.10% and
60.0%, respectively, at December 31, 1996. The provision for loan losses for the
year ended December 31, 1996, was $1.5 million, which represents a decrease of
$7.3 million, or 83.2% from the $8.8 million provision for loan losses for the
year ended December 31, 1995. In 1995, management increased the allowance for
loan losses to address the continued depressed California economy and real
estate market and to significantly increase the Company's overall level of
allowance for loan losses to over 1.00% of gross loans.
Noninterest Income. The following table sets forth the components of
noninterest income for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS FOR THE YEARS ENDED DECEMBER
ENDED JUNE 30, 31,
----------------- ------------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts........................ $ 544 $ 482 $ 888 $ 615 $ 566
Commercial banking fees.................................... 565 429 977 421 92
Gain on sale of servicing rights........................... 175 214 1,165 672 755
Gain (loss) on loan sales.................................. 132 (355) (204) 528 382
Loss on sale of securities................................. -- (389) (806) (335) --
Gain on branch sale........................................ -- -- -- -- 656
Loan servicing income...................................... 292 526 601 680 272
Miscellaneous income....................................... 24 258 473 816 1,044
------ ------ ------ ------ ------
Total noninterest income................................. $1,732 $1,165 $3,094 $3,397 $3,767
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
For the six months ended June 30, 1998, noninterest income was $1.7
million, an increase of $567,000, or 48.7% from $1.2 million for the same period
of the preceding year. For the year ended December 31, 1997, noninterest income
was $3.1 million, a decrease of $303,000, or 8.9% from the year ended December
31, 1996. Noninterest income in 1996 of $3.4 million decreased $370,000, or 9.8%
from the $3.8 million recognized during the year ended December 31, 1995.
The increase in noninterest income for the first six months of 1998
primarily reflects the Bank not having incurred any losses on the sale of
COFI-based securities during the first half of 1998, compared with having
incurred $530,000 of such losses in the corresponding period of 1997.
The decrease in noninterest income for the year ended December 31, 1997,
reflects the $806,000 loss incurred in connection with the sale of COFI-based
securities pursuant to the Company's business strategy to reduce its assets tied
to COFI. The $1.2 million gain on sale of servicing rights is a non-recurring
gain recognized as a result of the disposition of such servicing rights in
conjunction with the Bank's decision to close its mortgage banking division.
Additionally, the $601,000 of loan servicing income is substantially
non-recurring since
36
<PAGE>
substantially all of the related servicing portfolio was sold during 1997.
Commercial banking fees increased to $977,000 in 1997, or 132.1% from $421,000
in 1996 as a result of the Company's business focus shift to commercial banking.
Noninterest income for the year ended December 31, 1996 of $3.4 million is
$370,000, or 9.8% less than the $3.8 million of noninterest income for the year
ended December 31, 1995. The noninterest income for the year ended December 31,
1996 included $335,000 of losses incurred in conjunction with the disposal of
COFI-based securities. Included in noninterest income for the year ended
December 31, 1995, was a gain of $656,000 recognized in connection with the sale
of a retail branch.
Noninterest Expense. The following table sets forth the components of
noninterest expense for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED DECEMBER
ENDED JUNE 30, 31,
------------------- -----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel............................................... $ 8,247 $ 7,169 $14,087 $14,875 $12,000
Occupancy............................................... 2,447 2,306 4,811 4,754 4,355
Data processing......................................... 1,180 852 2,059 1,859 1,696
Furniture and equipment................................. 1,170 979 1,902 1,814 1,357
Deposit insurance....................................... 457 1,142 1,798 3,519 3,051
SAIF recapitalization assessment........................ -- -- -- 7,716 --
Communication........................................... 201 172 400 383 317
Professional fees and contracted services............... 902 882 2,242 1,551 1,303
Foreclosed assets expense............................... (3) 393 671 686 2,785
Miscellaneous expense................................... 2,693 2,050 4,220 4,256 3,278
------- ------- ------- ------- -------
Total noninterest expense............................. $17,294 $15,945 $32,190 $41,413 $30,142
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Efficiency ratio........................................ 66.10% 70.61% 69.33% 97.66% 92.45%
Efficiency ratio excluding SAIF recapitalization
assessment............................................ N/A N/A N/A 79.46 N/A
Noninterest expenses to average assets(1)............... 2.14% 2.11% 2.08% 2.74% 1.98%
</TABLE>
- ------------------
(1) Annualized for the six months ended June 30, 1998 and 1997.
Noninterest expense increased by $1.4 million, or 8.5%, to $17.3 million
for the six months ended June 30, 1998 from $15.9 million for the six months
ended June 30, 1997, primarily as a result of increases in the Commercial
Banking Division staffing level, the recordation of incentive compensation
accruals, and the expenses associated with the computer conversion and the name
change of the Bank. Personnel expenses of $8.2 million for the first half of
1998 are $1.0 million, or 15% higher than the $7.2 million of personnel expenses
for the first half of 1997. This increase resulted primarily from the additional
staff which was hired to execute the commercial banking business plan and
incentive compensation accruals.
During the first half of 1998, the Bank successfully completed a core
computer conversion to a system which is guaranteed to be year 2000 compliant.
Total nonrecurring conversion expenses for the six months ended June 30, 1998
were $333,000.
Noninterest expense decreased to $32.2 million, or 22.3%, for the year
ended December 31, 1997 from $41.4 million for the year ended December 31, 1996,
primarily as a result of the $7.7 million SAIF recapitalization assessment
recognized in 1996. Deposit insurance premiums of $1.8 million for the year
ended December 31, 1997 compares with $3.5 million for the year ended December
31, 1996, a decrease of 48.9% due to the Bank reaching the 'well capitalized'
level. As a result of reaching this capital level, the deposit insurance premium
was reduced from 16.4 basis points to 9.4 basis points on July 1, 1997. The
average deposit insurance premium for 1997 was 12.9 basis points. The deposit
insurance premium was further reduced to 6.4 basis points effective January 1,
1998. During 1997, the Bank began a core computer conversion to a system which
provides the necessary support for the Bank's new commercial banking activities.
Computer conversion related expenses were $390,000 for the year ended December
31, 1997. New equipment purchases for this conversion totaled $1.2 million which
will be amortized over a four year term commencing in 1998. As a result of the
foregoing and the improved net interest margin, the efficiency ratio decreased
to 69.3% in 1997 from 97.7% in 1996.
37
<PAGE>
Noninterest expense increased to $41.4 million for the year ended December
31, 1996 from $30.1 million for the year ended December 31, 1995 as a result of
(i) the $7.7 million SAIF recapitalization assessment, (ii) a $2.9 million
increase in personnel expenses which was primarily the result of the
establishment of the commercial banking division and three new retail branches,
(iii) an increase of $457,000 in furniture and equipment expense and $399,000 in
occupancy expenses, both primarily in conjunction with the establishment of
three new retail branches in 1996, and (iv) a $1.0 million increase of
miscellaneous expense primarily due to additional printing and advertising
expenses relating to the establishment of the commercial banking division and
the establishment of merchant card services. The increase in the foregoing
categories of noninterest expense during 1996 was partially offset by a $2.1
million decline in foreclosed assets expense due, in part, to the reduction in
the Company's non-performing assets.
Provision for Income Taxes. The provision for income taxes of $3.1 million
and $2.7 million on the income before taxes of $7.5 million and $6.5 million for
the six months ended June 30, 1998 and 1997, respectively, represents an
effective tax rate of 41.1%.
For the year ended December 31, 1997, the provision for income taxes of
$5.8 million on the income before taxes of $13.1 million represents an effective
tax rate of 44.2%. For the year ended December 31, 1996, the Company had a tax
benefit of $177,000 on the loss before taxes of $483,000. For the year ended
December 31, 1995, the Company's tax benefit was $3.4 million on the loss before
taxes of $6.3 million.
In 1997, the IRS concluded an examination of the income tax returns of the
Company for the years 1993 through 1995. The audit resulted in a cash payment of
$500,000, and the partial reversal of previously deferred tax assets which
approximated the allowances provided by the Company for this eventuality.
FINANCIAL CONDITION
At June 30, 1998, the Company had total assets of $1.91 billion, an
increase of $348.7 million, or 22.2%, compared with $1.56 billion at December
31, 1997. At June 30, 1998, the Company had investment securities of $575.3
million, an increase of $305.2 million, or 113.0%, from December 31, 1997. At
June 30, 1998, the Company had net loans of $1.26 billion, an increase of $56.8
million, or 4.73%, from $1.20 billion at December 31, 1997. Total deposits of
$1.47 billion at June 30, 1998 were consistent with the balances at December 31,
1997. Borrowings at June 30, 1998 were $298 million whereas the Company had no
borrowings at December 31, 1997. At June 30, 1998, the Company had guaranteed
preferred beneficial interests in junior subordinated debentures of $30 million,
whereas none were outstanding at December 31, 1997. At June 30, 1998, the
Company had equity of $98.1 million, an increase of $35.6 million, or 56.8%,
from $62.6 million at December 31, 1997.
At December 31, 1997, the Company had total assets of $1.56 billion and
total deposits of $1.47 billion. Total assets increased from $1.47 billion at
December 31, 1996, and total deposits increased from $1.39 billion at December
31, 1996. At December 31, 1997, the Company had net loans of $1.2 billion, a
14.3% increase from net loans of $1.05 billion at December 31, 1996. At December
31, 1997, the Company had investment securities totaling $270.1 million compared
to $343.7 million at December 31, 1996. At December 31, 1997, the Company had no
borrowings while the stockholders' equity increased to $62.6 million at December
31, 1997 from $54.3 million at December 31, 1996.
Loan Portfolio. In connection with the Bank's balance sheet restructuring,
the Bank closed its mortgage banking division and ceased the origination of
nonconforming mortgages for sale in the secondary market, but continued to
originate conforming residential mortgages (1-4 family) primarily for portfolio
retention. Residential mortgages (1-4 family) originated for sale in the six
months ended June 30, 1998 aggregated $9.3 million as compared to $8.0 million,
$22.4 million, $83.4 million and $87.7 million in the six months ended June 30,
1997 and the years ended December 31, 1997, 1996 and 1995, respectively. In
addition, with the creation of its commercial banking division in 1996, new
emphasis was placed on the origination of commercial real estate loans and
commercial business loans. Total new commitments for commercial loans originated
in the six months ended June 30, 1998 were $25.8 million as compared to $15.6
million, $31.9 million and $9.9 million for the six months ended June 30, 1997
and the years ended December 31, 1997 and 1996, respectively.
38
<PAGE>
The following table shows the composition of the Bank's loan portfolio by
amount and percentage of total gross loans in each major loan category at the
dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
AT JUNE 30,
1998 1997 1996 1995 1994
-------------------- -------------------- -------------------- -------------------- --------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT
---------- ------ ---------- ------ ---------- ------ ---------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer:
Residential mortgage
(1-4 family)(1)..... $ 712,357 56.03% $ 691,167 56.98% $ 541,156 50.79% $ 507,121 49.45% $432,045
Home equity........... 15,851 1.25 16,743 1.38 10,673 1.00 1,193 0.12 --
Other................. 2,321 0.18 2,732 0.23 2,642 0.25 2,981 0.29 1,474
---------- ------ ---------- ------ ---------- ------ ---------- ------ --------
Total consumer...... 730,529 57.46 710,642 58.59 554,471 52.04 511,295 49.86 433,519
---------- ------ ---------- ------ ---------- ------ ---------- ------ --------
Commercial:
Secured by real
estate--
multi-family........ 334,228 26.29 339,257 27.97 361,591 33.93 376,398 36.70 391,509
Secured by real
estate--
nonresidential(2)... 142,740 11.23 115,366 9.51 123,003 11.54 131,259 12.80 141,995
Construction.......... 35,810 2.82 26,603 2.19 19,892 1.87 6,612 0.64 7,597
Commercial business... 28,024 2.20 21,146 1.74 6,595 0.62 -- -- --
---------- ------ ---------- ------ ---------- ------ ---------- ------ --------
Total commercial.... 540,802 42.54 502,372 41.41 511,081 47.96 514,269 50.14 541,101
---------- ------ ---------- ------ ---------- ------ ---------- ------ --------
Total gross loans...... 1,271,331 100.00% 1,213,014 100.00% 1,065,552 100.00% 1,025,564 100.00% 974,620
------ ------ ------ ------
------ ------ ------ ------
Net deferred loan
origination costs..... 820 1,223 816 44 (1,402)
Allowance for loan
losses................ (13,207) (12,142) (11,682) (13,699) (7,550)
---------- ---------- ---------- ---------- --------
Net loans.............. $1,258,944 $1,202,095 $1,054,686 $1,011,909 $965,668
---------- ---------- ---------- ---------- --------
---------- ---------- ---------- ---------- --------
<CAPTION>
1993
------------------
% AMOUNT %
------ -------- ------
<S> <C> <C> <C>
Consumer:
Residential mortgage
(1-4 family)(1)..... 44.33% $380,570 42.85%
Home equity........... -- -- --
Other................. 0.15 1,929 0.22
------ -------- ------
Total consumer...... 44.48 382,499 43.07
------ -------- ------
Commercial:
Secured by real
estate--
multi-family........ 40.17 329,401 37.09
Secured by real
estate--
nonresidential(2)... 14.57 151,061 17.01
Construction.......... 0.78 25,115 2.83
Commercial business... -- -- --
------ -------- ------
Total commercial.... 55.52 505,577 56.93
------ -------- ------
Total gross loans...... 100.00% 888,076 100.00%
------ ------
------ ------
Net deferred loan
origination costs..... (2,075)
Allowance for loan
losses................ (8,000)
--------
Net loans.............. $878,001
--------
--------
</TABLE>
- ------------------
(1) Includes $502.8 million of limited documentation loans at June 30, 1998. See
'Business--Lending Activities--Residential Mortgages (1-4 family).'
(2) Includes $72.3 million, $87.5 million, $123.0 million, $131.3 million,
$142.0 million, and $151.0 million of primarily COFI-based loans at June 30,
1998 and at December 31, 1997, 1996, 1995, 1994 and 1993, respectively,
which were originated by the Bank during 1988 through 1992.
39
<PAGE>
The following table shows the Bank's loan originations during the periods
indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consumer:
Residential mortgage (1-4 family)
For sale:
GNMA.......................................... $ -- $ 759 $ 759 $ 33,066 $ 33,875
FHLMC and FNMA................................ 9,327 8,033 21,675 50,319 53,819
For portfolio:
Fully documented loans........................ 8,456 4,700 7,867 10,675 8,932
Limited documentation loans................... 117,714 77,930 244,523 131,548 114,251
Home equity loans.................................. 2,819 8,748 13,552 24,703 4,748
Other.............................................. 1,714 -- -- -- --
-------- -------- -------- -------- --------
Total consumer loans.......................... 140,030 100,170 288,376 250,311 215,625
-------- -------- -------- -------- --------
Commercial:
Secured by real estate--multi-family............... 15,580 4,189 7,461 7,318 842
Secured by real estate--non-residential............ 35,266 10,606 23,743 2,655 864
Construction(1).................................... 41,693 27,217 59,569 42,166 15,737
Commercial business................................ 25,834 15,615 31,933 9,901 --
-------- -------- -------- -------- --------
Total commercial loans........................ 118,373 57,627 122,706 62,040 17,443
-------- -------- -------- -------- --------
Total loan originations....................... $258,403 $157,797 $411,082 $312,351 $233,068
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- ------------------
(1) Includes loans in process.
Included in the Bank's residential mortgages (1-4 family) as of June 30,
1998 and December 31, 1997, respectively, were $502.8 million and $450.5
million, or 70.6% and 65.2% of limited documentation loans. Beginning in 1993,
the Bank has specialized in this loan product. Because of the less than full
documentation required for such loans, the Bank has emphasized relatively small
average loan size and low average loan-to-value ratios for these loans, as
evidenced by an average loan balance of $166,000 and average loan-to-value
ratios of 59% as of June 30, 1998.
Since it began originating limited documentation loans, the Bank has
experienced no net charge-offs with respect to such loans. At June 30, 1998, the
Bank had two loans more than three payments delinquent with an aggregate
principal balance of $199,000. Moreover, during the third quarter of 1997, the
Bank sold $17.2 million of the limited documentation loans to test the market
reception for this product. The Bank received a price in excess of par value on
the sale of such loans. Notwithstanding the historical performance of this type
of loan, there can be no assurance that such performance will continue.
Total gross loans increased $57.9 million, or 4.77%, to $1.27 billion at
June 30, 1998 from $1.21 billion at December 31, 1997 and 13.9%, from $1.07
billion at December 31, 1996, which was a 3.9% increase from $1.03 billion at
December 31, 1995. Increases in gross loans were the result of increases in
residential (1-4 family) loan production for portfolio retention and commercial
business loan generation resulting from the creation of the Bank's commercial
banking division in 1996.
40
<PAGE>
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments and changes in deferred fees and allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net loans:
Balance at beginning of period............ $1,202,095 $1,054,686 $1,054,686 $1,011,909 $ 965,668
---------- ---------- ---------- ---------- ----------
Originations......................... 258,403 157,797 411,082 312,351 233,068
Purchases............................ 217 361 44,416 7,642 16,677
Sales................................ (11,961) (940) (44,667) (478) (8,412)
Principal repayments................. (187,950) (123,379) (259,109) (275,084) (185,016)
Increase (decrease) in premiums,
discounts and deferred fees........ (403) (156) 407 772 1,446
Net (increase) decrease in allowance
for loan losses.................... (1,065) 204 (460) 2,017 (6,149)
Transfers to real estate owned....... (392) (3,363) (4,260) (4,443) (5,373)
---------- ---------- ---------- ---------- ----------
Balance at end of period.................. $1,258,944 $1,085,210 $1,202,095 $1,054,686 $1,011,909
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
In 1996, management made a strategic decision to reduce its COFI-based
assets and in the fourth quarter of 1996 ceased COFI-based lending. In addition,
the Bank began to reduce its COFI-based loan portfolio through amortization and
sales and replace it with current-index products including adjustable-rate
mortgage loans and loans with an initial rate of interest for a fixed term
(generally 3 to 5 years), the interest rates on which adjust annually thereafter
('intermediate fixed-rate loans'). As a result of this initiative, the Bank's
COFI-based loans declined to $505.9 million at June 30, 1998 from $554.4
million, $641.9 million, and $670.7 million at December 31, 1997, 1996 and 1995,
respectively.
At June 30, 1998, total gross loans included $307.4 million of intermediate
fixed-rate loans compared with $291.5 million at December 31, 1997, an increase
of $15.9 million or 5.5% which was the result of the Bank continuing to
emphasize the origination of intermediate fixed-rate mortgages (1-4 family).
Fixed-rate loans at June 30, 1998 were $277.4 million compared with $241.5
million at December 31, 1997, an increase of 15.0% which was the result of the
origination of primarily fifteen year mortgages.
As of December 31, 1997, total gross loans included $291.5 million of
intermediate fixed-rate loans compared with $224.3 million as of December 31,
1996, an increase of 30.0% which was the result of the Bank emphasizing the
origination of intermediate fixed-rate residential mortgages (1-4 family) during
1997. Fixed-rate loans as of December 31, 1997 were $241.5 million compared with
$176.8 million as of December 31, 1996, an increase of 36.6% which was the
result of the origination of fifteen and thirty year fixed-rate loans during
1997. To better manage its interest rate risk, the Bank has ceased the
origination of thirty year fixed-rate loans for portfolio retention, except on a
customer accommodation basis.
As of December 31, 1996, total gross loans included $224.3 million of
intermediate fixed-rate loans, compared with $213.4 million as of December 31,
1995, an increase of 5.1%. As of December 31, 1996, total fixed-rate loans were
$176.8 million as compared to $143.9 million as of December 31, 1995. As of
December 31, 1996, the ARM loan portfolio was $664.4 million as compared with
$668.3 million as of December 31, 1995, a decrease of 0.6%.
The following table sets forth the contractual loan maturity of the Bank's
loan portfolio at June 30, 1998. ARM loans are shown in the periods in which
they reprice rather than when they become due. The table does not include the
effect of future principal prepayments. The rate of loan prepayment varies from
time-to-time, depending upon various factors including market interest rates.
41
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, 1998
------------------------------------------------------------------------------------------
AFTER TEN
AFTER AFTER AFTER YEARS
ONE YEAR THREE YEARS FIVE YEARS THROUGH AFTER
WITHIN THROUGH THROUGH THROUGH TWENTY TWENTY
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS YEARS YEARS TOTAL
-------- ----------- ----------- ---------- --------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Consumer:
Residential mortgage (1-4
family)..................... $214,806 $ 84,690 $ 184,664 $ 9,214 $ 174,188 $44,795 $ 712,357
Home equity................... 15,851 -- -- -- -- -- 15,851
Other......................... 2,321 -- -- -- -- -- 2,321
-------- ----------- ----------- ---------- --------- ------- ----------
Total consumer.............. 232,978 84,690 184,664 9,214 174,188 44,795 730,529
Commercial:
Secured by real estate--multi-
family...................... 281,961 15,992 13,204 15,969 7,102 -- 334,228
Secured by real estate--
nonresidential.............. 112,457 30 21,106 2,249 6,898 -- 142,740
Construction.................. 35,810 -- -- -- -- -- 35,810
Commercial business........... 27,451 492 -- -- -- 81 28,024
-------- ----------- ----------- ---------- --------- ------- ----------
Total commercial............ 457,679 16,514 34,310 18,218 14,000 81 540,802
Total loans..................... $690,657 $ 101,204 $ 218,974 $ 27,432 $ 188,188 $44,876 1,271,331
-------- ----------- ----------- ---------- --------- ------- ----------
-------- ----------- ----------- ---------- --------- -------
Net deferred loan origination
costs......................... 820
Allowance for loan losses....... (13,207)
----------
Net loans....................... $1,258,944
----------
----------
</TABLE>
The following table sets forth at June 30, 1998 the dollar amount of loans
and mortgage-backed securities contractually due or repricing after June 30,
1999 and whether such loans and securities have fixed or adjustable interest
rates.
<TABLE>
<CAPTION>
DUE OR REPRICING AFTER JUNE 30, 1999
------------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Consumer:
Residential mortgage (1-4 family).................... $220,680 $ 276,870 $ 497,550
Home equity.......................................... -- -- --
Other................................................ -- -- --
-------- ---------- ----------
Total consumer.................................... 220,680 276,870 497,550
Commercial:
Secured by real estate--multi-family................. 38,443 13,824 52,267
Secured by real estate--nonresidential............... 13,536 16,747 30,283
Construction......................................... -- -- --
Commercial business.................................. 574 -- 574
-------- ---------- ----------
Total commercial.................................. 52,553 30,571 83,124
Total loans............................................ 273,233 307,441 580,674
-------- ---------- ----------
Mortgage-backed securities............................. 220,574 256,122 476,696
-------- ---------- ----------
Total loans and mortgage-backed securities............. $493,807 $ 563,563 $1,057,370
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
Non-Performing Assets and OREO. Management generally places loans on
non-accrual status when they become 90 days past due, unless they are both well
secured and in the process of collection. When a loan is placed on non-accrual
status, any interest previously accrued but not collected is reversed from
income. Loans are charged off when management determines that collection has
become unlikely. Other real estate owned ('OREO') consists of real property
acquired through foreclosure on the collateral underlying defaulted loans.
42
<PAGE>
The following table sets forth information regarding non-performing assets
at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, --------------------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Consumer:
Residential mortgage
(1 to 4 family).................... $ 5,610 $ 6,131 $ 7,085 $ 9,366 $ 6,379 $ 9,656
Home equity.......................... -- 15 -- -- -- --
Other................................ -- -- -- -- -- --
----------- ---------- ---------- ---------- -------- --------
Total consumer..................... 5,610 6,146 7,085 9,366 6,379 9,656
----------- ---------- ---------- ---------- -------- --------
Commercial:
Secured by real estate-multifamily... 165 904 3,496 5,673 801 1,049
Secured by real
estate-nonresidential.............. 3,281 2,804 8,896 5,445 4,144 2,829
Construction......................... -- -- -- -- -- 1,057
Commercial business.................. -- -- -- -- -- --
----------- ---------- ---------- ---------- -------- --------
Total commercial................... 3,446 3,708 12,392 11,118 4,945 4,935
----------- ---------- ---------- ---------- -------- --------
Total non-accrual loans................ 9,056 9,854 19,477 20,484 11,324 14,591
Other real estate owned (OREO)......... 240 412 1,619 1,803 5,023 14,415
----------- ---------- ---------- ---------- -------- --------
Total non-performing assets............ $ 9,296 $ 10,267 $ 21,096 $ 22,287 $ 16,347 $ 29,006
----------- ---------- ---------- ---------- -------- --------
----------- ---------- ---------- ---------- -------- --------
Non-performing assets to total
assets............................... 0.49% 0.66% 1.43% 1.46% 1.07% 1.99%
Non-accrual loans to total loans....... 0.71 0.81 1.83 2.00 1.16 1.64
Non-performing assets to total loans
and OREO............................. 0.73 0.85 1.98 2.17 1.67 3.21
Total gross loans...................... $ 1,271,331 $1,213,015 $1,065,552 $1,025,564 $974,620 $888,076
----------- ---------- ---------- ---------- -------- --------
----------- ---------- ---------- ---------- -------- --------
Gross income not recognized on
nonaccrual loans..................... $ 106 $ 64 $ 172 $ 487 $ 224 n/a
Accruing loans contractually past due
90 days or more...................... -- -- -- -- -- --
Loans classified as troubled debt
restructurings but not
included above....................... -- -- -- -- -- --
</TABLE>
The Bank records OREO at the lower of carrying value or fair value less
estimated costs to sell. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to earnings with a provision for
losses on foreclosed property in the period in which they are identified. During
the six months ended June 30, 1998, the Bank reduced total non-performing assets
to $9.3 million from $10.3 million at December 31, 1997, a decrease of $1.0
million or 9.7%. During 1997, the Bank reduced total non-performing assets to
$10.3 million as of December 31, 1997 from $21.1 million as of December 31,
1996, a reduction of $10.8 million or 51.3%. The reduction was the result of the
sale of non-performing loans and the reclassification of other loans which
became current and were reclassified to performing status. During the six months
ended June 30, 1998, the Bank reduced OREO from $412,000 to $240,000, or 41.7%,
as a result of the sale of assets. During the year ended December 31, 1997, OREO
decreased from $1.6 million to $412,000, or 74.5% as a result of the disposition
of the assets. At June 30, 1998, OREO consisted of four properties acquired
through foreclosure with a carrying value of $240,000.
The policy of the Bank is to review each loan in the portfolio to identify
problem credits. There are four classifications for problem loans: 'special
mention,' 'substandard,' 'doubtful' and 'loss.' Special mention loans do not yet
warrant adverse classification, but possess credit deficiencies or potential
weaknesses requiring the Bank's attention. Substandard loans have one or more
well-defined weaknesses and are characterized by the distinct possibility that
the Bank will sustain some loss if the deficiencies are not corrected. Doubtful
loans have the weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high
43
<PAGE>
possibility of loss. A loan classified 'loss' is considered uncollectible and
its continuance as an asset is not warranted.
The following table sets forth criticized loans at the dates indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, ---------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Special mention loans.................................... $ 7,718 $ 7,182 $15,902 $ 3,066 $15,226 $11,547
Substandard and doubtful loans........................... 12,999 16,822 19,235 28,462 20,248 25,044
-------- ------- ------- ------- ------- -------
Total criticized loans............................... $20,717 $24,004 $35,137 $31,528 $35,474 $36,591
-------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- -------
Total allowance for loan losses.......................... $13,207 $12,142 $11,682 $13,699 $ 7,550 $ 8,000
-------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- -------
Special mention loans to total loans..................... 0.61 % 0.59% 1.49% 0.30% 1.56% 1.30%
Substandard and doubtful loans to total loans............ 1.02 1.39 1.80 2.78 2.08 2.83
Criticized loans to total loans.......................... 1.63 1.98 3.30 3.07 3.65 4.13
Allowance for loan losses to substandard and
doubtful loans......................................... 101.60 72.18 60.73 48.13 37.29 31.94
Allowance for loan losses to criticized loans............ 63.75 50.58 33.25 43.45 21.28 21.86
</TABLE>
With the exception of the criticized loans described above, management is
not aware of any other loans as of June 30, 1998 where the known credit problems
of the borrower would cause management to doubt such borrower's ability to
comply with their present loan repayment terms or that would result in such
loans being included in the non-performing asset table above at some future
date. During the first six months of 1998, the Bank employed an outside loan
review firm to review the classification of its commercial loan portfolio. There
were no material changes in the classifications as a result of such review.
Management cannot predict the extent to which economic conditions in the
Bank's market area may worsen or the full impact such conditions may have on the
Bank's loan portfolio. Accordingly, there can be no assurance that other loans
will not become 90 days or more past due, be placed on non-accrual status or
become impaired or restructured loans or OREO in the future.
44
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio
at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, 1998 AT DECEMBER 31, 1997 1996
--------------------------------------- --------------------------------------- ------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS
------------------ ------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSUMER:
Residential mortgages (1-4
family)................. 3 $ 523 16 $ 2,671 6 $ 717 16 $ 3,547 9 $ 1,054
Home equity............... -- -- -- -- 2 49 1 15 -- --
Other..................... 11 18 11 20 27 35 22 44 19 29
-- -- -- -- --
--------- --------- --------- --------- ---------
Total consumer........ 14 541 27 2,691 35 801 39 3,606 28 1,083
-- --------- -- --------- -- --------- -- --------- -- ---------
COMMERCIAL:
Secured by real
estate--multi-family.... -- -- -- -- -- -- -- -- -- --
Secured by real estate--
nonresidential.......... -- -- 1 740 -- -- 2 2,418 -- --
Construction.............. -- -- -- -- -- -- -- -- -- --
Commercial business....... -- -- -- -- -- -- -- -- -- --
Total commercial...... -- -- 1 740 -- -- 2 2,418 -- --
-- --------- -- --------- -- --------- -- --------- -- ---------
Total loans............... 14 $ 541 28 $ 3,431 35 $ 801 41 $ 6,024 28 $ 1,083
-- --------- -- --------- -- --------- -- --------- -- ---------
-- --------- -- --------- -- --------- -- --------- -- ---------
<CAPTION>
AT DECEMBER 31, 1995
---------------------------------------
90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
CONSUMER:
Residential mortgages (1-4
family)................. 22 $ 4,179 8 $ 310 32 $ 6,055
Home equity............... -- -- -- -- -- --
Other..................... 12 14 9 34 12 8
-- --------- -- --------- -- ---------
Total consumer........ 34 4,193 17 344 44 6,063
-- --------- -- --------- -- ---------
COMMERCIAL:
Secured by real
estate--multi-family.... 1 940 -- -- 2 1,872
Secured by real estate--
nonresidential.......... 6 6,054 -- -- 6 3,750
Construction.............. -- -- -- -- -- --
Commercial business....... -- -- -- -- -- --
Total commercial...... 7 6,994 -- -- 8 5,622
-- --------- -- --------- -- ---------
Total loans............... 41 $11,187 17 $ 344 52 $11,683
-- --------- -- --------- -- ---------
-- --------- -- --------- -- ---------
</TABLE>
45
<PAGE>
During the six months ended June 30, 1998, delinquent residential mortgages
(1-4 family) decreased to $3.2 million or 0.45% of gross residential mortgages
(1-4 family) from $4.3 million or 0.62% of gross residential mortgages (1-4
family) at December 31, 1997. During the year ended December 31, 1997,
delinquent residential mortgages (1-4 family) decreased from $5.2 million, or
0.97% of gross residential mortgages (1-4 family) at December 31, 1996. This
compares with a decrease from $6.4 million as of December 31, 1995, or 1.26% of
gross residential mortgages (1-4 family). Management attributes the reduction in
delinquent loans to a general improvement in the California economy and to the
greater focus by management on the reduction of delinquent loans.
Delinquent mortgage loans secured by nonresidential real estate decreased
to $740,000 at June 30, 1998 from $2.4 million at December 31, 1997 as a result
of the assumption of one of the delinquent nonresidential loans by a third
party. Delinquent mortgage loans secured by nonresidential real estate decreased
to $2.4 million as of December 31, 1997 from $6.1 million as of December 31,
1996, or by 60.7% as a result of the sale of one delinquent loan during the
period. At June 30, 1998, there were no delinquent mortgage loans secured by
multi-family real estate.
Allowance For Loan Losses. The Bank has established a formalized process
for determining an adequate allowance for loan losses. This process results in
an allowance that consists of two components, allocated and unallocated. The
allocated component includes allowance estimates that result from analyzing
certain individual loans (including impaired loans), and includes the results of
analyzing loans on a pool basis. For loans that are analyzed individually, third
party information such as appraisals may be used to supplement management's
analysis. For loans that are analyzed on a pool basis, such as residential
mortgage loans (1-4 family), management's analysis consists of reviewing
delinquency trends, charge-off experience, economic conditions, current
composition of the loan portfolio, regional collateral value trends, and other
factors. The unallocated component of the allowance for loan losses is intended
to compensate for the subjective nature of estimating an adequate allowance for
loan losses, economic uncertainties, and other factors. In addition to the
assessment performed by management, the Bank's loan portfolio is subject to an
internal asset review function and is examined by its regulators. The results of
these examinations are incorporated into management's assessment of the
allowance for loan losses.
The allowance for loan losses is increased by provisions for loan losses
and reduced by charge-offs, net of recoveries. Loans are charged off to the
extent they are classified as loss either internally or by the Bank's
regulators. For any loan that is past due for more than 90 days, management will
generally charge off the amount by which the recorded loan amount exceeds the
value of the underlying collateral, unless the loan is both well-secured and in
the process of collection. Recoveries of amounts that have previously been
charged off are generally recorded only to the extent that cash is received.
While management uses available evidence in assessing the adequacy of the
allowance for loan losses, future additions to the allowance for loan losses
will be subject to continuing evaluations of the inherent risk in the portfolio.
If the economy declines or asset quality deteriorates, additional provisions for
loan losses could be required. Additionally, the Bank's regulators review the
adequacy of the allowance for loan losses as part of their examination process
and may require the Bank to record additional provisions for loan losses based
on their judgment or information available to them at the time of their
examinations. Management believes that the allowance for loan losses is adequate
to provide for estimated losses inherent in the Bank's loan portfolio.
46
<PAGE>
The following table sets forth information concerning the Bank's allowance
for loan losses for the dates indicated:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------ ---------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance beginning of period............... $12,142 $11,682 $11,682 $13,699 $ 7,550 $ 8,000 $ 6,979
------- ------- ------- ------- ------- ------- -------
Provision for loan losses................. 1,401 132 1,154 1,476 8,777 3,206 8,898
Charge-offs:
Consumer:
Residential mortgage (1-4 family)..... 86 473 616 949 1,000 3,337 6,867
Other................................. 90 98 194 227 29 51 71
------- ------- ------- ------- ------- ------- -------
Total consumer...................... 176 571 810 1,176 1,029 3,388 6,938
------- ------- ------- ------- ------- ------- -------
Commercial:
Secured by real estate--
multi-family........................ -- 13 13 783 737 76 208
Secured by real estate--
nonresidential...................... 170 246 246 2,604 930 508 1,339
Construction.......................... -- -- -- -- -- -- 80
Commercial business................... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total commercial.................... 170 259 259 3,387 1,667 585 1,627
------- ------- ------- ------- ------- ------- -------
Total charge-offs......................... 346 830 1,069 4,563 2,696 3,972 8,565
------- ------- ------- ------- ------- ------- -------
Recoveries:
Consumer:
Residential mortgage (1-4 family)..... -- 37 52 -- 60 190 122
Other................................. 10 15 34 33 7 10 18
------- ------- ------- ------- ------- ------- -------
Total consumer...................... 10 52 86 33 67 200 140
------- ------- ------- ------- ------- ------- -------
Commercial:
Secured by real estate--
multi-family........................ -- 163 10 367 -- -- --
Secured by real estate--
nonresidential...................... -- 279 279 670 -- 115 252
Construction.......................... -- -- -- -- -- -- 233
Commercial business................... -- -- -- -- 1 1 63
------- ------- ------- ------- ------- ------- -------
Total commercial.................... -- 442 289 1,037 1 117 548
------- ------- ------- ------- ------- ------- -------
Total recoveries.......................... 10 494 375 1,070 68 316 688
------- ------- ------- ------- ------- ------- -------
Balance at end of period.................. $13,207 $11,478 $12,142 $11,682 $13,699 $ 7,550 $ 8,000
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Allowance for loan losses to ending
loans................................... 1.04% 1.05% 1.00% 1.10% 1.34% 0.78% 0.90%
Net charge-offs to average loans
outstanding(1).......................... 0.05 0.06 0.06 0.34 0.26 0.37 0.85
</TABLE>
- ------------------
(1) Annualized for the six months ended June 30, 1998 and 1997.
47
<PAGE>
During the six months ended June 30, 1998, the allowance for loan losses
increased to $13.2 million from $12.1 million at December 31, 1997, or by 8.8%,
due to the Bank providing additional loss provisions of $1.4 million and
recording net charge-offs of $336,000. During the year ended December 31, 1997,
the allowance for loan losses increased to $12.1 million from $11.7 million as
of December 31, 1996, or by 3.4%, due to the Bank providing additional loan loss
provisions of $1.2 million and recording net charge-offs of $694,000 during the
year as California real estate values rebounded. During the year ended December
31, 1996, the allowance for loan losses decreased to $11.7 million from $13.7
million as of December 31, 1995, or by 14.6%, as a result of net charge-offs of
$3.5 million during the year which was partially offset by an additional
provision of $1.5 million. The $8.8 million provision for loan losses for the
year ended December 31, 1995, reflected management's decision to increase the
allowance for loan losses to address the continued depressed California economy
and real estate market and to significantly increase the Company's overall level
of loan loss allowance to over 1.00% of gross loans.
48
<PAGE>
The following table provides a summary of the allocation of the allowance
for loan losses for individual loan categories at the dates indicated. The
allocations presented should not be interpreted as an indication that
charge-offs will be incurred in these amounts or proportions, or that the
portion of the allowance allocated to each loan category represents the total
amount available for losses that may occur within that loan category. The entire
amount of the allowance for loan losses is available to absorb loan losses,
irrespective of the loan category to which any potential charge-off might
relate.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------
AT JUNE 30,
1998 1997 1996 1995
----------------- ----------------- ----------------- -----------------
AMOUNT %(1) AMOUNT %(1) AMOUNT %(1) AMOUNT %(1)
------- ------ ------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allocated:
Consumer:
Residential mortgage (1-4 family)........... $ 1,963 56.03% $ 1,982 56.98% $ 1,697 50.79% $ 2,691 49.45%
Home equity................................. 239 1.25 255 1.38 222 1.00 13 0.12
Other....................................... 185 0.18 238 0.23 82 0.25 76 0.29
------- ------ ------- ------ ------- ------ ------- ------
Total consumer............................ 2,387 57.46 2,475 58.58 2,001 52.04 2,780 49.86
------- ------ ------- ------ ------- ------ ------- ------
Commercial:
Secured by real estate--multi-family........ 2,391 26.29 2,130 27.97 2,533 33.93 2,384 36.70
Secured by real estate--nonresidential...... 2,045 11.23 1,919 9.51 2,811 11.54 3,323 12.80
Construction loans.......................... 658 2.82 508 2.19 252 1.87 98 0.64
Commercial business......................... 624 2.20 572 1.74 117 0.62 -- --
------- ------ ------- ------ ------- ------ ------- ------
Total commercial.......................... 5,718 42.54 5,129 41.42 5,713 47.96 5,805 50.14
Other......................................... 79 -- 83 -- 141 -- 275 --
------- ------ ------- ------ ------- ------ ------- ------
Total allocated............................... 8,184 100.00 7,687 100.00 7,855 100.00 8,860 100.00
Unallocated................................... 5,023 -- 4,455 -- 3,827 -- 4,839 --
------- ------ ------- ------ ------- ------ ------- ------
Total allowance for loan losses........... $13,207 100.00% $12,142 100.00% $11,682 100.00% $13,699 100.00%
------- ------ ------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------ ------- ------
<CAPTION>
1994 1993
---------------- ----------------
AMOUNT %(1) AMOUNT %(1)
------ ------ ------ ------
<S> <C> <C> <C> <C>
Allocated:
Consumer:
Residential mortgage (1-4 family)........... $1,512 44.33% $1,907 42.85%
Home equity................................. -- -- -- --
Other....................................... 11 0.15 16 0.22
------ ------ ------ ------
Total consumer............................ 1,523 44.48 1,923 43.07
------ ------ ------ ------
Commercial:
Secured by real estate--multi-family........ 2,307 40.17 2,055 37.09
Secured by real estate--nonresidential...... 2,693 14.57 2,753 17.01
Construction loans.......................... 259 0.78 447 2.83
Commercial business......................... -- -- -- --
------ ------ ------ ------
Total commercial.......................... 5,259 55.52 5,255 56.93
Other......................................... 162 -- 501 --
------ ------ ------ ------
Total allocated............................... 6,944 100.00 7,679 100.00
Unallocated................................... 606 -- 321 --
------ ------ ------ ------
Total allowance for loan losses........... $7,550 100.00% $8,000 100.00%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- ------------------
(1) Represents percentage of gross loans outstanding in specified category to
total gross loans.
49
<PAGE>
Securities. The Bank has historically maintained a securities portfolio
comprised primarily of COFI-based FHLMC and FNMA securities which reprice on a
monthly basis. As a result of the proceeds the Company received and made
available to the Bank from the Private Offerings, the Bank purchased U.S.
Government agency mortgage-backed securities, investment grade securities,
investment grade municipal bonds, and investment grade residential 1-4 family
mortgage-backed securities. The following table sets forth the Bank's securities
portfolio on the date indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
AT JUNE 30, 1998 1997 1996 1995
-------------------- -------------------- -------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities held to
maturity:
FHLB Note........................... $ -- $ -- $ 2,000 $ 1,998 $ 8,670 $ 8,629 $ 12,960 $ 12,873
FHLB Note........................... -- -- 2,000 2,000 2,000 2,000 2,000 2,000
SLMA Step-Up........................ -- -- -- -- -- -- 25,000 25,000
Other............................... -- -- -- -- 5,000 4,988 7,000 6,979
--------- -------- --------- -------- --------- -------- --------- --------
Total............................. $ -- $ -- $ 15,670 $ 15,617 $ 46,960 $ 46,852 $ 4,000 $ 3,998
--------- -------- --------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- -------- --------- --------
Investment securities available for
sale:
SLMA step-up........................ $ -- $ -- $ -- $ -- $ -- $ -- $ 10,000 $ 10,000
Municipals.......................... 23,845 23,944 -- -- -- -- -- --
Trust preferred securities.......... 73,935 74,670 -- -- -- -- -- --
--------- -------- --------- -------- --------- -------- --------- --------
Total............................. $ 97,780 $ 98,614 $ -- $ -- $ -- $ -- $ 10,000 $ 10,000
--------- -------- --------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- -------- --------- --------
Mortgage-backed securities held to
maturity:
FHLMC............................... $ 45,935 $ 44,378 $ 48,536 $ 46,618 $ 61,629 $ 59,014 $ 70,282 $ 68,503
FNMA................................ 113,859 110,318 117,184 112,788 124,710 119,221 135,432 131,462
Other............................... 13,960 13,561 16,075 15,566 22,216 21,248 27,817 26,574
--------- -------- --------- -------- --------- -------- --------- --------
Total............................. $ 173,754 $168,257 $ 181,795 $174,972 $ 208,555 $199,483 $ 233,531 $226,539
--------- -------- --------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- -------- --------- --------
Mortgage-backed securities available
for sale:
FNMA................................ $ 84,602 $ 82,368 $ 87,237 $ 84,308 $ 123,982 $119,514 $ 141,616 $138,514
GNMA................................ 120,202 120,774 -- -- -- -- -- --
Other............................... 99,682 99,800 -- -- -- -- -- --
--------- -------- --------- -------- --------- -------- --------- --------
Total............................. $ 304,486 $302,942 $ 87,237 $ 84,308 $ 123,982 $119,514 $ 141,616 $138,514
--------- -------- --------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- -------- --------- --------
</TABLE>
As of June 30, 1998, the aggregate amortized cost of the securities was
$576.0 million and the market value was $569.8 million. Of the total $6.2
million unrealized loss on these securities, $710,000 relates to securities
which are held as available-for-sale. Such unrealized losses, net of the related
tax benefit of $291,000, is reflected as a reduction of stockholders' equity.
The $5.5 million unrealized loss relating to the $173.8 million of securities
held to maturity has not been recognized in the financial statements.
50
<PAGE>
The following table sets forth the carrying value, weighted average yields
and contractual maturities of the Company's securities as of June 30, 1998.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
------------------------------------------------------------------------------------------------
AFTER ONE YEAR AFTER FIVE YEARS
THROUGH THROUGH
WITHIN ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL
------------------- ------------------- ------------------- ------------------- --------
BOOK WEIGHTED BOOK WEIGHTED BOOK WEIGHTED BOOK WEIGHTED BOOK
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available for sale:
Municipals............... $-- --% $-- --% $ -- --% $ 23,944 5.01% $ 23,944
Trust preferred
securities............. -- -- -- -- -- -- 74,670 7.56 74,670
--- --- -------- -------- --------
Total.................. -- -- -- -- -- -- 98,614 6.94 98,614
--- --- -------- -------- --------
Mortgage-backed securities
available for sale:
FNMA..................... -- -- -- -- -- -- 82,368 5.92 82,368
GNMA..................... -- -- -- -- -- -- 120,774 6.71 120,774
Other.................... -- -- -- -- -- -- 99,800 6.51 99,800
--- --- -------- -------- --------
Total.................. -- -- -- -- -- -- 302,942 6.43 302,942
--- --- -------- -------- --------
Mortgage-backed securities
held to maturity:
FHLMC.................... -- -- -- -- -- -- 45,935 5.86 45,935
FNMA..................... -- -- -- -- 2,343 5.75 111,516 5.69 113,859
Other mortgage-backed
securities............. -- -- -- -- -- -- 13,960 6.43 13,960
--- --- -------- -------- --------
Total.................. -- -- -- -- 2,343 5.75 171,411 5.80 173,754
--- --- -------- -------- --------
Total securities........... $-- -- $-- -- $2,343 5.75 $572,967 6.33 $575,310
--- --- -------- -------- --------
--- --- -------- -------- --------
<CAPTION>
WEIGHTED
AVERAGE
YIELD
--------
<S> <C>
Investment securities
available for sale:
Municipals............... 5.01%
Trust preferred
securities............. 7.56
Total.................. 6.94
Mortgage-backed securities
available for sale:
FNMA..................... 5.92
GNMA..................... 6.71
Other.................... 6.51
Total.................. 6.43
Mortgage-backed securities
held to maturity:
FHLMC.................... 5.86
FNMA..................... 5.69
Other mortgage-backed
securities............. 6.43
Total.................. 5.79
Total securities........... 6.33
</TABLE>
Deposits. Deposits are the Bank's primary source of funding. At June 30,
1998, the Bank had a deposit mix of 75.0% in time deposits, 1.6% in money market
accounts, 14.7% in passbook accounts and 8.7% in NOW and checking accounts. This
compares with a deposit mix of 75.2%, 1.6%, 15.5% and 7.6% at December 31, 1997,
respectively.
The Bank obtains deposits primarily from the communities it serves. No
material portion of its deposits have been obtained from or are dependent on any
one person or industry. At June 30, 1998, less than 2% of the Bank's deposits
were held by customers located outside the United States. In addition, as of
such date, the 100 depositors with the largest aggregate average deposit
balances comprised less than 10% of the Bank's total deposits. The Bank's
business is not seasonal in nature. The Bank accepts deposits in excess of
$100,000 from customers. Included in time deposits as of June 30, 1998, is
$280.1 million, or 19.0% of total deposits, of deposits of $100,000 or greater.
At June 30, 1998, the Bank had no brokered deposits.
51
<PAGE>
The following table sets forth the balances and rates paid for the major
categories of deposits at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------
AT JUNE 30,
1998 1997 1996 1995
---------------------- ---------------------- ---------------------- ----------------------
INTEREST INTEREST INTEREST INTEREST
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- -------- ---------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW and checking
accounts............. $ 128,079 0.70% $ 111,984 0.80% $ 106,491 0.79% $ 99,912 0.80%
Money market
accounts............. 23,856 3.31 20,986 2.48 22,111 2.39 25,425 2.39
Passbook accounts...... 217,138 2.26 212,013 2.11 216,471 2.20 205,017 2.21
Time deposits.......... 1,105,197 5.11 1,124,004 5.20 1,048,052 4.95 981,250 5.50
---------- ---------- ---------- ----------
Total.................. $1,472,270 4.28 $1,468,987 4.38 $1,393,125 4.17 $1,311,604 4.57
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The average cost of deposits during the six months ended June 30, 1998 was
4.40% as compared to 4.26% for the same period in the previous year. The average
cost of deposits was 4.38%, 4.37% and 4.57% during the years ended December 31,
1997, 1996 and 1995, respectively. At June 30, 1998, the Bank's average rate
paid on deposits was 60 basis points lower than the COFI index.
The following table presents, by various categories, the amount of time
deposit accounts as of June 30, 1998 and the time to maturity of the time
deposit accounts outstanding at June 30, 1998.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM JUNE 30,
--------------------------------------------
ONE THROUGH
Certificate accounts WITHIN ONE YEAR THREE YEARS THEREAFTER AT JUNE 30, 1998
--------------- ----------- ---------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
3.99% or less...................................... $ 44,406 $ -- $ -- $ 44,406
4.00% to 4.99%..................................... 259,509 -- -- 259,509
5.00% to 5.99%..................................... 763,915 19,438 810 784,163
6.00% to 6.99%..................................... 16,868 1 100 16,969
7.00% to 7.99%..................................... -- -- -- --
Over 8.00%......................................... 145 -- 5 149
--------------- ----------- ---------- ----------------
$ 1,084,843 $19,439 $916 $1,105,197
--------------- ----------- ---------- ----------------
--------------- ----------- ---------- ----------------
</TABLE>
At June 30, 1998, the Bank had $280.1 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD
- ---------------------------------------------------- AMOUNT
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Three months or less................................ $106,622
Over 3 through 6 months............................. 50,564
Over 6 through 12 months............................ 118,082
Over 12 months...................................... 4,812
-----------
Total.......................................... $280,080
-----------
-----------
</TABLE>
52
<PAGE>
Other Borrowings. The following table sets forth certain information
regarding the short-term borrowings of the Bank at or for the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS AT OR FOR THE YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
------------------ ----------------------------
1998 1997 1997 1996 1995
-------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB of San Francisco advances:
Average balance outstanding.............................. $ 46,927 $18,335 $11,176 $33,973 $ 29,278
Maximum amount outstanding at any month-end period....... 298,000 20,000 24,000 53,935 128,600
Balance outstanding at end of period..................... 298,000 -- -- -- 128,600
Weighted average interest rate during the period......... 5.68% 5.53% 5.55% 6.02% 6.58%
Weighted average interest rate at end of period.......... 5.64 -- -- -- 5.90
Weighted average remaining term to maturity at end of
period (in years)..................................... 7 -- -- -- --
Securities sold under agreements to repurchase:
Average balance outstanding.............................. $ 95 $10,743 $ 5,375 $15,819 $165,040
Maximum amount outstanding at any month-end during the
period................................................ -- 9,750 -- 74,400 246,500
Balance outstanding at end of period..................... -- -- -- -- --
Weighted average interest rate during the period......... 5.79% 5.42% 5.47% 6.31% 6.36%
Weighted average interest rate at end of period.......... -- -- -- -- --
Weighted average remaining term to maturity at end of
period (in years)..................................... -- -- -- -- --
</TABLE>
The Bank maintains a secured credit facility with the FHLB of San Francisco
against which advances may be made. The terms of this credit facility require
the Bank to maintain in safekeeping with the FHLB of San Francisco eligible
collateral of at least 100% of outstanding advances. At June 30, 1998, the Bank
had $298 million of advances outstanding. At December 31, 1997 and 1996, there
were no advances outstanding. At June 30, 1998, credit availability under this
facility was approximately $64 million. Although the Bank eliminated its outside
borrowings in 1996, the Bank has utilized borrowings as a funding source in
conjunction with its strategy of leveraging the proceeds from the Private
Offerings, consistent with its asset and liability objectives and the
maintenance of its status as a 'well capitalized' institution for regulatory
capital purposes. As of June 30, 1998, the Bank had borrowed $298 million from
the FHLB in conjunction with the leverage strategy, of which $202 million were
long-term and $96 million were overnight borrowings. Included in the long-term
advances of $202 million were $17 million which were fixed-rate for ten years
and $185 million which were for ten years but contained provisions that the FHLB
could, at their option, terminate the advances at quarterly intervals at
specified periods ranging from three to five years beyond the advance dates.
Liquidity. Maintenance of adequate liquidity requires that sufficient
resources be available at all times to meet the cash flow requirements of the
Company. Liquidity in a financial institution is required primarily to provide
for deposit withdrawals and the credit needs of its customers and to take
advantage of investment opportunities as they arise. A financial institution may
achieve desired liquidity from both assets and liabilities. Cash and deposits
held in other banks, federal funds sold, other short term investments, maturing
loans and investments, payments of principal and interest on loans and
investments and potential loan sales are sources of asset liquidity. Deposit
growth and access to credit lines established with correspondent banks and
market sources of funds are sources of liquidity.
At June 30, 1998, the Bank had outstanding commitments (including unused
lines of credit) to originate and/or purchase mortgage and non-mortgage loans
and securities of $243.7 million. Certificates of deposit which are scheduled to
mature within one year totaled $1.08 billion at June 30, 1998. The Bank
anticipates that it will have sufficient funds available to meet its current
loan commitments.
53
<PAGE>
The Company reviews its liquidity position on a regular basis based upon
its current position and expected trends of loans and deposits. Management
believes that the Company maintains adequate sources of liquidity to meet its
needs. The Bank's level of liquidity exceeded the applicable regulatory
guidelines as of June 30, 1998 and December 31, 1997 and 1996.
Market Risk and Net Portfolio Value. Market risk is the risk of loss from
adverse changes in market prices and rates. The Company's market risk arises
primarily from interest rate risk inherent in its lending, investment and
deposit taking activities. The Company's profitability is affected by
fluctuations in interest rates. A sudden and substantial change in interest
rates may adversely impact the Company's earnings to the extent that the
interest rates borne by assets and liabilities do not change at the same speed,
to the same extent or on the same basis. To that end, management actively
monitors and manages its interest rate risk exposure.
The principal objective of the Company's interest rate risk management is
to evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Company seeks to minimize the
vulnerability of its operations to changes in interest rates. The Company's
Board of Directors reviews the Company's interest rate risk position quarterly.
The Company's Asset/Liability Committee is comprised of the Company's senior
management under the direction of the Board of Directors, with senior management
responsible for reviewing with the Board of Directors its activities and
strategies, the effect of those strategies on the Company's net interest margin,
the market value of the portfolio and the effect that changes in interest rates
will have on the Company's portfolio and the Company's exposure limits.
The Company utilizes the following strategies to manage interest rate risk:
(i) origination and retention of intermediate fixed-rate and adjustable-rate
mortgage loans; (ii) sale of substantially all fixed-rate mortgage loans with
terms of thirty years without recourse; and (iii) origination of prime-based
commercial loans. The Company currently participates in hedging programs,
interest rate swaps and caps or other activities involving the use of
off-balance-sheet derivative financial instruments, to mitigate interest rate
risk.
The Company's interest sensitivity is monitored by management through the
use of a model which estimates the change in the Company's net portfolio value
('NPV') over a range of interest rate scenarios. NPV is defined as the current
market value of assets, minus the current market value of liabilities, plus or
minus the current value of off-balance-sheet items. Current market values are
estimated through cash flow-based methodologies. The change in NPV measures an
institution's vulnerability to changes in interest rates by estimating the
change in the market value of an institution's assets, liabilities and
off-balance-sheet contracts in response to an instantaneous change in the
general level of interest rates.
As market interest rates decrease, the average maturities of the Bank's
loans (and securities) shorten as a result of accelerated prepayment speeds,
causing a relatively moderate increase in the value of such assets. The
relatively minor movements in the repricing of the Bank's deposit accounts in a
downwardly moving interest rate environment result in the value of deposits
decreasing at a more rapid speed than the assets increase in value.
54
<PAGE>
The following table lists the Bank's percentage change in NPV assuming an
immediate change of plus or minus of up to 400 basis points from the level of
interest rates at June 30, 1998. All assets presented in this table are
held-to-maturity or available-for-sale. At June 30, 1998, the Bank had no
trading securities.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
CHANGE IN INTEREST RATES IN BASIS POINTS --------------------------------
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE
- ------------------------------------------------------------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
400........................................................................... $ 89,231 (84,890 ) -49
300........................................................................... 116,162 (57,959 ) -33
200........................................................................... 138,855 (35,267 ) -20
100........................................................................... 158,037 (16,085 ) -9
0........................................................................... 174,122 -- --
(100).......................................................................... 171,413 (2,709 ) -2
(200).......................................................................... 162,220 (11,902 ) -7
(300).......................................................................... 145,810 (28,312 ) -16
(400).......................................................................... 123,091 (51,031 ) -29
</TABLE>
As market interest rates rise, the average maturities of the Bank's loans
(and securities) lengthen as a result of decreasing prepayment speeds. Given the
COFI concentration within the Bank's loan and securities portfolios and the lag
effect of movements in the COFI index, the value of these assets decreases when
market rates rise. Decreases in the value of the loans and securities occur at a
more rapid rate in the model than increases in the value with respect to the
Bank's deposits. The value of the increase in the Bank's deposits increases
slowly in an increasing interest rate environment due to the high concentration
of time deposits within the Bank's deposit base for which the deposit terms are
generally one year or less.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to market interest rates. In this regard, the NPV model
presented assumes that the composition of the Bank's interest sensitive assets
and liabilities existing at the beginning of a period remains constant over the
period being measured. Accordingly, although the NPV measurement and net
interest income models provide an indication of the Bank's interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.
YEAR 2000 COMPLIANCE
Introduction. Similar to other financial institutions, the operations of
the Bank are particularly sensitive to potential problems arising from the
inability of many existing computer hardware and software systems and associated
applications to process accurately information relating to any two-digit 'date
field' entries referring to the year 2000 and beyond. Many existing systems are
constructed to read such entries as referring to dates beginning with '19,'
rather than '20.' This set of issues is generally referred to as the 'Year 2000'
problem. The FFIEC, through the bank regulatory agencies, has issued compliance
guidelines requiring financial institutions to develop and implement plans for
addressing Year 2000 issues relevant to their operations.
State of Readiness. The Bank has implemented a detailed Year 2000 plan, as
required by the FFIEC guidelines, to evaluate Year 2000 compliance of its
computer systems and the equipment which supports the operations of the Bank.
Also included in this Year 2000 plan is a detailed review of the readiness of
the Bank's service providers, vendors, major fund providers, major borrowers and
companies with which the Bank has material investments. As of September 13,
1998, the Bank has met all current target objectives of the Year 2000 plan, and
management believes that it will continue to meet all future target objectives
in accordance with the terms of the plan.
Like many financial institutions, the Bank relies upon computers for the
daily conduct of its business and for data processing generally. In conjunction
with its conversion to a commercial banking charter, the Bank installed a new
core computer system which was compatible with the Bank's commercial banking
business needs. This commercial banking data processing system is run in a
service bureau environment by one of the leading national
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vendors of data processing services for banks. The vendor of the new core system
is executing its Year 2000 readiness plan in cooperation with the Bank.
Management expects the new core banking system to be Year 2000 compliant.
In addition to its core computer system, the Bank is reliant on financial
accounting and mortgage loan origination systems that are computer-based, and
thus vulnerable to the Year 2000 issues. The Bank is in the process of
installing new financial accounting and mortgage loan origination systems which
are Year 2000 compliant. The Bank's mortgage loan servicing system is run in a
service bureau environment by a large national vendor of data processing
services. The Bank has renewed its contract with the vendor. The renewal
contract obligates the vendor to have its system Year 2000 compliant by the end
of 1998.
As a result of the new core computer system and the new financial
accounting and mortgage loan origination systems, management believes that it
has resolved the Year 2000 issues with respect to the most critical computer
systems and applications. Management is in the testing or remediation phase with
respect to equipment that is Year 2000 sensitive, which includes equipment
containing embedded microprocessors or other technology related to the
recognition of dates. The Bank expects to complete its Year 2000 conversion by
June 30, 1999.
Because of the substantial progress made by the Bank towards its Year 2000
conversion, the Bank does not anticipate that any additional significant changes
will be required or that the Year 2000 issue will pose significant operational
problems for the Bank. However, if the necessary changes are not made or
completed in a timely fashion or unanticipated problems arise, the Year 2000
issue may take longer for the Bank to address and may have a material impact on
the Bank's financial condition and results of operations.
In addition to its extensive interaction with major service providers, the
Bank has had initial communications with other vendors, major fund providers,
major borrowers and companies with which the Bank has material investments, to
evaluate their Year 2000 compliance plans and state of readiness and to
determine the extent to which the Bank's systems may be affected by the failure
of others to remediate their own Year 2000 issues. To date, however, the Bank
has received only preliminary feedback from such parties and has not
independently confirmed any information received from other parties with respect
to Year 2000 issues. As such, there can be no assurance that such other parties
will complete their Year 2000 conversion in a timely fashion or will not suffer
a Year 2000 business disruption that may adversely affect the Bank's financial
condition and results of operations.
Costs to Address the Year 2000 Issue. The Bank implemented its new core
banking system because of the change in its business focus to commercial
banking. The commercial banking products offered by the Bank were not supported
by the software applications offered as part of the Bank's prior data processing
platform. Additionally, the vendor that ran the Bank's prior data processing
platform indicated that it would not support that data processing platform
beyond 1998, and in fact service quality had begun to deteriorate in 1997. The
new financial accounting system is being installed as a result of the vendor for
the former system notifying the Bank of its intention to cease supporting the
software beyond 1998. The new mortgage loan origination system was purchased to
replace the existing system with a lower cost software solution.
The implementation of these new systems is consistent with the closure of
the Bank's mortgage banking division, its emphasis on portfolio lending within
its niche market, and its commercial banking focus. In each case, the system
conversions were being made for business reasons that were unrelated to the Year
2000 issues and did not contribute to the direct cost of Year 2000 compliance.
Nevertheless, these system replacements are all Year 2000 compliant and
therefore automatically address that issue. The additional costs to achieve Year
2000 compliance are currently estimated to be $500,000, and are not expected to
have a material financial impact on the Bank. The Bank intends to fund such
costs from its operations. However, as the Bank progresses with its Year 2000
conversion and implements the necessary changes to its systems, certain
additional costs may be identified. There can be no assurance that such
additional costs will not have a material adverse effect on the Bank's financial
condition and results of operations.
Risks of Year 2000 Issues. To date, the Bank has not identified any system
which presents a material risk of not being Year 2000 ready in a timely fashion
or for which a suitable alternative cannot be implemented. However, as the Bank
progresses with its Year 2000 conversion, the Bank may identify systems which do
present a material risk of Year 2000 disruption. Such disruption may include,
among other things, the inability to process
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and underwrite loan applications, to credit deposits and withdrawals from
customer accounts, to credit loan payments or track delinquencies, to properly
reconcile and record daily activity or to engage in similar normal banking
activities. Additionally, if the Bank's commercial customers are not Year 2000
compliant and suffer adverse effects on their operations, their ability to meet
their obligations to the Bank could be adversely affected. The failure of the
Bank to identify systems which require Year 2000 conversion that are critical to
the Bank's operations or the failure of the Bank or others with which the Bank
does business to become Year 2000 ready in a timely manner could have a material
adverse impact on the Bank's financial condition and results of operations.
Moreover, to the extent that the risks posed by the Year 2000 problem are
pervasive in data processing and transmission and communications services
worldwide, the Bank cannot predict with any certainty that its operations will
remain materially unaffected after January 1, 2000 or on dates preceding this
date at which time post-January 1, 2000 dates become significant within the
Bank's systems.
Contingency Plans. The Bank has two types of contingency plans:
Remediation and Business Interruption. Remediation Plans are designed to
mitigate the risks associated with the failure to successfully complete
renovation, validation and implementation of mission-critical systems. Business
Interruption Plans are plans of action to ensure the ability of the Bank to
continue functioning as a business entity in the event of unanticipated systems
failures at critical dates prior to, on, and after the Year 2000.
Remediation Plan. The Bank's Year 2000 conversion is expected to be
completed prior to any potential disruption to the Bank's business. However, the
Bank is developing Year 2000 remediation contingency plans for mission-critical
systems. These plans would be invoked in the event of anticipated failures of
particular Year 2000 projects or sub-projects. Such plans may involve the
designation of alternate vendors and would essentially constitute replacement of
the current Year 2000 remediation path with an alternate one. Remediation plans
will be built in succeeding stages of detail and this process may, if management
deems appropriate, be halted at any point where the success of the base project
is clearly predictable. If the results of testing of the Bank's systems are not
satisfactory, remediation contingency plans will be invoked for mission-critical
systems no later than the conclusion of testing, which is expected to be April
9, 1999.
Business Interruption Plan. These plans would be invoked if unanticipated
Year 2000 problems occur in production, similar to scenarios in Disaster
Recovery Plans. 'Swat Teams' will be established for mobilization in case of
emergencies that threaten the viability of the Bank, and require that certain
resources be available immediately for utilization. The Bank has begun
preparation of these plans, will continue to 'fine-tune' them, train staff to
carry them out, and test them.
The discussion above contains certain forward-looking statements. The costs
of the Year 2000 conversion, the date which the Bank has set to complete such
conversion and the possible risks associated with the Year 2000 issue are based
on the Bank's current estimates and are subject to various uncertainties that
could cause the actual results to differ materially from the Bank's
expectations. Such uncertainties include, among others, the success of the Bank
in identifying systems that are not Year 2000 compliant, the nature and amount
of programming required to upgrade or replace each of the affected systems, the
availability of qualified personnel, consultants and other resources, and the
success of the Year 2000 conversion efforts of others.
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BUSINESS
MARKET AREA
The Bank concentrates on marketing its services in the San Francisco Bay
area (which includes Oakland), and the Sacramento/Stockton and Los Angeles
metropolitan areas with a particular focus on areas with a high concentration of
ethnic Chinese. The ethnic Chinese markets within the Bank's primary market area
have experienced rapid growth in recent periods. According to 1990 Census data,
management believes there were an estimated 2.7 million Asian and Pacific
Islanders residing in California, and approximately 70% of this population were
in the middle and upper income brackets. Based on 1995 and 1996 demographic
data, management believes there were 200,000 Asian and Pacific Islanders living
in San Francisco County, which represented approximately 30% of the total
population. In addition, the Bank recently opened a commercial banking office in
Pasadena, California to take advantage of the opportunities in the Los Angeles
metropolitan area, particularly in the ethnic Chinese market. Management has
tailored its products and services to meet the financial needs of these growing
Asian and ethnic Chinese communities within its market area. Management believes
that this approach, combined with the extensive ties of its management and Board
of Directors to the growing Asian and ethnic Chinese communities, provides the
Bank an advantage in competing for customers in its market area. The Bank is the
largest financial institution focused on serving the ethnic Chinese market
within California.
HISTORICAL OPERATIONS
The Bank historically engaged in the origination of residential mortgages
(1-4 family) which were pooled and sold in the secondary market, with loan
servicing rights retained, and the servicing of loans for the Federal Home Loan
Mortgage Corporation ('FHLMC'), the Federal National Mortgage Association
('FNMA'), the Government National Mortgage Association ('GNMA') and private
investors. From time to time, the Bank sold its loan servicing rights and also
purchased agency servicing rights as part of its mortgage banking division
operations. The Bank also originated residential mortgages (1-4 family),
multi-family mortgages and commercial real estate mortgages for portfolio
retention. In addition, since 1993, the Bank has specialized in limited
documentation residential mortgage (1-4 family) lending. Furthermore, because
the Bank does not retain a large volume of fixed-rate mortgages in its permanent
portfolio for interest rate risk considerations, and since the production of
ARMs has been insufficient to provide adequate balance sheet growth, the Bank
has historically relied heavily on loan and securities purchases to complement
its asset base. In 1993, mortgage-backed securities represented approximately
one-third of the Bank's assets.
Historically, the Bank maintained a heavy concentration of ARM assets whose
interest rates were based on COFI. Since adjustments in COFI generally lag
behind market interest rate changes, COFI-based assets can reduce net interest
margins during periods of rapidly increasing deposit and borrowing interest
rates. The Bank experienced such effect in 1994-1995 when its net interest
margin decreased as the COFI adjusted upward more slowly than the cost of the
Bank's deposits and borrowings. During the period from 1990 to 1994, the value
of California real estate collateral declined and the Bank experienced
significant loan losses on a portion of its real estate loans. In 1995, the
Bank's allowance for loan losses was increased from 0.78% of total loans to over
1.00% of total loans. This action was due to a combination of a depressed
California economy and real estate market and to significantly increase the
Company's overall level of allowance for loan losses to over 1.00% of gross
loans. The resulting $8.8 million charge to income, coupled with the diminished
interest income resulting from the 1995 COFI-lag effect resulted in a net loss
of $2.9 million in 1995. During 1996, the Company's net interest income improved
by 35.3% to $39.0 million primarily as a result of the Bank's COFI-based assets
becoming fully indexed and the correction of the COFI-lag impact.
BALANCE SHEET RESTRUCTURING
In recent years, the mortgage banking industry has been highly competitive
and, combined with the availability of more efficient delivery systems through
brokers and the Internet, the industry has experienced shrinking profit margins
and reduced loan servicing values. Higher levels of prepayment activity
resulting from a lower interest rate environment and the willingness of lenders
to offer mortgage loans with no points and, in
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many cases, no fees, have reduced servicing values. To respond to these market
factors and to improve the long-term prospects of the Bank, the Bank took the
following measures:
COFI Asset Reduction. In the fourth quarter of 1996, to improve its net
interest margin, the Bank ceased all COFI-based mortgage lending and began to
reduce the Bank's COFI-based mortgage-backed securities portfolio. From December
31, 1996 to June 30, 1998, COFI-based loans have been reduced from 60.2% of the
Bank's total gross loan portfolio to 39.8%. From December 31, 1996 to June 30,
1998, total COFI exposure has been reduced from 64.9% of the Bank's
interest-earning assets to 40.2%.
Closure of Mortgage Banking Division. In 1997, the Bank closed its
mortgage banking division and ceased the origination of non-conventional
mortgages for sale in the secondary market and sold its agency loan servicing
portfolio. While the Bank no longer engages in this activity, the Bank continues
to originate conventional residential mortgage loans for portfolio retention and
conforming mortgages for resale in the secondary market through its retail
branch network. See 'Business--Lending Activities--Residential Mortgages (1-4
family).'
Reduced Non-Performing and Non-Interest Earning Assets. The Bank reduced
its non-performing assets from $22.3 million as of December 31, 1995 to $9.3
million as of June 30, 1998.
Reduced Mismatched Borrowings. The Bank reduced its predominantly high
cost LIBOR-based borrowings (which were mismatched with COFI-based assets) from
$265.3 million at the beginning of 1995 to zero at December 31, 1996 and 1997.
At June 30, 1998, the Bank had $298 million of borrowings which were entered
into in conjunction with the leveraging strategy to fund the purchase of
fixed-rate assets with scheduled maturities ranging from fifteen to thirty
years. Of the $298 million in borrowings, $202 million had scheduled maturities
of ten years, of which $185 million contained provisions that the FHLB could, at
their option, terminate the advances at quarterly intervals at specified periods
ranging from three to five years beyond the advance dates, and $17 million of
fixed-rate advances. The remaining $96 million of advances were short-term. Also
included in the leveraging strategy was the purchase of $200 million of
LIBOR-based interest rate caps to protect the Bank from a reduction in net
interest income in the event of an increase in market interest rates.
IMPLEMENTATION OF STRATEGY
In conjunction with the implementation of the balance sheet restructuring
described above which returned the Bank to profitability in 1996, excluding the
one-time SAIF recapitalization assessment, to further improve the Bank's
long-term prospects and to take advantage of the Bank's significant deposit
market share and the potential cross-selling opportunities to the ethnic Chinese
and Asian communities within its market area, the Board of Directors adopted a
business strategy to shift the primary business focus of the Bank from a
traditional thrift to a full service commercial bank. To implement its business
strategy, the Bank took the actions and adopted the initiatives described below.
Management. The Bank realigned management responsibilities and hired
commercial banking officers and SBA business banking officers with lending
experience in the Bank's market area. The management changes included the
following:
o President. In January 1998, Thomas S. Wu became the Bank's President
and Chief Executive Officer and was charged with the responsibility
of implementing the shift of the Bank's focus to commercial banking
services and products. Prior to that appointment Mr. Wu was the
Executive Vice President and Director of the Bank as of September
25, 1997. Mr. Wu was Senior Vice President and Director of Retail
Banking from 1992 to 1996 and also served the Bank as Vice
President, Regional Manager, of its Southern California Retail
Banking Division from 1991 to 1992.
o Head of Commercial Banking Division. In January 1996, Sylvia Loh was
appointed Head of the Bank's commercial banking division which was
formally established in 1996. Ms. Loh has over twenty years of
commercial banking and trade finance experience with major financial
institutions, including administrative and managerial experience in
overseeing over 26 branches. She also has experience working with
the United States EXIM Bank and has had extensive exposure in the
ethnic Chinese markets as well as the Pacific Rim region. She also
is a past President of the Association of Asian American Bankers
from 1996 to 1997.
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o Chief Credit Officer. In January 1997, William T. Goldrick was
appointed Senior Vice President and Chief Credit Officer to provide
technical expertise to formulate the Bank's commercial lending
policies and procedures. He has over 41 years of commercial bank
credit experience and is responsible for the Bank's regulatory
compliance.
Established Commercial Banking Division. In 1996, to take advantage of the
opportunities in the Bank's targeted markets, the Bank established its
commercial banking division to offer an array of commercial bank services and
products to its customers particularly focused on the ethnic Chinese
communities. Since its establishment, the commercial banking division has
originated approximately $110.1 million in commercial loan commitments and had
$98.7 million in outstanding loans as of June 30, 1998. As of June 30, 1998, the
division had a current committed pipeline of approximately $129 million. To
support its commercial banking activities, the Bank acquired a commercial
banking data processing system to replace a system designed for thrift
institutions. The new system provides customer profitability reports, account
analysis and other commercial banking management tracking and reporting
mechanisms. The installation of this new system was completed in February 1998.
The Bank installed software to enhance commercial real estate loan marketing and
development. The PC based system provides key information on substantially all
commercial real estate transactions in the Bank's market area in California. The
software provides information instrumental to identifying lending and
refinancing opportunities, screening potential credit opportunities and
evaluating collateral values to facilitate efficient solicitation of borrowers
and related depository relationships from commercial and multi-family property
owners. The Bank opened a commercial, construction and SBA lending office in
Pasadena, California during the second quarter of 1998. In addition to other
personnel, the Bank has hired a team of three experienced SBA business banking
officers to staff the Pasadena office. These officers were previously affiliated
with one of the leading lenders focusing on SBA lending to Asians.
Core Deposit Solicitation. To further develop the Bank's core deposit
base, the Bank is evaluating the establishment of mini-branches in or adjacent
to Asian supermarkets in selected target market areas. By continuing to
emphasize multilingual services at its ATMs, through its telephone banking
system and by its customer service and loan officers, the Bank expects to
continue to further its presence in the Asian, and specifically the ethnic
Chinese, markets in California. At June 30, 1998, less than 2% of the Bank's
deposits were held by customers located outside of the United States. In
addition, as of such date, the 100 depositors with the largest aggregate average
deposit balances comprised less than 10% of the Bank's total deposits. The Bank
also expects to increase its business accounts as its commercial lending
portfolio grows and correspondent accounts are established.
Capital Enhancement. At December 31, 1997 the Company's stockholders'
equity was $62.6 million or 4.0% of total assets. In April 1998, the Company
completed the Private Offerings. Following the Private Offering, the Company's
stockholders' equity increased to $98.1 million at June 30, 1998 and the
Company's consolidated Tier I capital increased from $63.9 million at December
31, 1997 to $128.2 million at June 30, 1998. See 'Supervision and
Regulation--Bank Holding Company and Bank Regulation--The Bank--Capital
Requirements.'
Leverage Strategy. As a result of the proceeds raised by the Private
Offerings, the Bank designed and implemented a plan to leverage such proceeds
through the purchase of U.S. Government agency mortgage-backed securities,
investment grade securities, investment grade municipal bonds and investment
grade residential mortgage (1-4 family) securities. The plan specifies that such
purchases will be funded primarily through intermediate and long-term secured
borrowings, advances from the FHLB and from cash made available from the
proceeds. The plan, which is consistent with the Bank's asset and liability
management policy, further specifies that certain interest rate caps are to be
purchased to reduce the Bank's exposure to increasing market interest rates.
Total assets to be purchased pursuant to the plan are approximately $337
million. As of June 30, 1998 the Bank had purchased $325 million of such assets
which were funded with $96 million of short-term borrowings, $202 million of
long-term borrowings and the balance was funded with cash. As of June 30, 1998,
the Bank had purchased $200 million of LIBOR-based interest rate caps to hedge
the assets. The average spread on such assets is in the range of 110 to 120
basis points, including the amortization of the interest rate caps.
Charter Conversion. In the first quarter of 1998, the Bank changed its
name to United Commercial Bank to reflect the Bank's new emphasis on providing
commercial banking services to its customers. The Bank
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converted to a California-chartered commercial bank and the Company became a
bank holding company on July 31, 1998. Following the conversions, the Bank's
primary regulator is the California Department of Financial Institutions and the
Company's primary regulator is the Federal Reserve Bank of San Francisco.
As a result of the measures taken to effect the Bank's shift in its primary
business focus from mortgage banking to commercial banking, and the
implementation of its strategic initiatives, management believes that the Bank
is and will continue to be well positioned to take advantage of the
opportunities in its market area and particularly in the growing ethnic Chinese
market in California.
CURRENT BANKING SERVICES
Through its network of retail branches, the Bank provides a wide range of
personal and commercial banking services to small-and medium-sized businesses,
business executives, professionals and other individuals. The Bank offers
multilingual services to all of its customers in English, Cantonese and
Mandarin. The Bank offers a variety of deposit products which includes the
traditional range of personal and business checking and savings accounts, time
deposits and individual retirement accounts, as well as a wide range of
specialized services, including international trade services for business
clients, travelers' checks, safe deposit boxes and Master Card and Visa merchant
deposit services.
The Bank engages in a full complement of lending activities, including
residential and commercial real estate, construction, commercial, trade finance,
account receivables, inventory, working capital and SBA loans. In addition to
the origination of residential mortgages, the Bank provides loans to small- and
medium-sized developers for the construction of resale housing and interim real
estate loans primarily for construction of single-family residences. The Bank
provides commercial loans for working capital and expansion and account
receivables and inventory financing to small and medium size businesses with
annual revenues that generally range from $500,000 to $20.0 million. The Bank
provides short-term trade finance facilities for terms of less than one year to
U.S. importers, exporters and manufacturers. The Bank also generates loans which
are guaranteed by the SBA, which loans are generally working capital loans
secured by inventories and receivables, and commercial real estate loans secured
by real property. The Bank's commercial borrowers are engaged in a wide variety
of manufacturing, wholesale trade and service businesses.
LENDING ACTIVITIES
Underwriting and Credit Administration. The Bank's lending activities are
guided by the basic lending policies established by the Board of Directors. The
Bank's lending policy requires that loans must meet minimum underwriting
criteria. Lending authority is granted to officers of the Bank on a limited
basis. Loan requests exceeding individual officer approval limits are approved
by the President. All commercial loans are generally ratified by the Credit
Review Committee. Loans in excess of $2.0 million are generally ratified by the
Board of Directors.
The Bank's credit administration function includes an internal asset credit
quality review. In addition, all commercial loans over $100,000 are reviewed by
an outside credit review agency comprised of former bank regulators with an
emphasis in credit review. The President, Chief Credit Officer and Chief
Financial Officer meet biweekly to review delinquencies, non-performing assets,
classified assets and other pertinent information to evaluate credit risk within
the Bank's loan portfolio. The information reviewed by this group is submitted
to the Board of Directors bimonthly.
Loan Portfolio. At June 30, 1998, approximately $712.4 million, or 56.0% of
the Bank's gross loan portfolio was in residential mortgages (1-4 family),
$334.2 million or 26.3% of gross loans was in multi-family mortgages, $142.7
million or 11.2% of gross loans was in commercial real estate loans, $35.8
million or 2.8% of gross loans was in construction loans, $15.9 million or 1.2%
of gross loans was in home equity loans and $28.0 million or 2.2% of gross loans
was in commercial business loans.
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Residential Mortgages (1-4 family). The Bank offers fixed-rate and
adjustable rate mortgage loans which include intermediate fixed-rate loans
secured by residential mortgages. Substantially all such loans are secured by
properties located in the Bank's primary market area. Residential mortgage loan
originations are obtained through the Bank's two delivery networks: the retail
branches and the wholesale lending department. In 1997 and the first half of
1998, approximately 41% of all residential mortgage loans were originated by the
Bank's retail branches. The retail branches originate loans by salaried
personnel through customer contact, referral and solicitation. The wholesale
lending department originates loans with commissioned loan officers through loan
brokers. The Bank originates both fully documented loans for which income and
assets are verified with third parties, as well as loans for which the
borrower's stated income and assets are relied upon without independent
verification. The Bank specializes in a limited documentation mortgage loan
product which serves a particular niche of borrowers willing to pay a premium,
in the form of higher interest rates, and provide larger down payments in
exchange for more expedient loan processing by virtue of providing less
documentation.
The Company underwrites one- to four-family residential mortgage loans to
the specific criteria of the program under which the loan is originated. The
residential originations are primarily for portfolio retention and are
underwritten to the Bank's program guidelines. Such guidelines differ from FNMA
and/or FHLMC guidelines with respect to factors such as, but not limited to,
loan amounts and specific loan documentation. Accordingly, such loans are not
saleable to these agencies. The Company has sold portfolio loans in the
secondary market from time to time to assess the saleability of its portfolio
loans. Based upon such sales, management believes that its one- to four-family
residential portfolio loans could be readily sold in the secondary market if
management elected to do so. The Company continues to underwrite loans to FNMA
and FHLMC guidelines which are sold from time to time in the secondary market
for inclusion in FNMA and/or FHLMC pools.
The Bank's underwriting guidelines for loan origination require: (i) for
fully documented loans, up to 80% loan to value ('LTV') for loan amounts up to
$700,000 and up to 70% LTV for loan amounts up to $800,000; (ii) for limited
documentation loans with no income verification, up to 80% LTV for loan amounts
up to $600,000 and up to 65% LTV for loan amounts up to $800,000; (iii) for low
documentation loans with no income or asset verification, up to 80% LTV for loan
amounts up to $450,000 and up to 60% LTV for loan amounts up to $800,000. A
borrower's employment and financial information are verified through third
parties and examination of paycheck stubs, bank statements and tax returns. The
Bank obtains appraisals from licensed appraisers approved by the credit review
committee.
At June 30, 1998, the Bank had approximately 4,290 loans secured by
residential mortgages (1-4 family), which totaled $712.3 million in the
aggregate; as of such date, the Bank's average loan balance with respect to
residential mortgages (1-4 family) amounted to approximately $166,100. Of the
Bank's residential mortgages (1-4 family) at June 30, 1998: $221.4 million, or
31.1% consisted of fixed-rate loans; $214.1 million, or 30.1% consisted of ARMs
with an adjustment date in one year or less; and $276.9 million, or 38.8%
consisted of intermediate fixed-rate loans. The Bank's fixed-rate mortgage loans
are made for terms of 15 years or 30 years. The 30 year, fixed-rate loans are
generally sold in the secondary market on a servicing released basis. Fixed-rate
mortgage loans are originated with due on sale clauses which provide the Bank
with the contractual right to deem the loan immediately due and payable in the
event the borrower transfers ownership of the property without the Bank's
consent. The Bank currently originates 30 year, fixed-rate loans for portfolio
retention only on a customer accommodation basis. The Bank currently offers a
variety of ARM loan programs with interest rates fixed for six months and which
adjust semi-annually thereafter. Intermediate fixed-rate loans have interest
rates fixed for three or five years and adjust annually thereafter. The Bank's
ARM loans generally provide for periodic (not more than 2%) and lifetime (not
more than 6%) caps on the increase or decrease in interest rates over the life
of the loan. The interest rate adjustment on ARM loans currently made by the
Bank is indexed to the one-year U.S. Treasury CMT Index.
Beginning in 1993, the Bank has specialized in the origination of limited
documentation residential mortgages (1-4 family). As of June 30, 1998, $502.8
million, or 70.6% of the Bank's residential mortgages (1-4 family) were
comprised of limited documentation loans. Because of the less than full
documentation required for such loans, the Bank has emphasized relatively small
average loan size and low average loan-to-value ratios for these loans, as
evidenced by an average loan balance of $165,600 and average loan-to-value
ratios of 59% as of
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June 30, 1998. Approximately 34% of such loans in the first half of 1998 were
originated through the Bank's retail branches.
Since it began originating limited documentation loans in 1993 the Bank has
experienced no net charge-offs with respect to such loans. At June 30, 1998, the
Bank had two loans more than three payments delinquent with an aggregate
principal balance of $199,000. Moreover, during the third quarter of 1997, the
Bank sold $17.2 million of the limited documentation loans to test the market
reception for this product. The Bank received a price in excess of par value on
the sale of such loans. Notwithstanding the historical performance of this type
of loan, there can be no assurance that such performance will continue.
The Bank previously offered a variety of adjustable-rate programs, which
provided for interest rates which adjusted periodically based on COFI. In the
fourth quarter of 1996, the Bank ceased all COFI-based mortgage lending.
Nevertheless, at June 30, 1998, $146.0 million or 20.5% of the Bank's
residential mortgage (1-4 family) loan portfolio consisted of COFI-based loans.
Commercial Lending-Generally. The Bank has recently established a
commercial banking division and has hired experienced commercial lending
officers. The Bank also has installed software to identify, market and develop
potential commercial real estate lending opportunities in its market area. The
Bank also offers an array of commercial loan products catering primarily to the
needs of its Chinese ethnic community. Set forth below is a description of the
types of commercial loans offered by the Bank.
Multi-family Mortgages. The Bank originates multi-family mortgages which
are generally secured by five to 36 unit residential buildings. Loans secured by
residential buildings in excess of 36 units are underwritten pursuant to the
Bank's underwriting standards with respect to commercial real estate loans.
Substantially all of the Bank's multi-family loan originations are secured by
properties located in the Bank's primary market area. The Bank underwrites
multi-family mortgages by obtaining full credit information on the borrower and
through independent verification of the borrower's income and assets. The
borrower's ability to effectively manage the multi-family property and ability
to assume the financial responsibility of the debt service obligation in the
event of unforeseen expenses or increased vacancy are also taken into
consideration in the underwriting process. In making its assessment of the
creditworthiness of the borrower, the Bank generally reviews the financial
statements, employment and credit history of the borrower, as well as other
related documentation. The Bank's current program criteria for multi-family
originations generally provide for debt service coverages of 1.15x or greater
and LTV's of 75% or less. The Bank currently offers fixed-rate and ARM
multi-family mortgages. The Bank's ARM multi-family loans are fixed for six
months and thereafter adjust semi-annually based upon the LIBOR index.
Multi-family loans are generally amortized over 30 years with balloon payments
in 10 or 15 years.
As of June 30, 1998, the Bank had approximately 819 multi-family mortgages
with an aggregate outstanding principal balance of $334.2 million. As of such
date, the Bank's average loan balance with respect to multi-family mortgages
amounted to approximately $408,100. As of June 30, 1998, $287.9 million, or
86.1% of these loans consisted of adjustable-rate loans with COFI-based interest
rates. In order to avoid an over concentration in multi-family mortgages, the
Bank limits its total multi-family mortgage exposure to not more than 35% of
total loans. As of June 30, 1998, the Bank had a 26.3% concentration in
multi-family mortgages. As a result of the Bank's limitations, market
competition and alternative investment opportunities, the Bank has not
originated a significant volume of multi-family mortgages during the three years
ended December 31, 1998. During the first six months of 1998, the Bank began to
refocus on the origination of multifamily mortgage loans and originated $15.6
million during this period.
Commercial Real Estate Construction. The Bank originates construction loans
for the development of single-family residences, multi-family and commercial
properties. Such loans are made primarily to experienced builders and developers
known to the Bank in its primary market area. As of June 30, 1998, the Bank had
approximately 86 outstanding construction loans with an aggregate outstanding
principal balance of $35.8 million. As of such date, the Bank's average loan
balance with respect to construction loans amounted to $416,400.
Construction loans are originated in amounts up to 80% of the lesser of the
appraised value of the property, as improved, or the sales price. Proceeds for
construction loans are disbursed on a percentage of completion basis or as
construction thresholds are met. Generally, if the borrower is a corporation or
partnership, guarantees by the
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principals are required. Construction loans are adjustable and tied to the prime
rate. Generally, the term of construction loans is for one year, with a one year
renewal option, if necessary.
Construction financing generally involves a higher degree of credit risk
than long-term financing on improved, owner-occupied real estate. The risk of
loss on a construction loan is dependent largely upon the property's value at
completion of the construction compared to the estimated cost, including
interest, of construction. If the estimate of value proves to be inaccurate, the
Bank may be confronted with a completed project, having a value which is
insufficient to assure full repayment.
Commercial Real Estate Non-Residential Mortgages. The Bank originates
medium-term commercial real estate loans secured by commercial or industrial
buildings where the properties are either used by the owner for business
purposes ('owner-user properties') or have income derived from tenants
('investment properties'). The Bank solicits potential borrowers through: (i)
its new database software system, which provides key information on
substantially all commercial real estate loans in its primary market in
California, (ii) referrals from its branches, (iii) direct solicitation of
borrowers and real estate brokers by the commercial banking lending officers,
and (iv) referrals from existing borrowing customers. Upon identification of a
prospective borrower, the Bank then makes a preliminary estimate of the value of
the property based upon the location, age, type of property and market rent. For
owner-user properties, the Bank may use market rent information from such
borrowers for its cash flow analysis. A proposal letter summarizing the
tentative terms of the prospective loan is then submitted to the borrower for
acceptance, at which time the non-refundable fee is paid to the Bank. This pre-
screening process helps the Bank control appraisal costs by reducing the number
of appraisals ordered for loans that ultimately are not approved. Upon
acceptance of the proposal, the Bank then performs property appraisal and
environmental surveys. The Bank's underwriting practices generally require the
principal balance of the loan to be no more than 65% of the stabilized appraised
value of the underlying real estate collateral. Commercial real estate loans are
typically secured by first deeds of trust, generally have terms of no more than
seven to ten years and are amortized up to 25 years. Although substantially all
of the commercial real estate loans currently being originated have interest
rates that adjust with changes in the prime rate or have fixed-rate terms of up
to five years, the Bank previously offered commercial real estate loans with
interest rates which adjusted periodically based on COFI.
At June 30, 1998, the Bank had approximately 147 commercial real estate
loans with an aggregate principal balance of $142.7 million. As of such date,
the average balance with respect to the Bank's commercial real estate loans
amounted to $971,000. As of June 30, 1998, of the Bank's $142.7 million of
commercial real estate loans, $72.1 million, or 50.5% consisted of COFI-based
loans. The Bank's underwriting practice also generally requires that the
properties securing commercial real estate loans have debt service coverage
ratios (the ratio of earnings before debt service to debt service) of at least
1.35x. The Bank's loan documentation usually provides the Bank with the right to
call the loan in the event that the debt service coverage ratio falls below
1.35x. The Bank generally requires that all commercial real estate loans made to
corporations, partnerships and other business entities be personally guaranteed
by the principals. The Bank utilizes tax returns to review and verify the income
stream of the borrower. Loan documentation is reviewed by the Bank's in-house
legal department. Such documentation typically requires annual financial
statements and rent rolls of a borrower to determine covenant compliance.
During the six months ended June 30, 1998, the Bank originated $35.3
million of commercial real estate loans. During the years ended December 31,
1997, 1996 and 1995, the Bank originated $23.7 million, $2.7 million and
$864,000 of commercial real estate loans, respectively. Management believes it
will originate $125.0 million of commercial real estate loans during 1998.
Through June 30, 1998, the Bank had in its pipeline $98.4 million of commercial
real estate loans. Notwithstanding the foregoing, no assurance can be made that
the Bank will achieve its year-end projections or that all of the commercial
real estate loans in the Bank's pipeline as of June 30, 1998, will close.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgages (1-4 family).
Because payments on loans secured by commercial real estate properties are
generally dependent on successful operation or management of the properties,
repayment of such loans is subject to a greater extent than the repayment of
residential mortgages on the then prevailing conditions in the real estate
market or the economy. The Bank seeks to minimize these risks through its
underwriting standards and
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in the first half of 1998, the Bank employed an outside loan review firm to
assist management with respect to internal asset review of the Bank's commercial
loans, including its commercial real estate loans.
Commercial Business Loans. The Bank provides commercial business loans to
customers for working capital purposes and to finance equipment, account
receivables and inventory. Working capital loans are generally subject to annual
review, and equipment loans have terms up to five years. Interest rates on these
loans are generally based on the prime rate. Working capital loan advances are
generally made against security interests in inventory and account receivables,
and equipment loans are secured by the underlying equipment. When appropriate,
the Bank may require additional collateral on such loans and may further secure
the indebtedness with a lien on real estate. In many cases, personal guarantees
are obtained as additional security.
During the six months ended June 30, 1998, the Bank originated $25.8
million of commercial loans. During the years ended December 31, 1997, 1996 and
1995, the Bank originated $31.9 million, $9.9 million and $0 of commercial
business loans, respectively. Management believes it will originate $55.0
million of commercial business loans during 1998 (not including SBA loans).
Through June 30, 1998, the Bank had in its pipeline $21.1 million of commercial
business loans (not including SBA loans). Notwithstanding the foregoing, no
assurance can be made that the Bank will achieve its year-end projections or
that all of the commercial business loans in the Bank's pipeline as of June 30,
1998, will close.
Unlike consumer residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment or
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business itself. Further, any collateral securing such loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the
success of the business. The Bank currently utilizes the unaffiliated firm
referenced above to assist management with respect to internal asset review of
the Bank's commercial business loans.
The Bank provides commercial lines of credit to small- and medium-sized
companies to finance their accounts receivable and inventory on a short term
basis (less than one year) and/or to finance their equipment and working capital
on a long term basis (over one year).
Short term financing is structured to enable the borrower to complete its
trade cycle from purchase of inventory to collection of receivable. As such, the
credit line may also include an option for the issuance of letters of credit to
overseas suppliers/sellers in order for the borrower to obtain inventory.
Pursuant to such letters of credit, the Bank extends credit to the borrower by
providing assurance, to the borrower's foreign suppliers, that payments will be
made upon shipment of goods. Upon shipment of goods and when the letters of
credit are negotiated by the foreign suppliers, the borrower's inventory is
financed by the Bank under the pre-approved line of credit facility.
The underwriting criteria of such short term trade financings often depends
on the quality of the borrowers' inventory and their accounts receivable. As a
general rule, inventory should not be held for more than 60 days, and accounts
receivables should not extend beyond 90 days. Total credit exposure (outstanding
loans plus letters of credit) under the line of credit are monitored monthly by
using a borrowing base formula of up to 80% against eligible receivables aged up
to 90 days, and up to 50% against eligible inventory with or without limits.
Aside from the established base formula, the borrower's overall financial
condition is considered, such as consistency in revenue streams, gross margins,
expense ratios, and net income. Another important underwriting criteria is the
adequacy of the borrower's capital in relation to the financial growth it seeks
to achieve. A company with a leverage ratio below 2.5:1 is acceptable to the
Bank.
Fixed assets, such as machinery and equipment, provide long term financial
benefits to the borrowers. Accordingly, loans for these types of financings are
structured for a term longer than one year. Repayment of the loans are
structured to match the income generated over the life expectancy of the assets.
As such, the underwriting criteria is dependent upon the amount of cash flow
(income plus depreciation) the borrower has available to service debt based on a
full amortization schedule, usually between five to seven years. The maximum
amount financed on capital assets is approximately 70% of its value. Similar to
trade finance credits,
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financial evaluation of revenue, profitability, expense ratios and capital
adequacy are made in considering this type of credit for approval.
The Bank originates and funds loans qualifying for guarantees issued by the
SBA. The SBA currently guarantees from 75% to 80% of the principal and accrued
interest of such loans. Loans are provided to eligible applicants or small
businesses to finance working capital, the purchase of equipment or real estate.
Depending upon the use of loan proceeds, the loan term may range from seven to
twenty-five years. The Bank typically requires that SBA loans be secured by
inventories and receivables or if commercial real estate is being financed,
secured by real property. Primary underwriting criteria are historical cash flow
to demonstrate repayment capability, experienced business management and
adequate collateral to secure the requested credit. Typically, the SBA prefers
that the applicant inject at least 30%- 33% cash (equity) into the transaction.
The Bank's benefits in originating loans under this program include limited
credit exposure for the Bank as a result of the SBA guaranty, increased Bank
revenues by selling the guaranteed portion of the loan through the secondary
market at a premium, and gaining 'Preferred Lender Program' status with the SBA
by producing volume and quality credits while serving the financial needs of
small business communities.
During the six months ended June 30, 1998, the Bank originated $2.5 million
of SBA loans. Management believes it will originate approximately $20.0 million
of SBA loans during 1998. Through June 30, 1998, the Bank had in its pipeline
$9.4 million of SBA loans. Notwithstanding the foregoing, no assurance can be
made that the Bank will achieve its year-end projections or that all of the SBA
loans in the Bank's pipeline as of June 30, 1998 will close.
Consumer Loans. The Bank's consumer loan portfolio is substantially
comprised of home equity lines of credit which are secured by residential real
estate. These lines of credit generally consist of floating rate loans, tied to
the prime rate.
DEPOSITS
The Bank's deposits are obtained primarily from ethnic Chinese households,
small- and medium-sized businesses owned by ethnic Chinese, and ethnic Chinese
business executives, professionals and other individuals. The Bank offers the
traditional range of depository products provided by commercial banks. Rates
paid on deposits vary depending on the deposit size, the term of deposit, and
the type of deposit. The Bank sets its deposit rates based on deposit needs and
market competition. As of June 30, 1998, less than 2% of the Bank's deposits
were held by customers located outside the United States. In addition, as of
such date, the 100 depositors with the largest aggregate average deposit
balances comprised less than 10% of the Bank's total deposits. As of June 30,
1998, the Bank's weighted average cost of deposits was 4.28%, which was 60 basis
points less than the COFI. The Bank does not solicit brokered deposits.
COMPETITION
The banking and financial services business in California generally, and in
the Bank's market area specifically, is highly competitive. The increasingly
competitive environment results from changes in regulation, changes in
technology and product delivery systems, and the consolidation among financial
services providers. The Bank competes for loans, deposits and customers for
financial services with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, insurance companies,
finance companies, money market funds, credit unions, and other nonbank
financial service providers. Many of these competitors are much larger in total
assets and capitalization, have greater access to capital markets and offer a
broader array of financial services than the Bank. To compete with the other
financial services providers, the Bank relies on local promotional activities,
personal relationships established by officers, directors and employees with its
customers, and specialized services tailored to meet its customers' needs.
The Bank competes for deposits from the ethnic Chinese markets with other
banks serving the Asian community in California. The Bank believes that it has
two major competitors that are targeting the ethnic Chinese market. Such
institutions have branch locations in many of the same neighborhoods as the
Bank, provide similar loan, savings and financial services, and market their
services in similar Asian publications and media in California.
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EMPLOYEES
At June 30, 1998, the Bank had 338 full-time equivalent employees. None of
the employees are covered by a collective bargaining agreement. The Bank
considers its employee relations to be satisfactory.
PROPERTIES
The Bank owns the facility that is located at 711 Van Ness Avenue, San
Francisco, California which serves as the Company's and the Bank's headquarters.
The Bank leases all of its remaining branch facilities under noncancelable
operating leases, many of which contain renewal options and some of which have
escalation clauses. The Bank's branch offices are set forth below:
<TABLE>
<CAPTION>
TOTAL DEPOSITS
AT JUNE 30, 1998
OFFICE LOCATION LEASE EXPIRATION DATE ----------------------
- -------------------------------------------------------------- ------------------------ (DOLLARS IN THOUSANDS)
<S> <C> <C>
Alhambra:
1211 East Valley Blvd.
Alhambra, CA 91801............................................ October 2001 $ 44,097
Artesia:
11809 Artesia Blvd.
Artesia, CA 90701............................................. May 2003 51,414
Balboa:
3555 Balboa Street
San Francisco, CA 94121....................................... March 1999 37,234
Citrus Heights:
7803 Madison Ave #650
Citrus Heights, CA 95610...................................... February 1999 (1)
Clement:
498 Clement Street
San Francisco, CA 94118....................................... March 2004 123,666
Cupertino:
20510 Stevens Creek Blvd.
Cupertino, CA 95014........................................... March 2001 30,137
Daly City:
246 Skyline Plaza
Daly City, CA 94015........................................... November 2002 2,760
Freeport:
4790 Freeport Blvd.
Sacramento, CA 95822.......................................... April 2009 56,883
Fremont:
34420 Fremont Blvd., Suite F
Fremont, CA 94555............................................. January 1999 32,179
Fresno:
1320 East Shaw Avenue, Suite 160
Fresno, CA 93710.............................................. December 1998 (2)
Geary:
6001 Geary Blvd.
San Francisco, CA 94121....................................... September 1999 21,743
(table continued on next page)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
OFFICE LOCATION LEASE EXPIRATION DATE TOTAL DEPOSITS
- -------------------------------------------------------------- ------------------------ AT JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
Irvine:
15333 Culver Dr., #670
Irvine, CA 92604.............................................. May 2001 $ 18,437
<S> <C> <C>
Irving:
2219 Irving Street
San Francisco, CA 94122....................................... October 1999 23,621
Kearny:
900 Kearny Street
San Francisco, CA 94133....................................... November 2011 46,298
Los Angeles Chinatown:
951 No. Broadway
Los Angeles, CA 90012......................................... February 2001 46,734
Montebello:
863 N. Wilcox Avenue
Montebello, CA 90640.......................................... April 2002 (3)
Monterey Park:
419 No. Atlantic Blvd., #101
Monterey Park, CA 91754....................................... November 2003 90,469
Noriega:
1301 Noriega Street
San Francisco, CA 94122....................................... August 2005 78,954
Oakland:
367 Eighth Street
Oakland, CA 94607............................................. February 1999 143,945
Oakland-Webster:
800 Webster Street
Oakland, CA 94607............................................. September 2007 62,539
Pasadena:
199 South Los Robles, Suite 780
Pasadena, CA 91101............................................ June 2003 (4)
Paso Robles:
825 Riverside Ave., Suite #2
Paso Robles, CA 93446......................................... January 2001 (5)
Rowland Heights:
1015 S. Nogales St., #102
Rowland Heights, CA 91748..................................... June 1999 44,212
San Francisco Chinatown:
1066 Grant Avenue
San Francisco, CA 94133....................................... September 2003 199,900
San Francisco Van Ness:
711 Van Ness Avenue
San Francisco, CA 94102....................................... Company-owned 61,880
(table continued on next page)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
OFFICE LOCATION LEASE EXPIRATION DATE TOTAL DEPOSITS
- -------------------------------------------------------------- ------------------------ AT JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
San Francisco Stockton:
1318 Stockton Street
San Francisco, CA 94133....................................... July 2003 $ 62,330
<S> <C> <C>
San Jose:
1663 Lundy Avenue, Suite D
San Jose, CA 95131............................................ January 2001 35,333
San Mateo:
27 East Fourth Avenue
San Mateo, CA 94401........................................... November 2000 16,378
Stockton:
146 E. Market Street
Stockton, CA 95202............................................ December 1998 26,127
Temple City:
5607 N. Rosemead Blvd.
Temple City, CA 91780......................................... September 2001 117,000
</TABLE>
- ------------------
(1) Facility is a spot construction lending center that does not take deposits.
(2) Facility is a construction lending center that does not take deposits.
(3) Facility is a homeowners center that does not take deposits.
(4) Facility is a commercial loan center that does not take deposits.
(5) Facility is a SBA Loan office that does not take deposits.
The Bank believes its present facilities are adequate for its present
needs. However, the Bank may acquire additional properties if needed due to
business expansion. The Bank believes that, if necessary, it could secure
suitable alternative facilities without adversely affecting operations.
LEGAL PROCEEDINGS
The Bank is subject to pending or threatened actions and proceedings
arising in the normal course of business. In the opinion of management, the
ultimate disposition of all pending or threatened actions and proceedings will
not have a material adverse effect on the Bank's operations or financial
condition.
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SUPERVISION AND REGULATION
INTRODUCTION
Bank holding companies and commercial banks engaged in the commercial
banking business are extensively regulated under both federal and state law. Set
forth below is a summary description of certain laws which relate to the
regulation of the Company and the Bank. The description below does not purport
to be complete and is qualified in its entirety by reference to applicable laws
and regulations.
RECENT LEGISLATIVE DEVELOPMENTS
The Financial Services Act of 1998, introduced in March 1998, would allow
securities firms, insurance companies and commercial banks to merge under a
holding company structure. Among other things, the bill would expand the Federal
Reserve's regulatory authority over these financial institutions. The Company is
unable to predict whether this bill or any other such legislation will be
enacted, what the provisions of such final legislation may be, or the extent to
which the legislation would restrict, disrupt or otherwise have a material
effect on its operations.
BANK HOLDING COMPANY AND BANK REGULATION
The Company. As a registered bank holding company, the Company is subject
to regulation under the Bank Holding Company Act of 1956, as amended (the
'BHCA') and the regulations promulgated by the Federal Reserve Board pursuant
thereto. Holdings is required to file with the Federal Reserve Board quarterly
and annual reports and such additional information as the Federal Reserve Board
may require pursuant to the BHCA. The Federal Reserve Board may conduct
examinations of the Company and its non-bank subsidiaries. The Company is a bank
holding company within the meaning of Section 3700 of the California Financial
Code. As such, the Company and its subsidiaries are subject to examination by,
and may be required to file reports with, the DFI.
The Federal Reserve Board could require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of a banking subsidiary such as the Bank. The
Federal Reserve Board also has the authority to regulate provisions of certain
bank holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company
would be required to file written notice and obtain approval from the Federal
Reserve Board prior to purchasing or redeeming its equity securities. Further,
the Company is required by the Federal Reserve Board to maintain certain levels
of capital.
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5% of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank (other than
the Bank) or bank holding company. Prior approval of the Federal Reserve Board
would also be required for the merger or consolidation of the Company and
another bank holding company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company, subject to the prior
approval of the Federal Reserve Board, can engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making any such determination, the Federal Reserve
Board would be required to consider whether the performance of such activities
by the Company or an affiliate could reasonably be expected to produce benefits
to the public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board is also empowered to differentiate
between activities commenced de novo and activities commenced by acquisition, in
whole or in part, of a going concern. In 1996, the Budget Act of 1996 (the
'Budget Act') eliminated the requirement that bank holding companies seek
Federal Reserve Board approval
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before engaging de novo in permissible nonbanking activities listed in Federal
Reserve Board Regulation Y, which governs bank holding companies, if the holding
company and its lead depository institution are well managed and well
capitalized and certain other criteria specified in the statute are met. For
purposes of determining the capital levels at which a bank holding company shall
be considered well capitalized under this section of the Budget Act and
Regulation Y, the Federal Reserve Board adopted, as a rule, risk-based capital
ratios (on a consolidated basis) that are the same as the level set for
determining that a state member bank is well capitalized under the provisions
established under the prompt corrective action provisions of federal law. See
'--Prompt Corrective Action.'
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
bank(s) and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board policy that in serving as a source of
strength to its subsidiary bank(s), a bank holding company should stand ready to
use available resources to provide adequate capital funds to its subsidiary
bank(s) during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary bank(s). A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary
bank(s) will generally be considered by the Federal Reserve Board to be an
unsafe and unsound banking practice or a violation of the Federal Reserve
Board's regulations or both.
Transactions with Affiliates. The Company is a bank holding company and as
such is subject to the Federal Reserve Board regulations, examination,
supervision and reporting requirements. As an insured institution and a
subsidiary of a bank holding company, the Bank is subject to restrictions in its
dealings with companies that are 'affiliates' of the Company under the Federal
Reserve Act.
The Bank's transactions with its affiliates are subject to the limitations
set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act and
Regulation O adopted by the Federal Reserve Board. Affiliates are defined as any
company that controls or is under common control with an institution. Under
Section 23A, the Company is an 'affiliate' of the Bank. Sections 23A and 23B
require that covered transactions and certain other transactions with affiliates
be on terms and conditions consistent with safe and sound banking practices or
on terms comparable to similar transactions with non-affiliated parties, and
impose quantitative restrictions on the amount of and collateralization
requirements on covered transactions. 'Covered transactions' generally include
loans or extensions of credit to an affiliate, purchases of securities issued by
an affiliate, purchases of assets from an affiliate (except as may be exempted
by order or regulation), and certain other transactions. In addition, a bank is
prohibited from extending credit to an affiliate (other than a subsidiary of the
institution), unless the affiliate is engaged only in activities that the
Federal Reserve Board has determined, by regulation, to be permissible for bank
holding companies. Sections 22(g) and 22(h) of the Federal Reserve Act impose
limitations on loans and extensions of credit from an institution to its
executive officers, directors and principal stockholders and each of their
related interests.
The Bank. The Bank is a California state-chartered commercial bank, and is
subject to primary supervision, periodic examination and regulation by the
Commissioner of the California DFI (the 'Commissioner') and the FDIC. If, as a
result of an examination of a Bank, either of these Bank regulatory agencies
should determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity or other aspects of the Bank's
operations are unsatisfactory or that the Bank or its management is violating or
has violated any law or regulation, various remedies are available to the bank
regulatory agency. Such remedies include the power to enjoin 'unsafe or unsound'
practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict the growth of
the bank, to assess civil monetary penalties, to remove officers and directors
and ultimately to terminate a bank's deposit insurance, which would result in a
revocation of the Bank's charter. The Bank was not the subject of any such
actions by the OTS in the past.
Safety and Soundness Standards. The FDIC and the Federal Reserve Board
have adopted final guidelines establishing standards for safety and soundness,
as required by Federal Deposit Insurance Corporation Improvement Act of 1991
('FDICIA'). These standards are designed to identify potential safety and
soundness concerns and ensure that action is taken to address those concerns
before they pose a risk to the deposit insurance
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<PAGE>
funds. The standards relate to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
asset growth; (v) earnings; and (vi) compensation, fee and benefits. If the FDIC
or the Federal Reserve Board determine that an institution fails to meet any of
these standards, the agency may require the institution to submit to the agency
an acceptable plan to achieve compliance with the standard. In the event the
institution fails to submit an acceptable plan within the time allowed by the
agency or fails in any material respect to implement an accepted plan, the
agency must, by order, require the institution to correct the deficiency. The
FDIC or the Federal Reserve Board agencies have promulgated safety and soundness
regulations and accompanying interagency compliance guidelines on asset quality
and earnings standards. These new guidelines provide six standards for
establishing and maintaining a system to identify problem assets and prevent
those assets from deteriorating. The institution should: (i) conduct periodic
asset quality reviews to identify problem assets; (ii) estimate the inherent
losses in those assets and establish reserves that are sufficient to absorb
estimated losses; (iii) compare problem asset totals to capital; (iv) take
appropriate corrective action to resolve problem assets; (v) consider the size
and potential risks of material asset concentrations; and (vi) provide periodic
asset reports with adequate information for management and the board of
directors to assess the level of asset risk. These new guidelines also set forth
standards for evaluating and monitoring earnings and for ensuring that earnings
are sufficient for the maintenance of adequate capital and reserves. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an accepted
plan may result in enforcement action.
Capital Requirements. The FDIC has adopted risk-based capital guidelines
to which the Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. The Bank is required
to maintain certain levels of regulatory capital in relation to regulatory
risk-weighted assets. The ratio of such regulatory capital to regulatory
risk-weighted assets is referred to as the Bank's 'risk-based capital ratio.'
Risk-based capital ratios are determined by allocating assets and specified
off-balance sheet items to four risk-weighted categories ranging from 0% to
100%, with higher levels of capital being required for the categories perceived
as representing greater risk.
These guidelines divide a bank's capital into two tiers. The first tier
('Tier I') includes common equity, retained earnings, certain non-cumulative
perpetual preferred stock (excluding auction rate issues) and minority interests
in equity accounts of consolidated subsidiaries, less goodwill and other
intangible assets (except mortgage servicing rights and purchased credit card
relationships subject to certain limitations). Supplementary ('Tier II') capital
includes, among other iterms, cumulative perpetual and long-term limited-life
preferred stock, mandatory convertible securities, certain hybrid capital
instruments, term subordinated debt and the allowance for loan and lease losses,
subject to certain limitations, less required deductions. Banks are required to
maintain a total risk-based capital ratio of 8%, of which at least 4% must be
Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC may, however, set higher leverage and risk-based capital requirements on
individual institutions when particular circumstances warrant. Banks
experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum levels. At
June 30, 1998, the Bank's tangible and core capital ratios were 6.56% and the
risk-based capital ratio was 13.61%.
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate risk
in assessing a bank's capital adequacy. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies also
have issued a joint policy statement providing guidance on interest rate risk
management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
The agencies have determined not to proceed with a
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previously issued proposal to develop a supervisory framework for measuring
interest rate risk and an explicit capital component for interest rate risk.
Insurance of Accounts. The FDIC has adopted a risk-based insurance
assessment system. The FDIC assigns an institution to one of three capital
categories based on the institution's financial information, as of the reporting
period ending seven months before the assessment period. The capital categories
are (1) well capitalized, (2) adequately capitalized or (3) undercapitalized. An
institution is also placed in one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned with the most well
capitalized, healthy institutions receiving the lowest rates.
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the Bank Insurance Fund ('BIF') are statutorily required to achieve and maintain
a ratio of insurance reserves to total insured deposits equal to 1.25%. Until
recently, members of the SAIF and BIF were paying average deposit insurance
assessments of between 24 and 25 basis points. The BIF met the required reserve
level in 1995, whereas the SAIF was not expected to meet or exceed the required
level until 2002 at the earliest. This situation was primarily due to the
statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ('FICO') to recapitalize the predecessor
to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule ranging from 0-27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank, could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law
the Funds Act which, among other things, imposed a special one-time assessment
on SAIF member institutions, including the Bank, to recapitalize the SAIF. As
required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis
points on SAIF assessable deposits held as of March 31, 1995, payable November
27, 1996 (the 'SAIF Special Assessment'). The SAIF Special Assessment was
recognized by the Bank as an expense in the quarter ended September 30, 1996,
and is generally tax deductible. The SAIF Special Assessment recorded by the
Bank amounted to $7.7 million on a pre-tax basis and $4.5 million on an
after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000, or the date the BIF and
SAIF are merged.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0-27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. The FDIC also lowered the SAIF assessment schedule for the
fourth quarter of 1996 to 18-27 basis points. Management cannot predict the
level of FDIC insurance assessments on an on-going basis.
The Bank's assessment rate, effective as of January 1, 1997, was reduced to
0.164% based upon its current risk classification, and the regular premium paid
for 1997 was $1.8 million. As discussed in further detail under 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Noninterest Expenses,' the Bank's deposit
insurance premium has been reduced to 6.4 basis points, effective as of January
1, 1998.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
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Under the Federal Deposit Insurance Act ('FDIA'), insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the OTS. The management of the Bank does not
know of any practice, condition or violation that might lead to termination of
deposit insurance.
Prompt Corrective Action. The federal banking regulators have established
capital levels for institutions to implement the 'prompt corrective action'
provisions of the FDICIA which require certain supervisory actions against
undercapitalized institutions. Based on these capital levels, insured
institutions will be categorized as well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized or critically undercapitalized.
The FDICIA requires federal banking regulators to take prompt corrective action
to solve the problems of those institutions that fail to satisfy their
applicable minimum capital requirements. The level of regulatory scrutiny and
restrictions imposed become increasingly severe as an institution's capital
level falls.
A 'well capitalized' institution must have risk-based capital of 10% or
more, leverage capital ratio of 5% or more and Tier 1 risk-based capital (based
on the ratio of core capital to risk-weighted assets) of 6% or more and may not
be subject to any written agreement, order, capital directive, or prompt
corrective action directive. As of December 31, 1997 and thereafter, the Bank
was a well capitalized institution under the definitions. An institution will be
categorized as 'adequately capitalized' if it has total risk-based capital of 8%
or more, Tier 1 risk-based capital of 4% or more, and generally a leverage
capital ratio of 4% or more and does not meet the definition of 'well
capitalized;' 'undercapitalized' if it has total risk-based capital of less than
8%, or Tier 1 risk-based capital of less than 4%, or generally a leverage ratio
of less than 4%; 'significantly undercapitalized' if it has total risk-based
capital of less than 6%, or Tier 1 risk-based capital of less than 3%, or
leverage capital of less than 3%; and 'critically undercapitalized' if it has a
ratio of tangible equity to total assets that is equal to less than 2%.
In the case of an institution that is categorized as 'undercapitalized,'
such an institution must submit a capital restoration plan to the FDIC. An
undercapitalized depository institution generally will not be able to acquire
other banks or thrifts, establish additional branches, pay dividends, or engage
in any new lines of business unless consistent with its capital plan. A
'significantly undercapitalized' institution will be subject to additional
restrictions on its affiliate transactions, the interest rates paid by the
institution on its deposits, the institution's asset growth, compensation of
senior executive officers, and activities deemed to pose excessive risk to the
institution. Regulators may also order a significantly undercapitalized
institution to hold elections for new directors, terminate any director or
senior executive officer employed for more than 180 days prior to the time the
institution became significantly undercapitalized, or hire qualified senior
executive officers approved by the regulators. The FDICIA provides that an
institution that is 'critically undercapitalized' must be placed in
conservatorship or receivership within 90 days of becoming categorized as such
unless the institution's regulator and the FDIC jointly determine that some
other course of action would result in a lower resolution cost to the
institution's insurance fund.
Potential Enforcement Actions. Commercial banking organizations, such as
the Company and the Bank, and their institution-affiliated parties, may be
subject to potential enforcement actions by the Federal Reserve Board, the FDIC
and/or the Commissioner for violations of any law, rule, regulation or any
condition imposed in writing by the agency or any written agreement with the
agency for unsafe or unsound practices in conducting their businesses.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of the Bank), the imposition
of civil money penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of removal and
prohibition orders against institution affiliated parties, and the imposition of
restrictions and sanctions under the prompt corrective action provisions of the
FDICIA. Additionally, a holding company's inability to serve as a source of
strength to its subsidiary banking organizations could serve as an additional
basis for a regulatory action against the holding company. Neither the Company
nor the Bank has been subject to any such enforcement actions.
Federal Home Loan Bank System. The Bank is a member of the FHLB system,
which consists of 12 regional Federal Home Loan Banks governed and regulated by
the Federal Housing Finance Board. The Federal Home Loan Banks provide a central
credit facility for member institutions. The Bank, as a member of the FHLB
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of San Francisco, is required to acquire and hold shares of capital stock in the
FHLB of San Francisco in an amount at least equal to the greater of 1% of the
aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations as of the close of each calendar
year, or 5% of its borrowings from the FHLB of San Francisco (including advances
and letters of credit issued by the FHLB on the Bank's behalf). The Bank is
currently in compliance with this requirement, with a $14.9 million investment
in stock of the FHLB of San Francisco as of June 30, 1998.
The FHLB of San Francisco makes advances to members in accordance with
policies and procedures periodically established by the Federal Housing Finance
Board and the Board of Directors of the FHLB of San Francisco. Currently
outstanding advances from the FHLB of San Francisco are required to be secured
by a member's shares of stock in the FHLB of San Francisco and by certain types
of mortgages and other assets. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ('FIRREA') further limited the eligible collateral in
certain respects. Interest rates charged for advances vary depending on
maturity, the cost of funds to the FHLB of San Francisco and the purpose of the
borrowing. As of June 30, 1998, there were $298.0 million in outstanding
advances from the FHLB of San Francisco to the Bank.
Federal Reserve System. The Federal Reserve Board regulations require
depository institutions to maintain non-interest-earning reserves against their
transaction accounts. The Federal Reserve Board regulations generally required
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $47.8 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts greater
than $47.8 million, the reserve requirement is $1.4 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $47.8 million. The first $4.7 million
of otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve 'discount window,' but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
Community Reinvestment Act. Under the Community Reinvestment Act (the
'CRA'), as implemented by FDIC regulations, an institution has a continuing and
affirmative obligation consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the federal bank regulators, in connection with its examination of a
financial institution, to assess the institution's record of meeting the credit
needs of its community and to take such records into account in its evaluation
of certain applications. As a state chartered bank, the Bank is subject to the
fair lending requirements and reporting obligations involving home mortgage
lending operations of the CRA. The FIRREA amended the CRA to require public
disclosure of an institution's CRA rating and to require that the federal
regulators provide a written evaluation of an institution's CRA performance
utilizing a four-tiered descriptive rating system in lieu of the existing
five-tiered numerical rating system. Based upon OTS examinations in 1996 and
1998, the Bank's CRA ratings were 'outstanding.'
Loans-to-One-Borrower Limitations. The FIRREA provided that
loans-to-one-borrower limits applicable to national banks apply to other
depository institutions. Generally, under current limits, loans and extensions
of credit outstanding at one time to a single borrower shall not exceed 15% of
the bank's unimpaired capital and unimpaired surplus. Loans and extensions of
credit fully secured by certain readily marketable collateral may represent an
additional 10% of unimpaired capital and unimpaired surplus. As of June 30,
1998, the Bank was in compliance with the loans-to-one-borrower limitations.
Interstate Banking and Branching. Under the Interstate Branching Act, a
bank holding company that is adequately capitalized and managed may obtain
approval under the BHCA (via merger) to acquire (via merger) an existing bank
located in another state without regard to state law. A bank holding company is
not permitted to make such an acquisition if, upon consummation, it would
control (a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in
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which the bank is located. A state may limit the percentage of total deposits
that may be held in that state by any one bank or bank holding company if
application of such limitation does not discriminate against out-of-state banks
or bank holding companies. An out-of-state bank holding company may not acquire
a state bank in existence for less than a minimum length of time that may be
prescribed by state law, except that a state may not impose more than a
five-year age requirement.
The Interstate Branching Act also permits mergers of insured banks located
in different states and conversion of the branches of the acquired bank into
branches of the resulting bank. Each state may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Branching Act also permits a national or state
bank to establish branches in a state other than its home state if permitted by
the laws of that state, subject to the same requirements and conditions as for a
merger transaction.
Under the Interstate Branching Act, the extent of a commercial bank's
ability to branch into a new state will depend on the law of the state.
California has adopted an early 'opt in' statute under the Interstate Branching
Act that permits out-of-state banks to acquire California banks that satisfy a
five-year minimum age requirement (subject to exceptions for supervisory
transactions) by means of merger or purchases of assets; although entry through
acquisition of individual branches of California institutions and de novo
branching into California are not permitted. The Interstate Branching Act and
the California branching statute allows out-of-state banks to enter and compete
in the markets in which the Bank operates.
MANAGEMENT OF THE COMPANY AND THE BANK
In accordance with the respective bylaws of the Company and the Bank, the
Boards of Directors of the Company and the Bank consists of seven members. The
directors of the Company have been elected to the following classes: one class
of directors, consisting of Messrs. Fell and McMeekin, has a term expiring at
the annual meeting of stockholders in 1999; the second class, consisting of
Messrs. Downing and Lam, has a term of office expiring at the annual meeting of
stockholders in 2000; and the third class, consisting of Messrs. Wong and Wu,
has a term of office expiring at the annual meeting of stockholders in 2001. The
remaining vacancy is expected to be filled by the Board of Directors of the
Company and the Bank in the near future. There are no arrangements or
understandings between the Company and the Bank and any person pursuant to which
such person has been proposed to be a director, and no director nominee is
related to any other director nominee or executive officer of the Company or the
Bank by blood, marriage or adoption.
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DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and the Bank are set
forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Directors:
Sau-wing Lam.................................... 46 Chairman of the Boards of Directors
Thomas S. Wu.................................... 40 President, Chief Executive Officer and Director
Jonathan H. Downing............................. 46 Senior Vice President, Chief Financial Officer,
Treasurer and Director
Robert Fell..................................... 76 Director
Ronald McMeekin................................. 65 Director
Godwin Wong..................................... 48 Director
Executive Officers Who Are Not Directors:
Louis E. Barbarelli............................. 56 Senior Vice President and Director of Operations
and Systems
William T. Goldrick............................. 66 Senior Vice President and Chief Credit Officer
Cecilia Lai..................................... 49 Senior Vice President, Director of Retail
Banking
Dennis Alan Lee................................. 56 Vice President and Corporate Counsel
Sylvia Loh...................................... 43 Senior Vice President and Director of Commercial
Banking
Deanne Miller................................... 50 Senior Vice President and Director of Human
Resources
</TABLE>
Mr. Lam was appointed President, Chief Executive Officer and Vice Chairman
of the Board of Directors of the Bank in December 1996. On December 31, 1997, he
retired as President and Chief Executive Officer of the Bank but remained as
Vice Chairman of the Board of Directors. Previously, Mr. Lam served as President
and Chief Executive Officer of Pacific Link Communications Limited located in
Hong Kong, a subsidiary of the First Pacific Group. Mr. Lam was appointed
President, Chief Executive Officer and Director of the Bank in March 1991 and
left in 1995 to head up Pacific Link Communications Limited. Mr. Lam's banking
experience began when he joined the International Division of Crocker National
Bank in San Francisco in July 1977. He was transferred to Crocker's Hong Kong
Regional Officer in 1979 where he directed the administration, correspondent
banking and marketing functions. He returned to Crocker's headquarters in 1983
where he directed Correspondent Banking for the Asia Pacific Region. In February
1984, he joined The Hibernia Bank in San Francisco, then a First Pacific Group
('Group') subsidiary, as the head of Trust Banking. When the Group acquired the
Bank in 1986, Mr. Lam was appointed its Chief Administrative Officer and Senior
Vice President, Retail Banking. In 1989, he was transferred to the Group's
headquarters in Hong Kong to become the Group Treasurer. Mr. Lam devotes a
significant amount of his personal time on voluntary services in the ethnic
Chinese communities. Mr. Lam graduated with a B.S. degree in Business
Administration from California State University at Fresno in 1975, and a MBA
degree in International Finance from the University of California at Berkeley in
1977.
Mr. Wu was appointed President and Chief Executive Officer of the Bank
effective January 1, 1998. Prior to that appointment, Mr. Wu was the Executive
Vice President and Director of the Bank as of September 25, 1997. Previously,
Mr. Wu was the Director of Customer Care for Pacific Link Communications Limited
in Hong Kong where he managed over 600 employees and was responsible for
formulating and implementing customer care, customer retention, and customer
communications strategies. Mr. Wu served as a director of the Bank from
1995-1996 and was a Senior Vice President, Head of Retail Banking of the Bank
from 1992-1996 when he directed the marketing, public relations, loan
originations, branch administration and operations control functions. Mr. Wu
also served the Bank as Vice President, Regional Manager, of its Southern
California Retail Banking Division from 1991-1992. Prior to joining the Bank in
1991, Mr. Wu was at First Pacific Bank, Hong
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Kong where he served as Vice President and Team Leader of its Business Banking
Group; Vice President, Deputy Head, Retail Banking Group; and Assistant Vice
President, Retail Banking Group from 1986-1991. Prior to joining First Pacific
Bank, Mr. Wu's experience included the following: Assistant Treasurer and Branch
Manager, Chase Manhattan Bank, N.A., Hong Kong; Assistant Manager, Banque
Nationale De Paris, Hong Kong; Assistant Officer, Standard Chartered Bank, Hong
Kong (1977-1986). Mr. Wu has also served on the Board of Directors of the
Self-Help For the Elderly (also a member of the finance committee) and the
PineView Housing Corporation (also chairperson of the finance committee). Mr. Wu
is a graduate of Cognitio College, Hong Kong and has taken numerous banking and
management courses at the University of California, Berkeley and the Chartered
Institute of Bankers.
Mr. Barbarelli has been Senior Vice President and Director of Operations
and Systems of the Bank since August 1993, and served as a member of the Board
of Directors from 1994 to 1998. Prior to 1993, he served for two years as a
Senior Vice President and Chief Auditor of the Bank. Before joining the Bank,
Mr. Barbarelli was the General Auditor at Jackson County Federal Bank in
Medford, Oregon. Mr. Barbarelli has also served at the senior management level
at Hibernia Bancshares (San Francisco, California), Central Bank (Concord,
California), Bank of California, Fireman's Fund Insurance and U.S. Leasing. Mr.
Barbarelli has a B.S. in Information Systems Management from the University of
San Francisco.
Mr. Downing has been Senior Vice President and Chief Financial Officer of
the Bank since 1989. Mr. Downing has served as a director of the Bank since
January 1991. Mr. Downing joined the First Pacific Group in July 1983 as one of
four professionals contracted to create a de novo mortgage banking operation
(FPM Inc.) in California. Mr. Downing served as Chief Financial Officer of FPM
Inc. until it was merged into United Savings Bank in 1986. At that time he
assumed the responsibilities of Director of Secondary Marketing for the Bank and
was appointed its Chief Financial Officer in 1989. Prior to joining the First
Pacific Group, Mr. Downing was with Arthur Andersen & Co. Mr. Downing received a
B.S. in Business Administration from California State University, San Diego. Mr.
Downing is a CPA and a member of the American Institute of Certified Public
Accountants and the California Society of Certified Public Accountants.
Mr. Goldrick has been Senior Vice President and Chief Credit Officer of the
Bank since January 1997. Prior to joining the Bank, Mr. Goldrick was the Senior
Vice President, Senior Credit Officer for America California Bank from 1995 to
1997; Chief Lending Officer for National American Bank from 1992 to 1995; First
Vice President-Manager Loan Administration for MBANK from 1987 to 1991; Vice
President-Credit Policy, Vice President-Senior Credit Officer for Asia and Vice
President-Division Administrator for Crocker National Bank. Mr. Goldrick has
also held various international banking positions with Crocker National Bank
from 1969 to 1986. Mr. Goldrick received a B.A. in Economics from the University
of California, Santa Barbara in 1957.
Ms. Lai has served as a member of the Board of Directors from 1997 to 1998,
and has served as the Senior Vice President and Director of Retail Banking since
1997. Prior to holding that position she was Vice President of Credit Risk
Management and Compliance, as well as CRA Officer and Compliance Officer at the
Bank since 1992. From 1988 to 1992, Ms. Lai held a variety of positions
(Director of Marketing, Manager, Market Support Group, Branch Manager and
Marketing Analyst) within the Bank. Prior to joining the Bank, Ms. Lai served as
Executive Director of the Oakland Chinese Community Council and in various
positions at Automatic Data Processing, Underwriters Travelers Insurance, and
Allstate Insurance Company. Ms. Lai received a B.A. and M.A. from Holy Names
College.
Mr. Lee has served as Corporate Counsel for the Bank since June, 1993.
Currently, he also serves as Vice President for the Bank. Prior to joining the
Bank, Mr. Lee was a director and General Counsel for Golden Coin Savings and
Loan Association. Prior to this, Mr. Lee was in private practice at the Law
Office of Barkley & Lee. Mr. Lee has also served in a variety of positions in
the legal profession, including City Attorney for the City of Pleasant Hill,
City Attorney for the cities of Martinez and Pleasant Hill, Senior Assistant
City Attorney for the City of Redwood City, Acting City Attorney and Assistant
City Attorney for the City of Berkeley, Judge Pro-Tem at the Berkeley-Albany
Municipal Court and Temporary Court Commissioner. Mr. Lee received an A.A.
degree from Warren Wilson Junior College (Asheville, North Carolina), B.A.
degree from San Francisco State College in 1966 and a J.D. from the University
of California, Hastings College of Law in 1969. Mr. Lee is a member of the State
Bar of California.
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Ms. Loh is a Senior Vice President and Director of Commercial Banking of
the Bank and joined the Bank as Vice President and Head of Commercial Banking in
January 1996. Ms. Loh created the commercial banking division for the Bank and
manages three marketing teams which focus on commercial real estate, trade
finance, business banking loan products and SBA. Prior to joining the Bank, Ms.
Loh held the position of Vice President, Relationship Manager, Bank of America,
International Trade Bank from 1992-1996. In this position, she managed an export
portfolio with an annual fee income of $12,000,000 and managed and increased an
import credit portfolio to $45,000,000. From 1988-1992, Ms. Loh was the Vice
President, Team Manager, Commercial Banking, Security Pacific Asian Bank where
she managed a team of loan officers with a focus on trade finance, real estate
investment and private banking. Ms. Loh was the Vice President, Preferred
Banking Manager, Bank of America, Golden Gate Area Management Group from
1987-1988 where she managed a team of seven Preferred Bankers supporting 26
retail branches with a focus on high net worth clientele. From 1982-1985, Ms.
Loh was the Assistant Vice President, Credit Administration, San Francisco Main
Office where she was responsible for the credit quality of a $200,000,000
commercial loan portfolio, assisted the commercial banking officers in credit
structuring and achieved excellent credit examinations for three consecutive
years. Ms. Loh was the Branch Manager, for Bank of America's Mandarin Towers
Branch from 1979 -1982. Ms. Loh received a B.A. degree in Accounting and Finance
from the California State University in San Francisco in 1979 and is a past
President of the Association of Asian American Bankers (1996-1997).
Ms. Miller is Senior Vice President and Director of Human Resources of the
Bank. Ms. Miller joined the Bank in 1986 as Assistant Vice President and
Employment Manager. In 1993, Ms. Miller was promoted to Vice President and
Director of Human Resources, and was promoted to Senior Vice President in 1997.
Prior to joining the Bank, Ms. Miller was a Human Resources Representative at
Crocker National Bank/Wells Fargo Bank, and a Personnel Recruiter for Allan Kent
Personnel Service. Ms. Miller is a graduate of Cedar Rapids Business College,
and completed the Paralegal Studies Program at San Francisco State University
and has taken personnel course work at the University of California, Berkeley.
Mr. Fell was appointed to the Board of the Bank in 1994. Mr. Fell joined
the Board of the FPB Bank Holding Company Limited in August 1993. He is
currently a financial consultant and is Chairman of the International Securities
Consultancy Limited. Mr. Fell is a published author, having written his personal
account of the history of the stock market and banking in Hong Kong during the
last ten years. He is a British subject who currently resides in London, United
Kingdom. Mr. Fell began his Civil Service career after the War with the British
Board of Trade where he concentrated on international trade and finance. He
served for five years in Australia as a Trade Commissioner and five years in
India. From 1967 to 1980, he was in charge of the United Kingdom's export policy
and commercial relations with the United States. He later became the head of the
Export Credits Guarantee Department where he was closely involved with the
United States EXIM Bank and the Department of the Treasury. In 1974, he left
government service to become the first Chief Executive of the London Stock
Exchange. In 1981, he was invited by the Hong Kong government to become a
Commissioner for Securities. He was instrumental in the unification of Hong
Kong's three stock exchanges and the creation of a financial futures market. In
1984, he was appointed Commissioner of Banking and of Deposit-taking Companies.
Mr. Fell was directly responsible for the changes in Hong Kong's banking
regulations and the successful rescue of several banks during the crisis of
1983. After the stock market crash in October 1987, he took over as Chief
Executive of the Hong Kong Stock Exchange and introduced the new management set
up which is still in use today.
Mr. McMeekin was appointed as a director of the Company and the Bank in
July 1998. With over 30 years of extensive domestic and overseas banking
experience, he has served as Chief Executive Officer for the following banks:
Bank of the Orient in San Francisco from 1990 to 1996, I.B.I. Asia in Hong Kong
from 1988 to 1989, and Ocean Leila in Hong Kong from 1973 to 1976. Mr. McMeekin
has developed banking operations in the United States, Europe, and Asia. His
experience in environments undergoing rapid change has allowed him to engineer
the turn-around of a major financial services group in Hong Kong as well as a
United States bank. Earlier assignments included senior management positions
with Crocker Bank (now Wells Fargo Bank) in San Francisco and Standard Chartered
Bank, London. Mr. McMeekin is also a member of the Institute of Bankers,
Scotland, and has attended management development programs at Harvard Business
School.
Dr. Wong has been a director of the Bank since 1994. Dr. Wong has been on
the Faculty of the Haas School of Business at the University of California at
Berkeley for the last thirteen years. Dr. Wong has also been a
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tenured professor of management at Golden Gate University for the last fifteen
years. Dr. Wong has been on the faculty of the Graduate School of Business
Administration, Zurich, Switzerland for the last nine years and lectured in 16
countries to high level business executives throughout the world. Dr. Wong was
appointed by the FDIC, Federal Home Loan Bank Board, Resolution Trust
Corporation and the OTS to be on the Boards of Directors of various financial
institutions, including Gateway Bank and California National Bank. Dr. Wong has
also served on the Boards of other organizations, including World Affairs
Council, International Forum, Harvard Club and Chinatown Resources Development
Center. Dr. Wong graduated with a Bachelor's degree from the University of
Wisconsin, a M.B.A. from the University of California, Los Angeles and a M.A.
and Ph.D from Harvard University.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS OF
THE COMPANY
The Board of Directors of the Company conducts its business through
meetings of the Board of Directors and through activities of its committees. The
Board of Directors of the Company meets quarterly and may have additional
meetings as needed. During the year ended December 31, 1997, the Board of
Directors of the Company acted eight times by unanimous written consent in lieu
of meeting. All of the directors of the Company participated in at least 75% of
the total number of the Company's Board meetings held and committee meetings on
which such directors served during 1997. The Board of Directors of the Company
maintains an Audit and Examining Committee, a Credit Policy and Investment
Committee and a Human Resources Committee, the nature and composition of which
are described below:
AUDIT COMMITTEE. The Audit and Examining Committee of the Company and the
Bank consist of Messrs. Fell, Wong and McMeekin. The Audit Committee is
responsible for reporting to the Board on the general financial condition of the
Bank and the results of the annual audit, and is responsible for ensuring that
the Bank's activities are being conducted in accordance with applicable laws and
regulations. The Audit and Examining Committee of the Company was formed in May
1998. The Audit and Examining Committee of the Bank met six times in 1997.
HUMAN RESOURCES COMMITTEE. The Human Resources Committee of the Company
consists of Messrs. Lam and Fell. The Human Resources Committee of the Company
reviews and recommends to the Board of Directors compensation for senior
management of the Bank; the adoption, amendment and implementation of incentive
compensation plans, stock option plans, and other benefit plans and programs for
the Company and the Bank. The Human Resources Committee of the Company and the
Bank is also responsible for maintaining on behalf of the Board of Directors a
current senior management succession and contingency plan; charged with the
investigation and resolution of any incident which may be construed as a
potential conflict of interest on behalf of any member of senior management or
other offices of the Company and the Bank wherein Board of Directors oversight
and action are appropriate; and may be required from time to time that senior
management of the Bank and officers and directors of the Company provide
proposals for, or status or progress reports on, policies or programs which may
have a material bearing on the strategic human resources philosophy and
consequent operational direction of the Bank. The Human Resources Committee of
the Company was formed in 1998. The Human Resources Committee of the Bank met
four times in 1997.
CREDIT POLICY AND INVESTMENT COMMITTEE. The Credit Policy and Investment
Committee of the Company and the Bank consists of Messrs. Wong, Downing, Fell,
Lam, McMeekin and Wu. The committee is responsible for approving credit
policies, setting parameters for credit risks, monitoring the overall credit
risk profile of the Company and the Bank and the valuation allowance reserve.
The Credit Policy and Investment Committee of the Company was formed in May
1998. The Credit Policy and Investment Committee of the Bank met six times in
1997.
DIRECTORS' COMPENSATION
DIRECTORS' FEES. Currently, all outside directors of the Company and the
Bank each receive an annual retainer of $25,200, while the Chairman of the Board
of Directors of the Company and the Bank receives an annual retainer of
$150,000, for service on the Board of Directors of the Company and the Bank. No
committee meeting fees are paid by the Company or the Bank. Messrs. Wu and
Downing do not receive any additional compensation for serving as directors of
the Company and the Bank.
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SUMMARY COMPENSATION TABLE
The following presents, for the year ended December 31, 1997, the cash
compensation paid by the Company and the Bank as well as certain other
compensation paid for that year, to the Chief Executive Officer and the other
five most highly compensated executive officers of the Company.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- ------------------------- -------
OTHER RESTRICTED SECURITIES LTIP ALL
NAME AND BONUS ANNUAL STOCK UNDERLYING PAYOUTS OTHER
PRINCIPAL POSITION YEAR SALARY (3) COMPENSATION AWARDS OPTIONS/SARS (4) COMPENSATION
- ------------------------------ ---- -------- ------- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sau-wing Lam (1) ............. 1997 $285,554 $ -- $3,529 $-- -- $-- $--
Chairman of the Board of
Directors
Thomas S. Wu (2) ............. 1997 $ 47,788 $30,000 $1,334 -- -- -- --
President, Chief Executive
Officer and Director
Jonathan H. Downing .......... 1997 $159,000 $17,500 $ 499 -- -- -- --
Senior Vice President, Chief
Financial Officer, Treasurer
and Director
Louis E. Barbarelli .......... 1997 $126,000 $25,000 $ 242 -- -- -- --
Senior Vice President and
Director of Operations and
Systems
Cecilia Lai .................. 1997 $101,246 $20,000 $ 194
Senior Vice President and
Director of Retail Banking
Dennis A. Lee ................ 1997 $117,468 $ 3,000 $2,697 -- -- -- --
Vice President and Corporate
Counsel
Sylvia Loh ................... 1997 $117,600 $20,000 $ 220 -- -- -- --
Senior Vice President and
Director of Commercial
Banking
</TABLE>
- ------------------
(1) Mr. Lam was President and Chief Executive Officer of the Bank and Vice
Chairman of the Board of Directors of the Bank during 1997. Effective
December 31, 1997, Mr. Lam resigned as President and Chief Executive Officer
of the Bank but remained as Vice Chairman of the Board of Directors.
Effective April 17, 1998, Mr. Lam was elected as Chairman of the Board of
Directors of the Bank and the Company.
(2) Mr. Wu re-joined the Bank on September 23, 1997, after spending one year
with a former overseas affiliate. Mr. Wu was named President and Chief
Executive Officer of the Bank effective January 1, 1998. Mr. Wu was elected
President and Chief Executive Officer of the Company effective March 26,
1998 and as a director of the Company on April 17, 1998. As of September 23,
1997, Mr. Wu's annual base compensation was $175,000 per annum.
(3) The referenced bonus represents a performance bonus for the year ended
December 31, 1996 which was paid in the first quarter of 1997.
(4) The former Long-Term Incentive Plan was terminated in conjunction with the
Private Offerings.
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
The Bank and the Company have entered into employment agreements with
Thomas S. Wu, the President and Chief Executive Officer of the Company and the
Bank (the 'Executive'). These employment agreements are intended to ensure that
the Bank and the Company will be able to maintain a stable and competent
management base. The continued success of the Bank and the Company depends to a
significant degree on the skills and competence of the Executive.
The employment agreements provide for a three-year term. The Bank
employment agreement provides that, commencing on the first anniversary date and
continuing each anniversary date thereafter, the Board of Directors
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<PAGE>
will review the agreement and the Executive's performance for purposes of
determining whether to extend the agreement for an additional year so that the
remaining term shall be three years, unless written notice of non-renewal is
given by the Board of Directors after conducting a performance evaluation of the
Executive. The term of the Company employment agreement shall be extended on a
daily basis unless written notice of non-renewal is given by the Board of
Directors after conducting a performance evaluation of the Executive. The
agreements provide that the Executive's base salary will be reviewed annually.
In addition to the base salary, the agreements provide for, among other things,
participation in stock benefit plans and other fringe benefits applicable to
executive personnel. The agreements provide for termination by the Bank or the
Company for cause as would be defined in the agreements, at any time. In the
event the Bank or the Company choose to terminate the Executive's employment for
any reasons other than for cause, or in the event of the Executive's resignation
from the Bank and the Company upon: (i) failure to re-elect the Executive to
Executive's current offices; (ii) a material change in the Executive's
functions, duties or responsibilities; (iii) a relocation of the Executive's
principal place of employment by more than 25 miles; (iv) liquidation or
dissolution of the Bank or the Company; or (v) a breach of the agreement by the
Bank or the Company; the Executive or, in the event of death, the Executive's
beneficiary, would be entitled to receive an amount equal to the remaining base
salary payments due to the Executive and the contributions that would have been
made on the Executive's behalf to any employee benefit plans of the Bank or the
Company during the remaining term of the agreement. The Bank and the Company
would also continue and pay for the Executive's life, health and disability
insurance coverage for the remaining term of the agreement.
Under the agreements, if voluntary or involuntary termination follows a
change in control of the Bank or the Company as defined in the proposed
employment agreements, it is expected that, the Executive or, in the event of
the Executive's death, his beneficiary, would be entitled to a severance payment
equal to the greater of: (i) the payments due for the remaining term of the
agreement; or (ii) three times the highest annual compensation paid for the
preceding three years. It is expected that the Bank and the Company would also
continue the Executive's life, health and disability insurance coverage for 36
months.
The Bank and the Company have entered into three-year termination and
change in control agreements ('CIC Agreements') with seven other executive
officers (the 'Officers') of the Company and the Bank. The CIC Agreements
provide that commencing on the first anniversary date and continuing on each
anniversary thereafter, the Bank's CIC Agreements may be renewed by the Board of
Directors for an additional year. The Company's CIC Agreements are similar to
the Bank's CIC Agreements except that the term of the Company's CIC Agreements
shall be extended on a daily basis. The CIC Agreements provide that in the event
voluntary or involuntary termination follows a change in control of the Bank or
the Company, the Officer would be entitled to receive a severance payment equal
to three times the Officer's highest annual compensation for the three years
preceding the change in control. The Bank would also continue, and pay for, the
Officer's life, health and disability insurance coverage for the remaining term
of the agreements. Payments to the Officer under the Bank's CIC Agreements are
guaranteed by the Company in the event that payments of benefits are not paid by
the Bank. The CIC Agreements also provide that if an Officer is terminated
during the existence of the CIC Agreement for any reason other than resignation,
cause (as defined in the CIC Agreements), death or permanent disability, but
prior to any change in control of the Company or the Bank, the Officer shall be
paid a severance payment equal to the highest annual compensation paid to such
Officer for the three preceding years.
In the event of a change in control, total payments to executives and
officers under the employment agreements and the CIC Agreements, based solely on
current base salary, would be $3.2 million.
STOCK OPTION PLAN
The Board of Directors of the Company has adopted a Stock Option Plan (the
'Stock Option Plan') which provides for the granting of stock options to
eligible officers, employees and directors of the Company and the Bank. The
Company has reserved 653,333 shares of Common Stock to be issued pursuant to the
Stock Option Plan, of which 620,000 were granted at an exercise price of $15.00
and will vest over a three-year period.
The stock option benefits provided under the Stock Option Plan are designed
to attract and retain qualified personnel in key positions, provide officers,
directors and key employees with a proprietary interest in the Company as an
incentive to contribute to the success of the Company, promote the attention of
management to other Stockholders' concerns and reward key employees for
outstanding performance. All employees and
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directors of the Company and its subsidiaries are eligible to participate in
such plan. The Stock Option Plan provides for the grant of: (i) options to
purchase the Company's Common Stock intended to qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended (the
'Code') ('Incentive Stock Options'); or (ii) options that do not so qualify
('Non-Statutory Stock Options'). Unless sooner terminated, the Stock Option Plan
will be in effect for a period of ten years from the date of adoption by the
Board of Directors. The Company intends to grant all future options under the
Stock Option Plan at an exercise price equal to the fair market value of the
underlying Common Stock on the date of grant. Following termination of
employment or service in the event of disability, a change in control or death,
all Non-Statutory Stock Options, whether or not exercisable, shall vest and
become immediately exercisable. In the event of termination for cause or
termination of employment for any other reason including retirement or voluntary
resignation, all vested Non-Statutory Stock Options as of the date of
termination shall remain exercisable for a period of one year, and all unvested
Non-Statutory Stock Options shall become null and void. Following termination of
employment or service in the event of disability, retirement, a change in
control or death, all Incentive Stock Options, whether or not exercisable, shall
vest and become immediately exercisable. In the event of termination for cause
or termination of employment for any other reason including voluntary
resignation, all vested Incentive Stock Options as of the date of termination
shall remain exercisable for a period of one year, and all unvested Incentive
Stock Options shall become null and void. It is anticipated that all options
granted to officers and employees will be intended to be Incentive Stock Options
to the extent permitted under Section 422 of the Code.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
FIRREA requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
the Bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the Board of Directors.
The Bank's policy provides that no loans may be made by the Bank to its
executive officers and directors.
It is the policy of the Company that all transactions between the Company
and holders of 10% or more of the shares of any class of its common stock and
affiliates thereof, contain terms no less favorable to the Company than could
have been obtained by it in arm's-length negotiations with unaffiliated persons
and are required to be approved by a majority of independent outside directors
of the Company not having any interest in the transaction.
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SECURITY OWNERSHIP OF MANAGEMENT AND OTHER BENEFICIAL OWNERS
The following table sets forth, as of September 30, 1998, certain
information as to those persons who were known by management to be beneficial
owners of more than 5% of the Company's outstanding shares of Common Stock, each
director, each Named Executive Officer and the shares of Common Stock
beneficially owned by all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF BENEFICIALLY
NAME OF BENEFICIAL OWNER POSITION(S) WITH THE COMPANY SHARES(1) OWNED
- ------------------------------------------------------------- ---------------------------- --------- ------------
<S> <C> <C> <C>
Sau-wing Lam................................................. Chairman of the Board of 50,000 *
Directors Directors
Thomas S. Wu................................................. Director, President and 33,333 *
Chief Executive Officer
Jonathan H. Downing.......................................... Senior Vice President, Chief 16,667 *
Financial Officer,
Treasurer and Director
Robert Fell.................................................. Director -- *
Godwin Wong.................................................. Director 20,000 *
Ronald McMeekin.............................................. Director -- *
Louis E. Barbarelli.......................................... Senior Vice President and 3,333 *
Director of Operations and
Systems
Cecilia Lai.................................................. Senior Vice President and 10,000 *
Director of Retail Banking
Dennis Alan Lee.............................................. Vice President and Corporate 6,667 *
Counsel
Sylvia Loh................................................... Senior Vice President and 16,667 *
Director of Commercial
Banking
All Executive Officers and Directors as a Group (12
persons)................................................... 163,333 1.75%
</TABLE>
- ------------------
* Does not exceed 1.0% of the Company's voting securities.
(1) The number of shares of Common Stock outstanding and the number owned by the
individuals or entities listed does not include any shares issuable pursuant
to outstanding options, none of which may be exercised until April 17, 1999.
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UCBH TRUST CO.
The Trust is a statutory business trust formed under Delaware law by the
filing of a certificate of trust with the Delaware Secretary of State on
September 26, 1997. The Trust exists for the exclusive purposes of: (i) issuing
and selling the Trust Securities; (ii) using the proceeds from the sale of Trust
Securities to acquire the Junior Subordinated Debentures; and (iii) engaging in
only those other activities necessary, advisable or incidental thereto. The
Junior Subordinated Debentures are the sole assets of the Trust, and
accordingly, payments under the Junior Subordinated Debentures will be the sole
revenues of the Trust. All of the Common Securities are owned by the Company.
The Common Securities rank pari passu, and payments will be made thereon pro
rata, with the Capital Securities, except that upon the occurrence and
continuance of an event of default under the Trust Agreement resulting from a
Debenture Event of Default, the rights of the Company as holder of the Common
Securities to payments in respect of Distributions and payments upon
liquidation, redemption or otherwise will be subordinated to the rights of the
holders of the Capital Securities. See 'Description of Exchange Capital
Securities--Subordination of Common Securities.' the Company has acquired Common
Securities in a Liquidation Amount equal to 3% of the total capital of the
Trust. The Trust has a term of 31 years, but may be dissolved earlier as
provided in the Trust Agreement. The Trust's business and affairs are conducted
by the Issuer Trustees, each appointed by the Company as holder of the Common
Securities. The Issuer Trustees for the Trust are Wilmington Trust Company, as
the Property Trustee, Wilmington Trust Company, as Delaware Trustee, and three
Administrative Trustees who are officers of the Company. Wilmington Trust
Company, as Property Trustee, is sole indenture trustee under the Trust
Agreement. See 'Description of Exchange Guarantee' and 'Description of Exchange
Junior Subordinated Debentures.' The holder of the Common Securities of the
Trust or, if an Event of Default under the Trust Agreement has occurred and is
continuing, the holders of a majority in Liquidation Amount of the Capital
Securities will be entitled to appoint, remove or replace the Property Trustee
and/or the Delaware Trustee. In no event will the holders of the Capital
Securities have the right to vote to appoint, remove or replace the
Administrative Trustees; such voting rights will be vested exclusively in the
holder of the Common Securities. The duties and obligations of each Issuer
Trustee are governed by the Trust Agreement. The Company, as issuer of the
Junior Subordinated Debentures, will pay all fees, expenses, debts and
obligations (other than the payment of principal, interest and premium, if any,
on the Trust Securities) related to the Trust and the Exchange Offer, and will
pay, directly or indirectly, all ongoing costs, expenses and liabilities of the
Trust. The principal executive office of the Trust is c/o UCBH Holdings, Inc.,
711 Van Ness Avenue, San Francisco, CA 94102.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Original Capital Securities, the Company
and the Trust entered into the Capital Securities Registration Rights Agreement
with the Purchasers, pursuant to which the Company and the Trust agreed to file
and use reasonable best efforts to cause to become effective with the Commission
a registration statement relating to the exchange of the Exchange Capital
Securities for the Original Capital Securities. A copy of the Capital Securities
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations of
the Company and the Trust under the Capital Securities Registration Rights
Agreement. The form and terms of the Exchange Capital Securities are the same as
the form and terms of the Original Capital Securities except that the Exchange
Capital Securities have been registered under the Securities Act, will not be
subject to certain restrictions on transfer applicable to the Original Capital
Securities and will not provide for any increase in the Distribution rate
thereon. In that regard, the Original Capital Securities provide, among other
things, that, if a registration statement relating to the Exchange Offer has not
been filed by August 14, 1998 and declared effective by September 15, 1998, the
Distribution rate borne by the Original Capital Securities will increase by
0.25% per annum until such registration statement is filed or declared
effective, as the case may be. In addition, the Original Capital Securities
provide that, if the Trust has not exchanged Exchange Capital Securities for all
Original Capital Securities validly tendered by the 45th day after the date on
which the registration statement is declared effective, the Distribution rate
borne by the Original Capital Securities will increase by 0.25% per annum for
the period from the occurrence
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<PAGE>
of such event until the Exchange Offer has been consummated. Upon consummation
of the Exchange Offer, holders of Original Capital Securities will not be
entitled to any increase in the Distribution rate thereon or any further
registration rights under the Capital Securities Registration Rights Agreement,
except under limited circumstances. See 'Risk Factors--Consequences of a Failure
to Exchange Original Capital Securities' and 'Description of Original
Securities.'
The Exchange Offer is not being made to, nor will the Trust accept tenders
for exchange from, holders of Original Capital Securities in any jurisdiction in
which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term 'holder' with respect to
the Exchange Offer means any person in whose name the Original Capital
Securities are registered on the books of the Trust or any other person who has
obtained a properly completed bond power from the registered holder, or any
person whose Original Capital Securities are held of record by DTC who desires
to deliver such Original Capital Securities by book-entry transfer at DTC.
Pursuant to the Exchange Offer, as soon as practicable after the Expiration
Date, the Company will exchange the Exchange Junior Subordinated Debentures for
the Original Junior Subordinated Debentures in a principal amount corresponding
to the Liquidation Amount of the Original Capital Securities accepted for
exchange and will execute the Exchange Guarantee in respect of the Exchange
Capital Securities exchanged for such Original Capital Securities. The Exchange
Guarantee and the Exchange Junior Subordinated Debentures have been registered
under the Securities Act.
TERMS OF THE EXCHANGE OFFER
The Trust hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to and including $30,000,000 aggregate Liquidation Amount of
Exchange Capital Securities for a like aggregate Liquidation Amount of Original
Capital Securities properly tendered on or prior to the Expiration Date and not
properly withdrawn in accordance with the procedures described herein. The Trust
will issue, as soon as practicable after the Expiration Date, an aggregate
Liquidation Amount of up to and including $30,000,000 of Exchange Capital
Securities in exchange for a like Liquidation Amount of outstanding Original
Capital Securities tendered and accepted in connection with the Exchange Offer.
Holders may tender their Original Capital Securities in whole or in part in a
Liquidation Amount of not less than $100,000 (100 Capital Securities) or any
integral multiple of $1,000 Liquidation Amount (one Capital Security) in excess
thereof.
The Exchange Offer is not conditioned upon any minimum Liquidation Amount
of Original Capital Securities being tendered. As of the date of this
Prospectus, $30,000,000 aggregate Liquidation Amount of the Original Capital
Securities is outstanding.
Holders of Original Capital Securities do not have any appraisal or
dissenters' rights in connection with the Exchange Offer. Original Capital
Securities that are not tendered for or are tendered but not accepted in
connection with the Exchange Offer will remain outstanding and be entitled to
the benefits of the Trust Agreement, but will not be entitled to any further
registration rights under the Capital Securities Registration Rights Agreement,
except under limited circumstances. See 'Risk Factors--Consequences of a Failure
to Exchange Original Capital Securities' and 'Description of Original
Securities.'
If any tendered Original Capital Securities are not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Original Capital
Securities will be returned, without expense, to the tendering holder thereof as
soon as practicable after the Expiration Date.
Holders who tender Original Capital Securities in connection with the
Exchange Offer will not be required to pay brokerage commissions or fees or,
subject to the instructions in the Letter of Transmittal, transfer taxes with
respect to the exchange of Original Capital Securities in connection with the
Exchange Offer. The Company will pay all charges and expenses, other than
certain applicable taxes described herein, in connection with the Exchange
Offer. See '--Fees and Expenses.'
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NEITHER THE COMPANY, THE BOARD OF DIRECTORS OF THE COMPANY NOR ANY ISSUER
TRUSTEE OF THE TRUST MAKES ANY RECOMMENDATION TO HOLDERS OF ORIGINAL CAPITAL
SECURITIES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION
OF THEIR ORIGINAL CAPITAL SECURITIES PURSUANT TO THE EXCHANGE OFFER. IN
ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. EACH
HOLDER OF ORIGINAL CAPITAL SECURITIES MUST DECIDE WHETHER TO TENDER PURSUANT TO
THE EXCHANGE OFFER AND, IF SO, THE LIQUIDATION AMOUNT OF ORIGINAL CAPITAL
SECURITIES TO TENDER BASED ON SUCH HOLDER'S OWN FINANCIAL POSITION AND
REQUIREMENTS.
EXPIRATION DATE, EXTENSIONS, AMENDMENTS
The term 'Expiration Date' means 5:00 p.m., New York City time, on November
23, 1998 unless the Exchange Offer is extended by the Company or the Trust (in
which case the term 'Expiration Date' shall mean the latest date and time to
which the Exchange Offer is extended).
The Company and the Trust expressly reserve the right in their sole and
absolute discretion, subject to applicable law, at any time and from time to
time, (i) to delay the acceptance of the Original Capital Securities for
exchange, (ii) to terminate the Exchange Offer (whether or not any Original
Capital Securities have theretofore been accepted for exchange) if the Trust
determines, in its sole and absolute discretion that if any of the events or
conditions referred to under '--Conditions to the Exchange Offer' have occurred
or exist or have not been satisfied, (iii) to extend the Expiration Date of the
Exchange Offer and retain all Original Capital Securities tendered pursuant to
the Exchange Offer, subject, however, to the right of holders of Original
Capital Securities to withdraw their tendered Original Capital Securities as
described under '--Withdrawal Rights,' (iv) to waive any condition or (v) amend
the terms of the Exchange Offer, subject to the Capital Securities Registration
Rights Agreement, in any respect. If the Exchange Offer is amended in a manner
determined by the Company and the Trust to constitute a material change, or if
the Company and the Trust waive a material condition of the Exchange Offer, the
Company and the Trust will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the holders of the Original
Capital Securities, and the Company and the Trust will extend the Exchange Offer
to the extent required by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and by
making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
Business Day (as defined herein) after the previously scheduled Expiration Date.
Without limiting the manner in which the Company and the Trust may choose to
make any public announcement and subject to applicable laws, the Company and the
Trust shall have no obligation to publish, advertise or otherwise communicate
any such public announcement other than by issuing a release to an appropriate
news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE CAPITAL SECURITIES
Upon the terms and subject to the conditions of the Exchange Offer, the
Trust will exchange, and will issue Exchange Capital Securities for Original
Capital Securities validly tendered and not withdrawn promptly after the
Expiration Date.
In all cases, delivery of Exchange Capital Securities in exchange for
Original Capital Securities tendered and accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(i) the book-entry confirmation described below under '--Procedures for
Tendering Original Capital Securities--Book-Entry Transfer' or (ii) certificates
representing such Original Capital Securities, and the Letter of Transmittal (or
facsimile thereof) properly completed and duly executed, with any required
signature guarantees, and any other documents required by the Letter of
Transmittal.
Upon the terms and subject to the conditions of the Exchange Offer, the
Trust will be deemed to have accepted for exchange, and thereby exchanged,
Original Capital Securities validly tendered and not withdrawn as, if and when
the Trust gives oral or written notice to the Exchange Agent (any such oral
notice to be promptly confirmed in writing) of the Trust's acceptance of such
Original Capital Securities for exchange pursuant to the
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Exchange Offer. The Exchange Agent will act as agent for the Trust for the
purpose of receiving tenders of book-entry confirmations or certificates
representing Original Capital Securities, Letters of Transmittal and related
documents, and as agent for tendering holders for the purpose of receiving
book-entry confirmations or certificates representing Original Capital
Securities, Letters of Transmittal and related documents and transmitting
Exchange Capital Securities to validly tendering holders. Such exchange will be
made as soon as practicable after the Expiration Date. If for any reason
whatsoever, acceptance for exchange or the exchange of any Original Capital
Securities tendered pursuant to the Exchange Offer is delayed (whether before or
after the Trust's acceptance for exchange of Original Capital Securities) or the
Trust extends the Exchange Offer or is unable to accept for exchange or exchange
Original Capital Securities tendered pursuant to the Exchange Offer, then,
without prejudice to the Trust's rights set forth herein, the Exchange Agent
may, nevertheless, on behalf of the Trust and subject to Rule 14e-1(c) under the
Exchange Act, retain tendered Original Capital Securities and such Original
Capital Securities may not be withdrawn except to the extent tendering holders
are entitled to withdrawal rights as described under '--Withdrawal Rights.'
Pursuant to the Letter of Transmittal, a holder of Original Capital
Securities will represent, warrant and agree that it has full power and
authority to tender, exchange, sell, assign and transfer Original Capital
Securities, that the Trust will acquire good, marketable and unencumbered title
to the tendered Original Capital Securities, free and clear of all liens,
restrictions, charges and encumbrances, and the Original Capital Securities
tendered for exchange are not subject to any adverse claims or proxies. The
holder also will represent, warrant and agree that it will, upon request,
execute and deliver any additional documents deemed by the Trust or the Exchange
Agent to be necessary or desirable to complete the exchange, sale, assignment,
and transfer of the Original Capital Securities tendered pursuant to the
Exchange Offer. Tendering holders of Original Capital Securities that use ATOP
will, by doing so, acknowledge that such holder has received and agrees to be
bound by the terms of the Letter of Transmittal and the Company may enforce the
Letter of Transmittal against such holder.
PROCEDURES FOR TENDERING ORIGINAL CAPITAL SECURITIES
Valid Tender. Except as set forth herein, in order for Original Capital
Securities to be validly tendered pursuant to the Exchange Offer, a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees and any other required documents, must be
received by the Exchange Agent at its address set forth under '--Exchange
Agent,' and (i) tendered Original Capital Securities must be received by the
Exchange Agent, or (ii) such Original Capital Securities must be tendered
pursuant to the procedures for book-entry transfer set forth herein and a
book-entry confirmation must be received by the Exchange Agent, in each case on
or prior to the Expiration Date, or (iii) the guaranteed delivery procedures set
forth herein must be complied with.
If less than all of the Original Capital Securities are tendered, a
tendering holder should fill in the Liquidation Amount of Original Capital
Securities being tendered in the appropriate box on the Letter of Transmittal or
so indicate in an agent's message in lieu of the Letter of Transmittal. The
entire Liquidation Amount of Original Capital Securities delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF THE BOOK-ENTRY CONFIRMATIONS OR CERTIFICATES, THE
LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE
RISK OF THE TENDERING HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN
ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED
MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY
SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
Book-Entry Transfer. For purposes of the Exchange Offer, the Exchange Agent
will establish an account with respect to the Original Capital Securities at DTC
within two Business Days after the date of this Prospectus. Any tendering
financial institution that is a participant in DTC's book-entry transfer
facility system must make a book-entry delivery of the Original Capital
Securities by causing DTC to transfer such Original Capital Securities into the
Exchange Agent's account at DTC in accordance with DTC's ATOP procedures for
transfers. Such holder of Original Capital Securities using ATOP should transmit
its acceptance to DTC on or prior to the
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Expiration Date (or comply with the guaranteed delivery procedures set forth
below). DTC will verify such acceptance, execute a book-entry transfer of the
tendered Original Capital Securities into the Exchange Agent's account at DTC
and then send to the Exchange Agent confirmation of such book-entry transfer,
including an agent's message confirming that DTC has received an express
acknowledgment from such holder that such holder has received and agrees to be
bound by the Letter of Transmittal and that the Trust and the Company may
enforce the Letter of Transmittal against such holder (a 'book-entry
confirmation').
A beneficial owner of Original Capital Securities that are held by or
registered in the name of a custodian is urged to contact such custodian
promptly if such beneficial owner wishes to participate in the Exchange Offer.
Certificates. If the tender is not made through ATOP, certificates
representing Original Capital Securities, as well as the Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and any other required documents required by the Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
under '--Exchange Agent' on or prior to the Expiration Date in order for such
tender to be effective (or the guaranteed delivery procedure set forth herein
must be complied with).
If less than all of the Original Capital Securities are tendered, a
tendering holder should fill in the Liquidation Amount of Original Capital
Securities being tendered in the appropriate box on the Letter of Transmittal.
The entire Liquidation Amount of Original Capital Securities delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
Signature Guarantees. Certificates for the Original Capital Securities need
not be endorsed and signature guarantees on the Letter of Transmittal are
unnecessary unless (i) a certificate for the Original Capital Securities is
registered in a name other than that of the person surrendering the certificate
or (ii) such holder completes the box entitled 'Special Issuance Instructions'
or 'Special Delivery Instructions' in the Letter of Transmittal. In the case of
(i) or (ii) above, such certificates for Original Capital Securities must be
duly endorsed or accompanied by a properly executed bond power, with the
endorsement or signature on the bond power and on the Letter of Transmittal
guaranteed by a firm or other entity identified in Rule 17Ad-15 under the
Exchange Act as an 'eligible guarantor institution,' including (as such terms
are defined therein): (a) a bank; (b) a broker, dealer, municipal securities
broker or dealer or government securities broker or dealer; (c) a credit union;
(d) a national securities exchange, registered securities association or
clearing agency; or (e) a savings association that is a participant in a
Securities Transfer Association (each of the foregoing, an 'Eligible
Institution'), unless surrendered on behalf of such Eligible Institution. See
Instruction 1 to the Letter of Transmittal.
Delivery. The method of delivery of the book-entry confirmation or
certificates representing tendered Original Capital Securities, the Letter of
Transmittal, and all other required documents is at the option and sole risk of
the tendering holder, and delivery will be deemed made only when actually
received by the Exchange Agent. If delivery is by mail, registered mail, return
receipt requested, properly insured, or an overnight delivery service is
recommended. In all cases, sufficient time should be allowed to ensure timely
delivery.
Notwithstanding any other provision hereof, the delivery of Exchange
Capital Securities in exchange for Original Capital Securities tendered and
accepted for exchange pursuant to the Exchange Offer will in all cases be made
only after timely receipt by the Exchange Agent of (i) a book-entry confirmation
with respect to such Original Capital Securities or (ii) certificates
representing Original Capital Securities and a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), together with any
required signature guarantees and any other documents required by the Letter of
Transmittal. Accordingly, the delivery of Exchange Capital Securities might not
be made to all tendering holders at the same time and will depend upon when
book-entry confirmations with respect to Original Capital Securities or
certificates representing Original Capital Securities and other required
documents are received by the Exchange Agent.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Guaranteed Delivery. If a holder desires to tender Original Capital
Securities pursuant to the Exchange Offer and the certificates for such Original
Capital Securities are not immediately available or time will not permit all
required documents to reach the Exchange Agent on or prior to the Expiration
Date, or the procedure
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for book-entry transfer cannot be completed on a timely basis, such Original
Capital Securities may nevertheless be tendered, provided that all of the
following guaranteed delivery procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) a properly completed and duly executed notice to the Exchange Agent
guaranteeing delivery to the Exchange Agent of either certificates representing
Original Capital Securities or a book-entry confirmation in compliance with the
requirements set forth herein (a 'Notice of Guaranteed Delivery'), substantially
in the form accompanying the Letter of Transmittal, is received by the Exchange
Agent, as provided herein, on or prior to the Expiration Date; and
(iii) a book-entry confirmation or the certificates representing all
tendered Original Capital Securities, in proper form for transfer, together with
a properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees and any other documents
required by the Letter of Transmittal, are, in any case, received by the
Exchange Agent within three New York Stock Exchange trading days after the date
of execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
The Trust's acceptance for exchange of Original Capital Securities tendered
pursuant to any of the procedures described above will constitute a binding
agreement between the tendering holder and the Trust upon the terms and subject
to the conditions of the Exchange Offer.
Determination of Validity. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered Original Capital Securities will be determined by the Company and
the Trust, in their sole discretion, whose determination shall be final and
binding on all parties. The Company and the Trust reserve the absolute right, in
their sole and absolute discretion, to reject any and all tenders determined by
them not to be in proper form or the acceptance of which, or exchange for, may,
in the opinion of counsel to the Company and the Trust, be unlawful. The Company
and the Trust also reserve the absolute right, subject to applicable law, to
waive any of the conditions of the Exchange Offer as set forth under
'--Conditions to the Exchange Offer' or any condition or irregularity in any
tender of Original Capital Securities of any particular holder, whether or not
similar conditions or irregularities are waived in the case of other holders.
The interpretation by the Company and the Trust of the terms and conditions
of the Exchange Offer (including the Letter of Transmittal and the instructions
thereto) will be final and binding. No tender of Original Capital Securities
will be deemed to have been validly made until all irregularities with respect
to such tender have been cured or waived. None of the Company, the Trust, any
affiliates or assigns of the Company or the Trust, the Exchange Agent or any
other person shall be under any duty to give any notification of any
irregularities in tenders or incur any liability for failure to give any such
notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company
and the Trust, proper evidence satisfactory to the Company and the Trust, in
their sole discretion, of such person's authority to so act must be submitted.
RESALES OF EXCHANGE CAPITAL SECURITIES
The Trust is making the Exchange Offer for the Exchange Capital Securities
in reliance on the position of the Staff of the Commission as set forth in the
Letters. However, neither the Company nor the Trust sought its own interpretive
letter and there can be no assurance that the Staff of the Commission would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff of the Commission, and subject to the two immediately following sentences,
the Company and the Trust believe that Exchange Capital Securities issued
pursuant to the Exchange Offer in exchange for Original Capital Securities may
be offered for resale, resold and otherwise transferred by a holder thereof
(other than a holder who is a broker-dealer) without further compliance with the
registration and
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prospectus delivery requirements of the Securities Act, provided that such
Exchange Capital Securities are acquired in the ordinary course of such holder's
business and that such holder is not participating, and has no arrangement or
understanding with any person to participate, in a distribution (within the
meaning of the Securities Act) of such Exchange Capital Securities. However, any
holder of Original Capital Securities who is an 'affiliate' of the Company or
the Trust or who intends to participate in the Exchange Offer for the purpose of
distributing Exchange Capital Securities, or any broker-dealer who purchased
Original Capital Securities from the Trust for resale pursuant to Rule 144A or
any other available exemption under the Securities Act, (i) will not be able to
rely on the interpretations of the Staff of the Commission set forth in the
Letters, (ii) will not be permitted or entitled to tender such Original Capital
Securities in the Exchange Offer and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or other transfer of such Original Capital Securities unless such sale is
made pursuant to an exemption from such requirements. In addition, as described
herein, if any broker-dealer holds Original Capital Securities acquired for its
own account as a result of market-making or other trading activities and
exchanges such New Capital Securities for Original Capital Securities, then such
broker-dealer must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of such Exchange Capital
Securities.
Each holder of Original Capital Securities who wishes to exchange Original
Capital Securities for Exchange Capital Securities in the Exchange Offer will be
required to represent that (i) it is not an 'affiliate' of the Company or the
Trust, (ii) any Exchange Capital Securities to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Capital Securities, and (iv) if
such holder is not a broker-dealer, such holder is not engaged in, and does not
intend to engage in, a distribution (within the meaning of the Securities Act)
of such Exchange Capital Securities. In addition, the Company and the Trust may
require such holder, as a condition to such holder's eligibility to participate
in the Exchange Offer, to furnish to the Company and the Trust (or an agent
thereof) in writing information as to the number of 'beneficial owners' (within
the meaning of Rule 13d-3 under the Exchange Act) on behalf of whom such holder
holds the Original Capital Securities to be exchanged in the Exchange Offer.
Each broker-dealer that receives Exchange Capital Securities for its own account
pursuant to the Exchange Offer must acknowledge that it acquired the Original
Capital Securities for its own account as the result of market-making activities
or other trading activities and must agree that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such Exchange Capital Securities. The Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act.
Based on the position taken by the Staff of the Commission in the Letters, the
Company and the Trust believe that Participating Broker-Dealers who acquired
Original Capital Securities for their own accounts as a result of market-making
activities or other trading activities may fulfill their prospectus delivery
requirements with respect to the Exchange Capital Securities received upon
exchange of such Original Capital Securities (other than Original Capital
Securities which represent an unsold allotment from the initial sale of the
Original Capital Securities) with a prospectus meeting the requirements of the
Securities Act, which may be the prospectus prepared for an exchange offer so
long as it contains a description of the plan of distribution with respect to
the resale of such Exchange Capital Securities. Accordingly, this Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer during the period referred to below in connection
with resales of Exchange Capital Securities received in exchange for Original
Capital Securities where such Original Capital Securities were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Company and the Trust have agreed that this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of such Exchange
Capital Securities for a period ending 90 days after the Expiration Date
(subject to extension under certain limited circumstances described herein) or,
if earlier, when all such Exchange Capital Securities have been disposed of by
such Participating Broker-Dealer. See 'Plan of Distribution.' However, a
Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of Exchange Capital Securities received in exchange for Original
Capital Securities pursuant to the Exchange Offer must notify the Company or the
Trust, or cause the Company or the Trust to be notified, on or prior to the
Expiration Date, that it is a Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the Letter of Transmittal or may
be delivered to the Exchange Agent at its address set forth herein under
'--Exchange
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Agent.' Any Participating Broker-Dealer who is an 'affiliate' of the Company or
the Trust may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Original
Capital Securities pursuant to the Exchange Offer will be deemed to have agreed,
by execution of the Letter of Transmittal, that, upon receipt of notice from the
Company or the Trust of the occurrence of any event or the discovery of (i) any
fact that makes any statement contained or incorporated by reference in this
Prospectus untrue in any material respect or (ii) any fact that causes this
Prospectus to omit to state a material fact necessary in order to make the
statements contained or incorporated by reference herein, in the light of the
circumstances under which they were made, not misleading, or of the occurrence
of certain other events specified in the Capital Securities Registration Rights
Agreement, such Participating Broker-Dealer will suspend the sale of Exchange
Capital Securities (or the Exchange Guarantee or the Exchange Junior
Subordinated Debentures, as applicable) pursuant to this Prospectus until the
Company or the Trust has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or supplemented
Prospectus to such Participating Broker-Dealer, or the Company or the Trust has
given notice that the sale of the Exchange Capital Securities (or the Exchange
Guarantee or the Exchange Junior Subordinated Debentures, as applicable) may be
resumed, as the case may be. If the Company or the Trust gives such notice to
suspend the sale of the Exchange Capital Securities (or the Exchange Guarantee
or the Exchange Junior Subordinated Debentures, as applicable), it shall extend
the 90-day period referred to above during which Participating Broker-Dealers
are entitled to use this Prospectus in connection with the resale of Exchange
Capital Securities by the number of days during the period from and including
the date of the giving of such notice to and including the date when
Participating Broker-Dealers shall have received copies of the amended or
supplemented Prospectus necessary to permit resales of the Exchange Capital
Securities or to and including the date on which the Company or the Trust has
given notice that the sale of Exchange Capital Securities (or the Exchange
Guarantee or the Exchange Junior Subordinated Debentures, as applicable) may be
resumed, as the case may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Original Capital Securities
may be withdrawn at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth under '--Exchange Agent' on or prior
to the Expiration Date. Any such notice of withdrawal must specify the name of
the person who tendered the Original Capital Securities to be withdrawn, the
aggregate Liquidation Amount of Original Capital Securities to be withdrawn, and
(if certificates for such Original Capital Securities have been tendered) the
name of the registered holder of the Original Capital Securities as set forth on
the certificates if different from that of the person who tendered such Original
Capital Securities. If certificates representing Original Capital Securities
have been delivered or otherwise identified to the Exchange Agent, then prior to
the physical release of such certificates, the tendering holder must submit the
serial numbers shown on the particular certificates to be withdrawn and the
signature on the notice of withdrawal must be guaranteed by an Eligible
Institution, except in the case of Original Capital Securities tendered for the
account of an Eligible Institution. If Original Capital Securities have been
tendered pursuant to the procedures for book-entry transfer set forth in
'--Procedures for Tendering Original Capital Securities--Book-Entry Transfer,'
the notice of withdrawal must specify the name and number of the account at DTC
to be credited with the withdrawal of Original Capital Securities. Withdrawals
of tenders of Original Capital Securities may not be rescinded. Original Capital
Securities properly withdrawn will not be deemed validly tendered for purposes
of the Exchange Offer, but may be retendered at any subsequent time on or prior
to the Expiration Date by following any of the procedures described above under
'--Procedures for Tendering Original Capital Securities.'
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Trust, in its sole
discretion, whose determination shall be final and binding on all parties. None
of the Company, the Trust, any affiliates or assigns of the Company or the
Trust, the Exchange Agent or any other person shall be under any duty to give
any notification of any irregularities in any notice of
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withdrawal or incur any liability for failure to give any such notification. Any
Original Capital Securities that have been tendered but are withdrawn will be
returned to the holder thereof promptly after withdrawal.
DISTRIBUTIONS ON THE EXCHANGE CAPITAL SECURITIES
Holders of Original Capital Securities whose Original Capital Securities
are accepted for exchange on or prior to November 1, 1998 will not receive
Distributions on such Original Capital Securities and will be deemed to have
waived the right to receive any Distributions on such Original Capital
Securities accumulated from and including April 17, 1998. Accordingly, holders
of Exchange Capital Securities as of the close of business on October 15, 1998
will be entitled to receive Distributions accumulated from and including April
17, 1998.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company and the Trust will not be required
to accept for exchange, or to exchange, any Original Capital Securities for any
Exchange Capital Securities, and, as described herein, may terminate the
Exchange Offer (whether or not any Original Capital Securities have theretofore
been accepted for exchange) or may waive any conditions to or amend the Exchange
Offer, if any of the following conditions have occurred or exists or have not
been satisfied prior to the Expiration Date:
(i) there shall occur a change in the current interpretation by the Staff
of the Commission that permits the Exchange Capital Securities issued pursuant
to the Exchange Offer in exchange for Original Capital Securities to be offered
for resale, resold and otherwise transferred by holders thereof (other than
broker-dealers and any such holder that is an 'affiliate' of the Company or the
Trust within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Capital Securities are acquired in
the ordinary course of such holders' business and such holders have no
arrangement or understanding with any person to participate in the distribution
of such Exchange Capital Securities; or
(ii) any law, statute, rule or regulation shall have been adopted or
enacted which, in the judgment of the Company or the Trust, would reasonably be
expected to impair its ability to proceed with the Exchange Offer; or
(iii) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration Statement,
or proceedings shall have been initiated or, to the knowledge of the Company or
the Trust, threatened for that purpose, or any governmental approval has not
been obtained, which approval the Company or the Trust shall, in its sole
discretion, deem necessary for the consummation of the Exchange Offer as
contemplated hereby; or
(iv) the Company shall have determined in good faith that there is a
reasonable likelihood that, or a material uncertainty exists as to whether,
consummation of the Exchange Offer would result in an adverse tax consequence to
the Trust or the Company.
If the Company or the Trust determine in its sole and absolute discretion
that any of the foregoing events or conditions has occurred or exists or has not
been satisfied, it may, subject to applicable law, terminate the Exchange Offer
(whether or not any Original Capital Securities have theretofore been accepted
for exchange) or may waive any such condition or otherwise amend the terms of
the Exchange Offer in any respect. If such waiver or amendment constitutes a
material change to the Exchange Offer, the Company or the Trust will promptly
disclose such waiver or amendment by means of a prospectus supplement that will
be distributed to the registered holders of the Original Capital Securities and
will extend the Exchange Offer to the extent required by Rule 14e-1 under the
Exchange Act.
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EXCHANGE AGENT
Wilmington Trust Company has been appointed as Exchange Agent for the
Exchange Offer. Delivery of the Letters of Transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent as follows:
<TABLE>
<S> <C> <C>
BY MAIL OR OVERNIGHT DELIVERY: FACSIMILE TRANSMITTAL: BY HAND DELIVERY:
(Registered or Certified Mail (Eligible Institutions Only) Wilmington Trust Company
Recommended) (302) 651-1079 1105 North Market Street
Wilmington Trust Company TO CONFIRM BY TELEPHONE Wilmington, Delaware 19890
1100 North Market Street (302) 651-1562 Attn: Corporate Trust Operations
Wilmington, Delaware 19890
Attn: Corporate Trust Operations
</TABLE>
Delivery to other than the above address or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of Original Capital Securities, and in handling or
tendering for their customers.
Holders who tender their Original Capital Securities for exchange will not
be obligated to pay any transfer taxes in connection therewith. If, however,
Exchange Capital Securities are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of the Original Capital
Securities tendered, or if a transfer tax is imposed for any reason other than
the exchange of Original Capital Securities in connection with the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
Neither the Company nor the Trust will make any payment to brokers, dealers
or others soliciting acceptances of the Exchange Offer.
The summary herein of certain provisions of the Capital Securities
Registration Rights Agreement does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Capital Securities Registration Rights Agreement, a form of which is available
upon request to the Company. See 'Additional Information.' In addition, the
information set forth above concerning certain interpretations of and positions
taken by the Staff of the Commission is not intended to constitute legal advice,
and prospective investors should consult their own legal advisors with respect
to such matters.
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DESCRIPTION OF EXCHANGE CAPITAL SECURITIES
Pursuant to the terms of the Trust Agreement, the Trust will issue the
Exchange Capital Securities. The Exchange Capital Securities will represent
beneficial interests in the Trust and the holders thereof will be entitled to a
preference over the Common Securities in certain circumstances with respect to
Distributions and amounts payable on redemption of the Trust Securities or
liquidation of the Trust. See '--Subordination of Common Securities.' The Trust
Agreement has been qualified under the Trust Indenture Act of 1939, as amended
(The 'Trust Indenture Act'). This summary of certain provisions of the Exchange
Capital Securities, the Common Securities and the Trust Agreement does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Trust Agreement, including the
definitions therein of certain terms.
GENERAL
The Exchange Capital Securities will be limited to $30,000,000 aggregate
Liquidation Amount. The Exchange Capital Securities will rank pari passu, and
payments will be made thereon pro rata, with the Original Capital Securities and
the Common Securities except as described under '--Subordination of Common
Securities.' Legal title to the Exchange Junior Subordinated Debentures will be
held by the Property Trustee in trust for the benefit of the holders of the
Trust Securities. The Exchange Guarantee will not guarantee payment of
Distributions or amounts payable on redemption of the Capital Securities or
liquidation of the Trust when the Trust does not have funds on hand legally
available for such payments. See 'Description of Exchange Guarantee.'
DISTRIBUTIONS
Distributions on the Exchange Capital Securities will be cumulative, will
accumulate from April 17, 1998, and will be payable semi-annually in arrears on
May 1 and November 1 of each year, commencing on November 1, 1998, at the annual
rate of 9.375% of the Liquidation Amount to the holders of the Exchange Capital
Securities on the relevant record dates. The record dates will be the fifteenth
day of the month preceding the month in which the relevant Distribution Date (as
defined herein) falls. The amount of Distributions payable for any period will
be computed on the basis of a 360-day year of twelve 30-day months and, for any
period of less than a full calendar month, the number of days elapsed in such
month. In the event that any date on which Distributions are payable on the
Exchange Capital Securities is not a Business Day (as defined below), payment of
the Distribution payable on such date will be made on the next succeeding day
that is a Business Day (and without any interest or other payment in respect to
any such delay), except that if such next succeeding Business Day falls in the
next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date (each date on which Distributions are payable in accordance with
the foregoing, a 'Distribution Date'). A 'Business Day' shall mean any day other
than a Saturday or a Sunday, or a day on which banking institutions in the State
of Delaware or San Francisco, California are authorized or required by law or
executive order to remain closed.
So long as no Debenture Event of Default shall have occurred and be
continuing, the Company will have the right under the Indenture to elect to
defer the payment of interest on the Exchange Junior Subordinated Debentures at
any time or from time to time for a period not exceeding ten (10) consecutive
semi-annual periods with respect to each Extension Period, provided that no
Extension Period shall end on a date other than an Interest Payment Date or
extend beyond the Stated Maturity Date. Upon any such election, semi-annual
Distributions on the Exchange Capital Securities will be deferred by the Trust
during such Extension Period. Distributions to which holders of the Exchange
Capital Securities are entitled during any such Extension Period will accumulate
additional Distributions thereon at the rate per annum of 9.375% thereof,
compounded semi-annually from the relevant Distribution Date, but not exceeding
the interest rate then accruing on the Exchange Junior Subordinated Debentures.
The term 'Distributions,' as used herein, shall include any such additional
Distributions.
Prior to the termination of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed ten (10) consecutive semi-annual periods,
to end on a date other than an Interest Payment Date or to extend beyond the
Stated Maturity
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Date. Upon the termination of any such Extension Period and the payment of all
amounts then due on any Interest Payment Date, the Company may elect to begin a
new Extension Period, subject to the above requirements. No interest shall be
due and payable during an Extension Period, except at the end thereof. The
Company must give the Property Trustee, the Administrative Trustees and the
Debenture Trustee notice of its election of any such Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Exchange Capital Securities would have been
payable except for the election to begin such Extension Period and (ii) the date
the Administrative Trustees are required to give notice to any securities
exchange or automated quotation system or to holders of such Exchange Capital
Securities of the record date or the date such Distributions are payable, but in
any event not less than five Business Days prior to such record date. There is
no limitation on the number of times that the Company may elect to begin an
Extension Period. See 'Description of Exchange Junior Subordinated
Debentures--Option to Extend Interest Payment Date' and 'Federal Income Tax
Consequences--Interest Income and Original Issue Discount.'
During any such Extension Period, the Company may not: (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock; (ii)
make any payment of principal of or premium, if any, on or repay, repurchase or
redeem any debt securities of the Company (including any Other Debentures) that
rank pari passu with or junior in right of payment to the Junior Subordinated
Debentures; or (iii) make any guarantee payments with respect to any guarantee
by the Company of the debt securities of any subsidiary of the Company
(including Other Guarantees) if such guarantee ranks pari passu with or junior
in right of payment to the Junior Subordinated Debentures (other than (a)
dividends or distributions in shares of, or options, warrants or rights to
subscribe for or purchase shares of, common stock of the Company, (b) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee, (d) as a result of a reclassification of the
Company's capital stock or the exchange or conversion of one class or series of
the Company's capital stock for another class or series of the Company's capital
stock, (e) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged and (f) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans for its directors, officers or employees or any of the
Company's dividend reinvestment plans). The Company has no current intention to
exercise its option to defer payments of interest on the Junior Subordinated
Debentures.
The revenue of the Trust available for distribution to holders of the
Exchange Capital Securities will be limited to payments under the Exchange
Junior Subordinated Debentures in which the Trust will invest the proceeds from
the issuance and sale of the Trust Securities. See 'Description of Exchange
Junior Subordinated Debentures--General.' If the Company does not make interest
payments on the Exchange Junior Subordinated Debentures, the Property Trustee
will not have funds available to pay Distributions on the Exchange Capital
Securities. The payment of Distributions (if and to the extent the Trust has
funds on hand legally available for the payment of such Distributions) will be
guaranteed by the Company on a limited basis as set forth herein under
'Description of Exchange Guarantee.'
REDEMPTION
Upon the repayment on the Stated Maturity Date or prepayment in whole or in
part prior to the Stated Maturity Date of the Exchange Junior Subordinated
Debentures (other than following the distribution of the Junior Subordinated
Debentures to the holders of the Trust Securities), the proceeds from such
repayment or prepayment shall be applied by the Property Trustee to redeem a
Like Amount (as defined below) of the Trust Securities, upon not less than 30
nor more than 60 days' notice of a date of redemption (the 'Redemption Date'),
at the applicable Redemption Price, which shall be equal to (i) in the case of
the repayment of the Exchange Junior Subordinated Debentures on the Stated
Maturity Date, the Maturity Redemption Price (equal to the principal of, and
accrued and unpaid interest on, the Exchange Junior Subordinated Debentures),
(ii) in the case of the optional prepayment of the Exchange Junior Subordinated
Debentures before the Initial Optional Prepayment Date upon the occurrence and
continuation of a Special Event, the Special Event Redemption Price (equal to
the Special Event Prepayment Price in respect of the Junior Subordinated
Debentures) and (iii) in the case of the optional prepayment of the Exchange
Junior Subordinated Debentures on or after the Initial Optional
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Prepayment Date, the Optional Redemption Price (equal to the principal of, and
accrued and unpaid interest on, the Junior Subordinated Debentures). See
'Description of Exchange Junior Subordinated Debentures--Optional Prepayment'
and '--Special Event Prepayment.' If less than all of the Exchange Junior
Subordinated Debentures are to be prepaid on a Redemption Date, then the
proceeds of such prepayment shall be allocated pro rata to the Trust Securities.
'Like Amount' means (i) with respect to a redemption of the Trust
Securities, Trust Securities having a Liquidation Amount equal to the principal
amount of Exchange Junior Subordinated Debentures to be paid in accordance with
their terms and (ii) with respect to a distribution of Exchange Junior
Subordinated Debentures upon the liquidation of the Trust, Exchange Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of the Trust Securities of the holder to whom such Exchange Junior
Subordinated Debentures are distributed.
The Company will have the option to prepay the Exchange Junior Subordinated
Debentures, (i) in whole or in part, on or after the Initial Optional Prepayment
Date, at the Optional Prepayment Price and (ii) in whole but not in part, at any
time prior to the Initial Optional Prepayment Date, upon the occurrence of a
Special Event, at the Special Event Prepayment Price, in each case subject to
the receipt of any required regulatory approval. See 'Description of Exchange
Junior Subordinated Debentures--Optional Prepayment' and '--Special Event
Prepayment.'
LIQUIDATION OF THE TRUST AND DISTRIBUTION OF EXCHANGE JUNIOR SUBORDINATED
DEBENTURES
The Company will have the right at any time to terminate the Trust and,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, to cause the Exchange Junior Subordinated Debentures to be
distributed to the holders of the Trust Securities in liquidation of the Trust.
Such right is subject to: (i) the Company having received an opinion of counsel
to the effect that such distribution will not be a taxable event to holders of
Exchange Capital Securities; and (ii) the receipt of any required regulatory
approval.
The Trust shall automatically terminate upon the first to occur of: (i)
certain events of bankruptcy, dissolution or liquidation of the Company; (ii)
the distribution of a Like Amount of the Exchange Junior Subordinated Debentures
to the holders of the Trust Securities, if the Company, as Sponsor, has given
written direction to the Property Trustee to terminate the Trust (which
direction is optional and, except as described above, wholly within the
discretion of the Company, as Sponsor); (iii) redemption of all of the Trust
Securities as described under '--Redemption;' (iv) expiration of the term of the
Trust; and (v) the entry of an order for the dissolution of the Trust by a court
of competent jurisdiction.
If a termination occurs as described in clause (i), (ii), (iv), or (v)
above, the Trust shall be liquidated by the Issuer Trustees as expeditiously as
the Issuer Trustees determine to be possible by distributing, after satisfaction
of liabilities to creditors of the Trust as provided by applicable law, to the
holders of the Trust Securities a Like Amount of the Exchange Junior
Subordinated Debentures, unless such distribution is determined by the Property
Trustee not to be practicable, in which event such holders will be entitled to
receive out of the assets of the Trust legally available for distribution to
holders, after satisfaction of liabilities to creditors of the Trust as provided
by applicable law, an amount equal to the aggregate of the Liquidation Amount
plus accumulated and unpaid Distributions thereon to the date of payment (such
amount being the 'Liquidation Distribution'). If such Liquidation Distribution
can be paid only in part because the Trust has insufficient assets on hand
legally available to pay in full the aggregate Liquidation Distribution, then
the amounts payable directly by the Trust on the Trust Securities shall be paid
on a pro rata basis, except that if a Debenture Event of Default has occurred
and is continuing, the Exchange Capital Securities shall have a priority over
the Common Securities. See '--Subordination of Common Securities.'
If the Company elects not to prepay the Exchange Junior Subordinated
Debentures prior to maturity in accordance with their terms and either elects
not to or is unable to liquidate the Trust and distribute the Exchange Junior
Subordinated Debentures to holders of the Trust Securities, the Trust Securities
will remain outstanding until the repayment of the Exchange Junior Subordinated
Debentures on the Stated Maturity Date.
After the liquidation date is fixed for any distribution of Exchange Junior
Subordinated Debentures to holders of the Trust Securities, (i) the Trust
Securities will no longer be deemed to be outstanding, (ii) DTC or its
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nominee will receive, in respect of each registered global certificate, if any,
representing Trust Securities and held by it, a registered global certificate or
certificates representing the Exchange Junior Subordinated Debentures to be
delivered upon such distribution and (iii) any certificates representing Trust
Securities not held by DTC or its nominee will be deemed to represent Exchange
Junior Subordinated Debentures having a principal amount equal to the
Liquidation Amount of such Trust Securities, and bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid Distributions on such
Trust Securities until such certificates are presented to the Administrative
Trustees or their agent for cancellation, whereupon the Company will issue to
such holder, and the Debenture Trustee will authenticate, a certificate
representing such Exchange Junior Subordinated Debentures.
There can be no assurance as to the market prices for the Exchange Capital
Securities or the Exchange Junior Subordinated Debentures that may be
distributed in exchange for the Trust Securities if a dissolution and
liquidation of the Trust were to occur. Accordingly, the Exchange Capital
Securities that an investor may purchase, or the Exchange Junior Subordinated
Debentures that the investor may receive on dissolution and liquidation of the
Trust, may trade at a discount to the price that the investor paid to purchase
such securities.
REDEMPTION PROCEDURES
If applicable, Trust Securities shall be redeemed at the applicable
Redemption Price with the proceeds from the contemporaneous repayment or
prepayment of the Exchange Junior Subordinated Debentures. Any redemption of
Trust Securities shall be made and the applicable Redemption Price shall be
payable on the Redemption Date only to the extent that the Trust has funds
legally available for the payment of such applicable Redemption Price. See also
'--Subordination of Common Securities.'
If the Trust gives a notice of redemption in respect of the Exchange
Capital Securities, then, by 12:00 noon, New York City time, on the Redemption
Date, to the extent funds are legally available, with respect to the Exchange
Capital Securities held by DTC or its nominees, the Property Trustee will
deposit or cause the Paying Agent (as defined herein) to deposit irrevocably
with DTC funds sufficient to pay the applicable Redemption Price. See '--Form,
Denomination, Book-Entry Procedures and Transfer.' With respect to the Exchange
Capital Securities held in certificated form, the Property Trustee, to the
extent funds are legally available, will irrevocably deposit with the paying
agent for the Exchange Capital Securities funds sufficient to pay the applicable
Redemption Price and will give such paying agent irrevocable instructions and
authority to pay the applicable Redemption Price to the holders thereof upon
surrender of their certificates evidencing the Exchange Capital Securities. See
'--Payment and Paying Agency.' Notwithstanding the foregoing, Distributions
payable on or prior to the Redemption Date shall be payable to the holders of
such Exchange Capital Securities on the relevant record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
deposited as required, then upon the date of such deposit, all rights of the
holders of the Exchange Capital Securities called for redemption will cease,
except the right of the holders of such Exchange Capital Securities to receive
the applicable Redemption Price, but without interest on such Redemption Price,
and such Exchange Capital Securities will cease to be outstanding. In the event
that any Redemption Date of Exchange Capital Securities is not a Business Day,
then the applicable Redemption Price payable on such date will be paid on the
next succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay), except that, if such next succeeding
Business Day falls in the next calendar year, such payment shall be made on the
immediately preceding Business Day. In the event that payment of the applicable
Redemption Price is improperly withheld or refused and not paid either by the
Trust or by the Company pursuant to the Exchange Guarantee as described under
'Description of Exchange Guarantee,' (i) Distributions on Exchange Capital
Securities will continue to accumulate at the then applicable rate, from the
Redemption Date originally established by the Trust to the date such applicable
Redemption Price is actually paid and (ii) the actual payment date will be the
Redemption Date for purposes of calculating the applicable Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Exchange Capital Securities by tender, in
the open market or by private agreement.
Notice of any redemption will be mailed at least 30 days but not more than
60 days prior to the Redemption Date to each holder of Trust Securities at its
registered address. Unless the Company defaults in payment of the
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applicable Redemption Price on, or in the repayment of, the Exchange Junior
Subordinated Debentures, on and after the Redemption Date, Distributions will
cease to accrue on the Trust Securities called for redemption.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of the Trust Securities; provided, however, that if on any Distribution
Date or Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or applicable Redemption Price
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all of the outstanding Exchange Capital Securities for all Distribution
periods terminating on or prior thereto, or in the case of payment of the
applicable Redemption Price the full amount of such Redemption Price, shall have
been made or provided for, and all funds available to the Property Trustee shall
first be applied to the payment in full in cash of all Distributions on, or
Redemption Price of, the Exchange Capital Securities then due and payable.
In the case of any Event of Default, the Company as holder of the Common
Securities will be deemed to have waived any right to act with respect to such
Event of Default until the effect of such Event of Default shall have been
cured, waived or otherwise eliminated. Until any such Event of Default has been
so cured, waived or otherwise eliminated, the Property Trustee shall act solely
on behalf of the holders of the Exchange Capital Securities and not on behalf of
the Company as holder of the Common Securities, and only the holders of the
Exchange Capital Securities will have the right to direct the Property Trustee
to act on their behalf.
EVENTS OF DEFAULT; NOTICE
The occurrence of a Debenture Event of Default (see 'Description of
Exchange Junior Subordinated Debentures--Debenture Events of Default')
constitutes an 'Event of Default' under the Trust Agreement.
Within ten (10) Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Exchange Capital
Securities, the Administrative Trustees and the Company, as Sponsor, unless such
Event of Default shall have been cured or waived. The Company, as Sponsor, and
the Administrative Trustees are required to file annually with the Property
Trustee a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Exchange Capital Securities shall have a preference over the Common Securities
as described under '--Liquidation of the Trust and Distribution of Exchange
Junior Subordinated Debentures' and '--Subordination of Common Securities.'
REMOVAL OF ISSUER TRUSTEES
Unless a Debenture Event of Default shall have occurred and be continuing,
any Issuer Trustee may be removed at any time by the holder of the Common
Securities. If a Debenture Event of Default has occurred and is continuing, the
Property Trustee and the Delaware Trustee may be removed at such time by the
holders of a majority in Liquidation Amount of the outstanding Exchange Capital
Securities. In no event will the holders of the Exchange Capital Securities have
the right to vote to appoint, remove or replace the Administrative Trustees,
which voting rights are vested exclusively in the Company as the holder of the
Common Securities. No resignation or removal of an Issuer Trustee and no
appointment of a successor trustee shall be effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
Trust Agreement.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any person resulting from any merger,
conversion or consolidation to which such Issuer Trustee shall be a party, or
any person succeeding to all or substantially all the corporate trust business
of such Issuer Trustee, shall be the successor of such Issuer Trustee under the
Trust Agreement, provided such person shall be otherwise qualified and eligible.
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MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any corporation or other Person,
except as described below or as otherwise described under '--Liquidation of the
Trust and Distribution of Exchange Junior Subordinated Debentures.' The Trust
may, at the request of the Company, as Sponsor, with the consent of the
Administrative Trustees but without the consent of the holders of the Exchange
Capital Securities, merge with or into, consolidate, amalgamate, or be replaced
by or convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to a trust organized as such under the laws of any
State; provided, that: (i) such successor entity either (a) expressly assumes
all of the obligations of the Trust with respect to the Trust Securities or (b)
substitutes for the Trust Securities other securities having substantially the
same terms as the Trust Securities (the 'Successor Securities') so long as the
Successor Securities rank the same as the Trust Securities rank in priority with
respect to distributions and payments upon liquidation, redemption and
otherwise; (ii) the Company expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee with
respect to the Exchange Junior Subordinated Debentures; (iii) the Successor
Securities are listed, or any Successor Securities will be listed upon
notification of issuance, on any national securities exchange or other
organization on which the Trust Securities are then listed or quoted, if any;
(iv) if the Exchange Capital Securities (including any Successor Securities) are
rated by any nationally recognized statistical rating organization prior to such
transaction, such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the Exchange Capital Securities (including any
Successor Securities) or, if the Exchange Junior Subordinated Debentures are so
rated, the Exchange Junior Subordinated Debentures, to be downgraded by any such
nationally recognized statistical rating organization; (v) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Trust Securities (including any Successor Securities) in any material respect;
(vi) such successor entity has a purpose identical to that of the Trust; (vii)
prior to such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, the Company has received an opinion from independent counsel
to the Trust experienced in such matters to the effect that (a) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Trust Securities (including any Successor Securities) in any material respect
(other than any dilution of such holders' interests in the new entity), and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Trust nor such successor entity will be required
to register as an investment company under the Investment Company Act of 1940,
as amended (the 'Investment Company Act'); and (viii) the Company or any
permitted successor or assignee owns all of the common securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the Exchange
Guarantee and the Common Guarantee. Notwithstanding the foregoing, the Trust
shall not, except with the consent of holders of 100% in Liquidation Amount of
the Trust Securities, consolidate, amalgamate, merge with or into, or be
replaced by or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to, any other entity or permit any
other entity to consolidate, amalgamate, merge with or into, or replace it if
such consolidation, amalgamation, merger, replacement, conveyance, transfer or
lease would cause the Trust or the successor entity not to be classified as a
grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under '--Mergers, Consolidations,
Amalgamations or Replacements of the Trust' and 'Description of Exchange
Guarantee--Amendments and Assignment' and as otherwise required by law and the
Trust Agreement, the holders of the Exchange Capital Securities will have no
voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities (i) to cure any ambiguity, correct or supplement
any provisions in the Trust Agreement that may be inconsistent with any other
provision, or to make any other provisions with respect to matters or questions
arising under the Trust Agreement, which shall not be inconsistent with the
other provisions of the Trust Agreement, (ii) to modify, eliminate or add to any
provisions of the Trust Agreement to such extent as shall be necessary to ensure
that the Trust will be classified for United States federal income tax purposes
as a grantor trust at all times that any Trust Securities are
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outstanding or to ensure that the Trust will not be required to register as an
'investment company' under the Investment Company Act or (iii) to modify,
eliminate or add any provisions of the Trust Agreement to such extent as shall
be necessary to enable the Trust or the Company to conduct the Exchange Offer in
the manner contemplated by the Capital Securities Registration Rights Agreement;
provided, however, that in each such case such action shall not adversely affect
in any material respect the interests of the holders of the Trust Securities.
Any amendments of the Trust Agreement pursuant to the foregoing shall become
effective when notice thereof is given to the holders of the Trust Securities.
The Trust Agreement may be amended by the Issuer Trustees and the Company (i)
with the consent of holders representing a majority (based upon Liquidation
Amount) of the outstanding Trust Securities and (ii) upon receipt by the Issuer
Trustees of an opinion of counsel experienced in such matters to the effect that
such amendment or the exercise of any power granted to the Issuer Trustees in
accordance with such amendment will not affect the Trust's status as a grantor
trust for United States federal income tax purposes or the Trust's exemption
from status as an 'investment company' under the Investment Company Act,
provided that, without the consent of each holder of Trust Securities, the Trust
Agreement may not be amended to (i) change the amount or timing of any
Distribution on the Trust Securities or otherwise adversely affect the amount of
any Distribution required to be made in respect of the Trust Securities as of a
specified date or (ii) restrict the right of a holder of Trust Securities to
institute suit for the enforcement of any such payment on or after such date.
So long as any Exchange Junior Subordinated Debentures are held by the
Property Trustee, the Issuer Trustees shall not (i) direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee, or execute any trust or power conferred on the Debenture Trustee with
respect to the Exchange Junior Subordinated Debentures, (ii) waive certain past
defaults under the Indenture, (iii) exercise any right to rescind or annul a
declaration of acceleration of the maturity of the principal of the Exchange
Junior Subordinated Debentures or (iv) consent to any amendment, modification or
termination of the Indenture or the Exchange Junior Subordinated Debentures,
where such consent shall be required, without, in each case, obtaining the prior
approval of the holders of a majority in Liquidation Amount of all outstanding
Exchange Capital Securities; provided, however, that where a consent under the
Indenture would require the consent of each holder of Exchange Junior
Subordinated Debentures affected thereby, no such consent shall be given by the
Property Trustee without the prior approval of each holder of the Exchange
Capital Securities. The Issuer Trustees shall not revoke any action previously
authorized or approved by a vote of the holders of the Exchange Capital
Securities except by subsequent vote of such holders. The Property Trustee shall
notify each holder of Exchange Capital Securities of any notice of default with
respect to the Exchange Junior Subordinated Debentures. In addition to obtaining
the foregoing approvals of such holders of the Exchange Capital Securities,
prior to taking any of the foregoing actions, the Issuer Trustees shall obtain
an opinion of counsel experienced in such matters to the effect that the Trust
will not be classified as an association taxable as a corporation for United
States federal income tax purposes on account of such action.
Any required approval of holders of Exchange Capital Securities may be
given at a meeting of such holders convened for such purpose or pursuant to
written consent. The Property Trustee will cause a notice of any meeting at
which holders of Exchange Capital Securities are entitled to vote, or of any
matter upon which action by written consent of such holders is to be taken, to
be given to each holder of record of Exchange Capital Securities in the manner
set forth in the Trust Agreement.
No vote or consent of the holders of Exchange Capital Securities will be
required for the Trust to redeem and cancel the Exchange Capital Securities in
accordance with the Trust Agreement.
Notwithstanding that holders of the Exchange Capital Securities are
entitled to vote or consent under any of the circumstances described above, any
of the Exchange Capital Securities that are owned by the Company, the Issuer
Trustees or any affiliate of the Company or any Issuer Trustees, shall, for
purposes of such vote or consent, be treated as if they were not outstanding.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The Exchange Capital Securities initially will be represented by one or
more Exchange Capital Securities in registered, global form (the 'Global Capital
Securities'). The Global Capital Securities will be deposited upon issuance with
the Property Trustee as custodian for DTC, in New York, New York, and registered
in the name of
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DTC or its nominee, in each case for credit to an account of a direct or
indirect participant in DTC as described below.
In the event that Exchange Capital Securities are issued in certificated
form, the Exchange Capital Securities will be in blocks having a Liquidation
Amount of not less than $100,000 (100 Capital Securities) and may be transferred
or exchanged only in such blocks in the manner and at the offices described
below.
Except as set forth below, the Global Capital Securities may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee and only in amounts that would not cause a
holder to own less than 100 Capital Securities. Beneficial interests in the
Global Capital Securities may not be exchanged for Exchange Capital Securities
in certificated form, except in the limited circumstances described below. See
'--Exchange of Book-Entry Capital Securities for Certificated Capital
Securities.'
DEPOSITORY PROCEDURES
DTC has advised the Trust and the Company that DTC is a limited-purpose
trust company organized under the laws of the State of New York, a member of the
Federal Reserve System, a 'clearing corporation' within the meaning of the
Uniform Commercial Code and a 'clearing agency' registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations (collectively, the
'Participants') and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations.
Indirect access to DTC's system is also available to other entities such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, the 'Indirect Participants'). Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interest and transfer
of ownership interest of each actual purchaser of each security held by or on
behalf of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Trust and the Company that, pursuant to procedures
established by it, (i) upon deposit of the Global Capital Securities, DTC will
credit the accounts of Participants with portions of the Liquidation Amount of
the Global Capital Securities and (ii) ownership of such interests in the Global
Capital Securities will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with respect
to other owners of beneficial interests in the Global Capital Securities).
Investors in the Global Capital Securities may hold their interests therein
directly through DTC if they are Participants in such system, or indirectly
through organizations (including Euroclear and Cedel) which are Participants in
such system. All interest in a Global Capital Security, including those held
through Euroclear or Cedel, will be subject to the procedures and requirements
of DTC. Those interests held through Euroclear or Cedel also may be subject to
the procedures and requirements of such system. The laws of some states require
that certain persons take physical delivery in certified form of securities that
they own. Consequently, the ability to transfer beneficial interests in a Global
Capital Security to such persons will be limited to that extent. Because DTC can
act only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in a Global Capital Security to pledge such interests to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical certificate
evidencing such interests. For certain other restrictions on the transferability
of the Exchange Capital Securities, see '--Exchange of Book-Entry Capital
Securities for Certificated Capital Securities' and '--Exchange of Certificated
Capital Securities for Book-Entry Capital Securities.'
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL CAPITAL
SECURITIES WILL NOT HAVE CAPITAL SECURITIES REGISTERED IN THEIR NAME, WILL NOT
RECEIVE PHYSICAL DELIVERY OF EXCHANGE CAPITAL SECURITIES IN CERTIFICATED FORM
AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE
TRUST AGREEMENT FOR ANY PURPOSE.
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Payments in respect of the Global Capital Security registered in the name
of DTC or its nominee will be payable by the Property Trustee to DTC in its
capacity as the registered holder under the Trust Agreement. Under the terms of
the Trust Agreement, the Property Trustee will treat the persons in whose names
the Exchange Capital Securities, including the Global Capital Securities, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the Property
Trustee nor any agent thereof has or will have any responsibility or liability
for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Capital Securities, or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Capital Securities or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Trust and the Company that its current practice, upon receipt of any
payment in respect of securities such as the Global Capital Securities, is to
credit the accounts of the relevant Participants with the payment on the payment
date, in amounts proportionate to their respective holdings in Liquidation
Amount of beneficial interests in the relevant security as shown on the records
of DTC unless DTC has reason to believe it will not receive payment on such
payment date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Global Capital Securities will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the Property Trustee, the Trust or the Company. None of the Trust, the
Company or the Property Trustee will be liable for any delay by DTC or any of
its Participants in identifying the beneficial owners of the Global Capital
Securities, and the Trust or the Company and the Property Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Secondary market trading activity in interests in the Global Capital
Securities will settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its participants. Transfers between
Participants in DTC will be effected in accordance with DTC's procedures, and
will settle in same-day funds.
DTC has advised the Trust and the Company that it will take any action
permitted to be taken by a holder of Exchange Capital Securities (including,
without limitation, the presentation of Exchange Capital Securities for exchange
as described below) only at the direction of one or more Participants to whose
account with DTC interests in the Global Capital Securities are credited and
only in respect of such portion of the Liquidation Amount of the Exchange
Capital Securities as to which such Participant or Participants has or have
given such direction. However, if there is an Event of Default under the Trust
Agreement, DTC reserves the right to exchange the Global Capital Securities for
Exchange Capital Securities in certificated form and to distribute such Exchange
Capital Securities to its Participants.
The information in this section concerning DTC, Euroclear and Cedel and its
book-entry system has been obtained from sources that the Trust and the Company
believe to be reliable, but neither the Trust nor the Company takes
responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interest in the Global Capital Securities among Participants in DTC, they are
under no obligation to perform or to continue to perform such procedures, and
such procedures may be discontinued at any time. None of the Trust, the Company
or the Property Trustee will have any responsibility for the performance by DTC
or their respective Participants or Indirect Participants of their respective
obligations under the rules and procedures governing its operations.
EXCHANGE OF BOOK-ENTRY CAPITAL SECURITIES FOR CERTIFICATED CAPITAL SECURITIES
A Global Capital Security is exchangeable for Exchange Capital Securities
in registered certificated form if (i) DTC (x) notifies the Trust that it is
unwilling or unable to continue as Depositary for the Global Capital Security
and the Trust thereupon fails to appoint a successor Depositary within 90 days
or (y) has ceased to be a clearing agency registered under the Exchange Act,
(ii) the Company in its sole discretion elects to cause the issuance of the
Exchange Capital Securities in certificated form or (iii) there shall have
occurred and be continuing an Event of Default or any event which after notice
or lapse of time or both would be an Event of Default under the Trust Agreement.
In addition, beneficial interests in a Global Capital Security may be exchanged
by or on behalf of DTC for certificated Exchange Capital Securities upon request
by DTC, but only upon at least 20 days' prior written notice given to the
Property Trustee in accordance with DTC's customary
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procedures. In all cases, certificated Exchange Capital Securities delivered in
exchange for any Global Capital Security or beneficial interests therein will be
registered in the names, and issued in any approved denominations, requested by
or on behalf of the Depositary (in accordance with its customary procedures)
unless the Property Trustee determines otherwise in compliance with applicable
law.
EXCHANGE OF CERTIFICATED CAPITAL SECURITIES FOR BOOK-ENTRY CAPITAL SECURITIES
Other Capital Securities, which will be issued in certificated form, may
not be exchanged for beneficial interests in any Global Capital Security unless
such exchange occurs in connection with a transfer of such Other Capital
Securities and the transferor first delivers to the Property Trustee a written
certificate (in the form provided in the Trust Agreement) to the effect that
such transfer will comply with the appropriate transfer restrictions applicable
to such Capital Securities.
PAYMENT AND PAYING AGENCY
Payments in respect of the Global Capital Securities shall be made to the
Depositary, which shall credit the relevant accounts at the Depositary on the
applicable Distribution Dates, or in respect of the Exchange Capital Securities
that are not held by the Depositary, such payments shall be made by check mailed
to the address of the holder entitled thereto as such address shall appear on
the register. The paying agent (the 'Paying Agent') shall initially be the
Property Trustee and any co-paying agent chosen by the Property Trustee and
acceptable to the Administrative Trustees and the Company. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days' written notice to the
Property Trustee, the Administrative Trustees and the Company. In the event that
the Property Trustee shall no longer be the Paying Agent, the Administrative
Trustees shall appoint a successor (which shall be a bank or trust company
acceptable to the Administrative Trustees and the Company) to act as Paying
Agent.
RESTRICTIONS ON TRANSFER
The Exchange Capital Securities will be issued, and may be transferred,
only in blocks having a Liquidation Amount of not less than $100,000 (100
Capital Securities) and multiples of $1,000 in excess thereof. Any attempted
sale, transfer or other disposition of Exchange Capital Securities in a block
having a Liquidation Amount of less than $100,000 shall be deemed to be void and
of no legal effect whatsoever. Any such transferee shall be deemed not to be the
holder of such Exchange Capital Securities for any purpose, including but not
limited to the receipt of Distributions on such Exchange Capital Securities, and
such transferee shall be deemed to have no interest whatsoever in such Exchange
Capital Securities.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Exchange Capital Securities.
Registration of transfers of the Exchange Capital Securities will be
effected without charge by or on behalf of the Trust, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. The Trust will not be required to register or cause to be
registered the transfer of the Exchange Capital Securities after they have been
called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of
an Event of Default, undertakes to perform only such duties as are specifically
set forth in the Trust Agreement and, during the existence of an Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of Trust
Securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred thereby. If no Event of Default has
occurred and is continuing and the Property Trustee is required to decide
between alternative causes of action, construe ambiguous provisions in the Trust
Agreement or is unsure of the application of any provision of the Trust
Agreement, and the matter is not one on which holders of the Exchange Capital
Securities or the Common Securities are entitled under the Trust Agreement to
vote, then the Property Trustee
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shall take such action as is directed by the Company and, if not so directed,
shall take such action as it deems advisable and in the best interests of the
holders of the Trust Securities and will have no liability except for its own
bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an 'investment company' required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the Exchange Junior
Subordinated Debentures will be treated as indebtedness of the Company for
United States federal income tax purposes. In this connection, the Company and
the Administrative Trustees are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Trust or the Trust
Agreement, that the Company and the Administrative Trustees determine in their
discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect the interests of the holders of the
Trust Securities.
Holders of the Trust Securities have no preemptive or similar rights.
The Trust may not borrow money, issue debt, execute mortgages or pledge any
of its assets.
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DESCRIPTION OF EXCHANGE JUNIOR SUBORDINATED DEBENTURES
The Exchange Junior Subordinated Debentures are to be issued under an
Indenture, as supplemented from time to time (as so supplemented, the
'Indenture'), between the Company and Wilmington Trust Company, as trustee (the
'Debenture Trustee'). The Indenture will be qualified under the Trust Indenture
Act of 1939, as amended (the 'Trust Indenture Act'), and will, by its terms,
incorporate certain provisions of the Trust Indenture Act. This summary of
certain terms and provisions of the Exchange Junior Subordinated Debentures and
the Indenture does not purport to be complete, and where reference is made to
particular provisions of the Indenture, such provisions, including the
definitions of certain terms, some of which are not otherwise defined herein,
are qualified in their entirety by reference to all of the provisions of the
Indenture and those terms made a part of the Indenture by the Trust Indenture
Act.
GENERAL
Concurrently with the issuance of the Original Capital Securities, the
Trust invested the proceeds thereof, together with the consideration paid by the
Company for the Common Securities, in Original Junior Subordinated Debentures
issued by the Company. Pursuant to the Exchange Offer, the Company will exchange
the Exchange Junior Subordinated Debentures for Original Junior Subordinated
Debentures accepted for exchange. The Exchange Junior Subordinated Debentures
will bear interest from April 17, 1998 at the annual rate of 9.375% of the
principal amount thereof, payable semi-annually in arrears on May 1 and November
1 of each year (each, an 'Interest Payment Date'), commencing November 1, 1998,
to the person in whose name each Exchange Junior Subordinated Debenture is
registered, subject to certain exceptions, at the close of business on the
fifteenth day of the month preceding the month in which the relevant payment
date falls. It is anticipated that, until the liquidation, if any, of the Trust,
each Exchange Junior Subordinated Debenture will be held in the name of the
Property Trustee in trust for the benefit of the holders of the Trust
Securities. The amount of interest payable for any period will be computed on
the basis of a 360-day year of twelve 30-day months and, for any period of less
than a full calendar month, the number of days elapsed in such month. In the
event that any date on which interest is payable on the Exchange Junior
Subordinated Debentures is not a Business Day, then payment of the interest
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that if such next succeeding Business Day falls in the next succeeding
calendar year, then such payment shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on such
date. Accrued interest that is not paid on the applicable Interest Payment Date
will bear additional interest on the amount thereof (to the extent permitted by
law) at the rate per annum of 9.375% thereof, compounded semi-annually. The term
'interest,' as used herein, shall include semi-annual interest payments,
interest on semi-annual interest payments not paid on the applicable Interest
Payment Date and Additional Sums (as defined below), as applicable.
The Exchange Junior Subordinated Debentures will be issued in denominations
of $1,000 and integral multiples thereof. The Exchange Junior Subordinated
Debentures will mature on May 1, 2028 (the 'Stated Maturity Date').
The Exchange Junior Subordinated Debentures will be unsecured and rank pari
passu with the Original Junior Subordinated Debentures and all Other Debentures
and will be unsecured and will rank subordinate and junior in right of payment
to all Senior Indebtedness to the extent and in the manner set forth in the
Indenture. See '--Subordination.'
The Company is a holding company and almost all of the operating assets of
the Company are owned by the Company's subsidiaries. The Company is a legal
entity separate and distinct from its subsidiaries. Holders of Exchange Junior
Subordinated Debentures should look only to the Company for payments on the
Exchange Junior Subordinated Debentures. The principal sources of the Company's
income are dividends, interest and fees from its subsidiaries. The Company
relies primarily on dividends from the Bank to meet its obligations for payment
of principal and interest on its outstanding debt obligations and corporate
expenses. There are regulatory limitations on the payment of dividends directly
or indirectly to the Company from the Bank. As of June 30, 1998, under DFI
regulations, the total amount available for payment of dividends by the Bank to
the Company was approximately $9.5 million. However, the DFI has the power to
prohibit any act, including the payment of dividends, if such act would reduce
bank capital to a point that, in its opinion, would render the Bank
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undercapitalized and thus constitute an unsafe or unsound banking practice. In
addition, the Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, and certain other transactions with, the Company
and certain other affiliates, and on investments in stock or other securities
thereof. Such restrictions prevent the Company and such other affiliates from
borrowing from the Bank unless the loans are secured by various types of
collateral. Further, such secured loans, other transactions and investments by
the Bank are generally limited in amount as to the Company and as to each of
such other affiliates to 10% of the Bank's capital and surplus and as to the
Company and all of such other affiliates to an aggregate of 20% of the Bank's
capital and surplus.
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability of
holders of the Capital Securities to benefit indirectly from such distribution),
is subject to the prior claims of creditors of that subsidiary (including
depositors, in the case of the Bank), except to the extent the Company may
itself be recognized as a creditor of that subsidiary. At June 30, 1998, the
subsidiaries of the Company had total liabilities (excluding liabilities owed to
the Company) of $1.75 billion. Accordingly, the Exchange Junior Subordinated
Debentures will be effectively subordinated to all existing and future
liabilities of the Company's subsidiaries (including the Bank's deposit
liabilities) and all liabilities of any future subsidiaries of the Company. The
Indenture does not limit the incurrence or issuance of other secured or
unsecured debt of the Company or any subsidiary, including Senior Indebtedness.
See '--Subordination.'
FORM, REGISTRATION AND TRANSFER
If the Exchange Junior Subordinated Debentures are distributed to the
holders of the Trust Securities, the Exchange Junior Subordinated Debentures may
be represented by one or more global certificates registered in the name of Cede
& Co. as the nominee of DTC. The depositary arrangements for such Exchange
Junior Subordinated Debentures are expected to be substantially similar to those
in effect for the Exchange Capital Securities. For a description of DTC and the
terms of the depositary arrangements relating to payments, transfers, voting
rights, redemptions and other notices and other matters, see 'Description of
Exchange Capital Securities--Form, Denomination, Book-Entry Procedures and
Transfer.'
PAYMENT AND PAYING AGENTS
Payment of principal of (and premium, if any) and interest on Exchange
Junior Subordinated Debentures will be made at the office of the Debenture
Trustee in Wilmington, Delaware or at the office of such Paying Agent or Paying
Agents as the Company may designate from time to time, except that at the option
of the Company payment of any interest may be made, except in the case of
Exchange Junior Subordinated Debentures in global form, (i) by check mailed to
the address of the Person entitled thereto as such address shall appear in the
register for Exchange Junior Subordinated Debentures or (ii) by transfer to an
account maintained by the Person entitled thereto as specified in such register,
provided that proper transfer instructions have been received by the relevant
Record Date. Payment of any interest on any Exchange Junior Subordinated
Debenture will be made to the Person in whose name such Exchange Junior
Subordinated Debenture is registered at the close of business on the Record Date
for such interest, except in the case of defaulted interest. The Company may at
any time designate additional Paying Agents or rescind the designation of any
Paying Agent; however, the Company will at all times be required to maintain a
Paying Agent in each place of payment for the Exchange Junior Subordinated
Debentures.
Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Exchange Junior Subordinated Debenture and
remaining unclaimed for two years after such principal (and premium, if any) or
interest has become due and payable shall, at the request of the Company, be
repaid to the Company and the holder of such Exchange Junior Subordinated
Debenture shall thereafter look, as a general unsecured creditor, only to the
Company for payment thereof.
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OPTION TO EXTEND INTEREST PAYMENT DATE
So long as no Debenture Event of Default has occurred and is continuing,
the Company will have the right under the Indenture to defer the payment of
interest on the Exchange Junior Subordinated Debentures at any time and from
time to time for a period not exceeding ten (10) consecutive semi-annual periods
with respect to each Extension Period, provided that no Extension Period shall
end on a date other than an Interest Payment Date or extend beyond the Stated
Maturity Date. At the end of such Extension Period, the Company must pay all
interest then accrued and unpaid (together with interest thereon at the annual
rate of 9.375%, compounded semi-annually, to the extent permitted by applicable
law ('Compounded Interest')). During an Extension Period, interest will continue
to accrue and, if the Exchange Junior Subordinated Debentures have been
distributed to holders of the Trust Securities, holders of Exchange Junior
Subordinated Debentures (or holders of the Trust Securities while Trust
Securities are outstanding) will be required to accrue such deferred interest
income for United States federal income tax purposes prior to the receipt of
cash attributable to such income. See 'Federal Income Tax Consequences
- --Interest Income and Original Issue Discount.'
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company (including any Other
Debentures) that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures or (iii) make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any subsidiary of the
Company (including any Other Guarantees) if such guarantee ranks pari passu with
or junior in right of payment to the Exchange Junior Subordinated Debentures
(other than (a) dividends or distributions in shares of, or options, warrants or
rights to subscribe for or purchase shares of, common stock of the Company, (b)
any declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee, (d) as a result of a reclassification of the
Company's capital stock or the exchange or conversion of one class or series of
the Company's capital stock for another class or series of the Company's capital
stock, (e) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged, and (f) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans for its directors, officers or employees or any of the
Company's dividend reinvestment plans).
Prior to the termination of any such Extension Period, the Company may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 10 consecutive semi-annual periods, end on
a date other than an Interest Payment Date or extend beyond the Stated Maturity
Date. Upon the termination of any such Extension Period and the payment of all
amounts then due on any Interest Payment Date, the Company may elect to begin a
new Extension Period, subject to the above requirements. No interest shall be
due and payable during an Extension Period, except at the end thereof. The
Company must give the Property Trustee, the Administrative Trustees and the
Debenture Trustee notice of its election of any Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Trust Securities would have been payable except
for the election to begin or extend such Extension Period or (ii) the date the
Administrative Trustees are required to give notice to any securities exchange
or to holders of Exchange Capital Securities of the Record Date or the date such
Distributions are payable, but in any event not less than five Business Days
prior to such Record Date. The Debenture Trustee shall give notice of the
Company's election to begin or extend a new Extension Period to the holders of
the Exchange Capital Securities. There is no limitation on the number of times
that the Company may elect to begin an Extension Period.
OPTIONAL PREPAYMENT
The Exchange Junior Subordinated Debentures will be prepayable, in whole or
in part, at the option of the Company on or after the Initial Optional
Prepayment Date, subject to the Company having received any required regulatory
approval, at 100% of the principal amount thereon plus accrued and unpaid
interest thereon to the date of prepayment (the 'Optional Prepayment Price').
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SPECIAL EVENT PREPAYMENT
If a Special Event shall occur and be continuing prior to the Initial
Optional Prepayment Date, the Company may, at its option and subject to receipt
of any required regulatory approval, prepay the Exchange Junior Subordinated
Debentures in whole (but not in part) at any time (i) within 90 days of the
occurrence of such Special Event and (ii) prior to May 1, 2005, at a prepayment
price (the 'Special Event Prepayment Price') equal to the Make-Whole Amount (as
defined below). The 'Make-Whole Amount' shall be equal to the greater of (x)
100% of the principal amount of the Exchange Junior Subordinated Debentures to
be prepaid or (y) the sum, as determined by a Quotation Agent (as defined
herein), of the present values of the scheduled payments of principal and
interest on the Exchange Junior Subordinated Debentures from the prepayment date
to the Maturity Date discounted to the prepayment date on a semi-annual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Adjusted
Treasury Rate, plus, in the case of each of clauses (x) and (y), accrued and
unpaid interest thereon to the date of prepayment. If, following the occurrence
of a Special Event, the Company exercises its option to prepay the Exchange
Junior Subordinated Debentures, then the proceeds of that prepayment must be
applied to redeem a Like Amount of Trust Securities at the Special Event
Redemption Price (equal to the Special Event Prepayment Price in respect of the
Exchange Junior Subordinated Debentures). See 'Description of Exchange Capital
Securities--Redemption.'
A 'Special Event' means a Tax Event or a Regulatory Capital Event, as the
case may be.
A 'Tax Event' means the receipt by the Company and the Trust of an opinion
of counsel experienced in such matters to the effect that, as a result of any
amendment to, or change (including any announced prospective change) in, the
laws or any regulations thereunder of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement or decision is announced on or after April 17, 1998, there is
more than an insubstantial risk that: (i) the Trust is, or will be within 90
days of the date of such opinion, subject to United States federal income tax
with respect to income received or accrued on the Junior Subordinated
Debentures; (ii) interest payable by the Company on the Junior Subordinated
Debentures is not, or within 90 days of the date of such opinion will not be,
deductible by the Company, in whole or in part, for United States federal income
tax purposes; or (iii) the Trust is, or will be within 90 days of the date of
such opinion, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
A 'Regulatory Capital Event' means that the Company shall have become, or
pursuant to law or regulation will become within 180 days, subject to capital
requirements under which, in the written opinion of counsel experienced in such
matters, the Capital Securities would not constitute Tier 1 Capital (as that
concept is used in the guidelines or regulations issued by the Board of
Governors of the Federal Reserve Board as of the date of this Prospectus)
applied as if the Company (or its successor) were a bank holding company, or the
then-equivalent of such Tier 1 Capital (provided, however, that the distribution
of the Junior Subordinated Debentures in connection with the liquidation of the
Trust by the Company shall not in and of itself constitute a Regulatory Capital
Event unless such liquidation shall have occurred in connection with a Tax
Event).
'Adjusted Treasury Rate' means, with respect to any prepayment date, the
rate per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such prepayment date plus (i) five basis points less than the
difference between the coupon of the Capital Securities at pricing and the yield
on the 6.125% U.S. Treasury Bond due November, 2027 if such prepayment date
occurs prior to May 1, 1999 and (ii) 55 basis points less than the difference
between the coupon of the Capital Securities at pricing and the yield on the
6.125% U.S. Treasury Bond due November, 2027, in all other cases.
'Comparable Treasury Issue' means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the Remaining
Life of the Junior Subordinated Debentures to be prepaid that would be utilized,
at the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
Remaining Life. If no United States Treasury security has a maturity which is
within a period from three months before to three months after the Remaining
Life, the two most closely corresponding United States Treasury securities as
selected by the Quotation Agent
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shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be
interpolated or extrapolated on a straight-line basis, rounding to the nearest
month.
'Treasury Rate' means (i) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently published
statistical release designated 'H.15(519)' or any successor publication which is
published weekly by the Federal Reserve Board and which establishes yields on
actively traded United States Treasury securities adjusted to constant maturity
under the caption 'Treasury Constant Maturities' for the maturity corresponding
to the Remaining Life (if no maturity is within three months before or after the
Remaining Life, yields for the two published maturities most closely
corresponding to the Remaining Life shall be determined and the Treasury Rate
shall be interpolated or extrapolated from such yields on a straight-line basis,
rounding to the nearest month), or (ii) if such release (or any successor
release) is not published during the week preceding the calculation date or does
not contain such yields, the rate per annum equal to the semi-annual equivalent
yield to maturity of the Comparable Treasury Issue, calculated equal to the
Comparable Treasury Price for such prepayment date. The Treasury Rate shall be
calculated on the third Business Day preceding the prepayment date.
'Remaining Life' means the term of the Junior Subordinated Debenture from
the Prepayment Date to the Stated Maturity Date.
'Quotation Agent' means the Reference Treasury Dealer appointed by the
Company. 'Reference Treasury Dealer' means a nationally-recognized U.S.
Government securities dealer in New York City selected by the Company.
'Comparable Treasury Price' means, with respect to any prepayment date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
Business Day preceding such prepayment date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated 'Composite 3:30 p.m. Quotations for U.S.
Government Securities' or (ii) if such release (or any successor release) is not
published or does not contain such prices on such Business Day, (A) the average
of the Reference Treasury Dealer Quotations for such prepayment date, after
excluding the highest and lowest such Reference Treasury Dealer Quotations, or
(B) if the Debenture Trustee obtains fewer than three such Reference Treasury
Dealer Quotations, the average of all such Quotations.
'Reference Treasury Dealer Quotations' means, with respect to each
Reference Treasury Dealer and any prepayment date, the average, as determined by
the Debenture Trustee, of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) quoted in
writing to the Debenture Trustee by such Reference Treasury Dealer at 5:00 p.m.,
New York City time, on the third Business Day preceding such prepayment date.
Notice of any prepayment will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Exchange Junior
Subordinated Debentures to be prepaid at its registered address. Unless the
Company defaults in payment of the prepayment price, on and after the prepayment
date interest ceases to accrue on such Exchange Junior Subordinated Debentures
called for prepayment.
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Company will pay as
additional amounts on the Exchange Junior Subordinated Debentures such amounts
as shall be necessary in order that the amount of Distributions then due and
payable by the Trust on the outstanding Trust Securities shall not be reduced as
a result of any additional taxes, duties and other governmental charges to which
the Trust has become subject as a result of a Tax Event ('Additional Sums').
CERTAIN COVENANTS OF THE COMPANY
The Company will also covenant that it will not, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment of principal, interest or premium, if any, on or repay or
repurchase or redeem any debt securities of the Company (including Other
Debentures) that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures or (iii) make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any subsidiary of the
Company (including under Other Guarantees) if such
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guarantee ranks pari passu or junior in right of payment to the Junior
Subordinated Debentures (other than (a) dividends or distributions in shares of,
or options, warrants or rights to subscribe for or purchase shares of, common
stock of the Company, (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee, (d) as a result of a
reclassification of the Company's capital stock or the exchange or conversion of
one class or series of the Company's capital stock for another class or series
of the Company's capital stock, (e) the purchase of fractional interests in
shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
and (f) purchases of common stock related to the issuance of common stock or
rights under any of the Company's benefit plans for its directors, officers or
employees or any of the Company's dividend reinvestment plans) if at such time
(1) there shall have occurred any event of which the Company has actual
knowledge that (a) is, or with the giving of notice or the lapse of time, or
both, would be, a Debenture Event of Default and (b) in respect of which the
Company shall not have taken reasonable steps to cure, (2) the Company shall be
in default with respect to its payment of any obligations under the Guarantee or
(3) the Company shall have given notice of its election of an Extension Period
as provided in the Indenture and shall not have rescinded such notice, and such
Extension Period, or any extension thereof, shall have commenced and be
continuing.
So long as the Trust Securities remain outstanding, the Company also will
covenant: (i) to directly or indirectly maintain 100% direct or indirect
ownership of the Common Securities, provided, however, that any permitted
successor of the Company under the Indenture may succeed to the Company's
ownership of such Common Securities; (ii) to use its reasonable efforts to cause
the Trust (a) to remain a business trust, except in connection with the
distribution of Junior Subordinated Debentures to the holders of Trust
Securities in liquidation of the Trust, the redemption of all of the Trust
Securities of the Trust, or certain mergers, consolidations or amalgamations,
each as permitted by the Trust Agreement, and (b) to otherwise continue to be
classified as a grantor trust for United States federal income tax purposes; and
(iii) to use its reasonable efforts to cause each holder of Trust Securities to
be treated as owning an undivided beneficial interest in the Junior Subordinated
Debentures.
MODIFICATION OF INDENTURE
From time to time the Company and the Debenture Trustee may, without the
consent of the holders of Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies or enabling the Company and the
Trust to conduct an Exchange Offer as contemplated by the Capital Securities
Registration Rights Agreement, provided that any such action does not materially
adversely affect the interest of the holders of Junior Subordinated Debentures),
and qualifying, or maintaining the qualification of, the Indenture under the
Trust Indenture Act. The Indenture contains provisions permitting the Company
and the Debenture Trustee, with the consent of the holders of a majority in
principal amount of Junior Subordinated Debentures, to modify the Indenture in a
manner affecting the rights of the holders of Junior Subordinated Debentures;
provided that no such modification may, without the consent of the holders of
each outstanding Junior Subordinated Debenture so affected, (i) change the
Stated Maturity Date, or reduce the principal amount of the Junior Subordinated
Debentures or reduce the amount payable on redemption thereof or reduce the rate
or extend the time of payment of interest thereon except pursuant to the
Company's right under the Indenture to defer the payment of interest as provided
therein (see '--Option to Extend Interest Payment Date') or make the principal
of, or interest or premium on, the Junior Subordinated Debentures payable in any
coin or currency other than that provided in the Junior Subordinated Debentures,
or impair or affect the right of any holder of Junior Subordinated Debentures to
institute suit for the payment thereof, or (ii) reduce the percentage of
principal amount of Junior Subordinated Debentures, the holders of which are
required to consent to any such modification of the Indenture.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures constitutes a
'Debenture Event of Default' (whatever the reason for such Debenture Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant
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to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(i) failure for 30 days to pay any interest (including Compounded
Interest and Additional Sums, if any) or Liquidated Damages, if
any, on the Junior Subordinated Debentures or any Other
Debentures, when due (subject to the deferral of any due date in
the case of an Extension Period); or
(ii) failure to pay any principal or premium, if any, on the Junior
Subordinated Debentures or any Other Debentures when due whether
at maturity, upon redemption, by declaration of acceleration of
maturity or otherwise; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Indenture for 90 days after
written notice to the Company from the Debenture Trustee or the
holders of at least 25% in aggregate outstanding principal
amount of Junior Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have, subject to certain exceptions, the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Debenture Trustee. The Debenture Trustee or the holders of not
less than 25% in aggregate outstanding principal amount of the Junior
Subordinated Debentures may declare the principal due and payable immediately
upon a Debenture Event of Default. The holders of a majority in aggregate
outstanding principal amount of the Junior Subordinated Debentures may annul
such declaration and waive the default if the default (other than the
non-payment of the principal of the Junior Subordinated Debentures which has
become due solely by such acceleration) has been cured and a sum sufficient to
pay all matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures affected thereby may, on behalf of the holders of
all the Junior Subordinated Debentures, waive any past default, except a default
in the payment of principal (or premium, if any) on or interest (unless such
default has been cured and a sum sufficient to pay all matured installments of
interest (and premium, if any) and principal due otherwise than by acceleration
has been deposited with the Debenture Trustee) or a default in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each outstanding Junior Subordinated
Debenture.
The Indenture requires the annual filing by the Company with the Debenture
Trustee of a certificate as to the absence of certain defaults under the
Indenture.
The Indenture provides that the Debenture Trustee may withhold notice of a
Debenture Event of Default from the holders of the Junior Subordinated
Debentures if the Debenture Trustee considers it in the interest of such holders
to do so.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF EXCHANGE CAPITAL SECURITIES
If a Debenture Event of Default shall have occurred and be continuing and
shall be attributable to the failure of the Company to pay the principal of (or
premium, if any), or interest (including Compounded Interest and Additional
Sums, if any), on the Exchange Junior Subordinated Debentures on the due date, a
holder of Exchange Capital Securities may institute a Direct Action. The Company
may not amend the Indenture to remove the foregoing right to bring a Direct
Action without the prior written consent of the holders of all of the Exchange
Capital Securities. Notwithstanding any payments made to a holder of Exchange
Capital Securities by the Company in connection with a Direct Action, the
Company shall remain obligated to pay the principal of (or premium, if any) or
interest (including Compounded Interest and Additional Sums, if any) on the
Exchange Junior Subordinated Debentures, and the Company shall be subrogated to
the rights of the holder of such Exchange Capital Securities with respect to
payments on the Exchange Capital Securities to the extent of any payments made
by the Company to such holder in any Direct Action.
The holders of the Exchange Capital Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Exchange Junior Subordinated
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Debentures unless there shall have been an Event of Default under the Trust
Agreement. See 'Description of Exchange Capital Securities--Events of Default;
Notice.'
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties as an entirety
or substantially as an entirety to any Person, and no Person shall consolidate
with or merge into the Company or convey, transfer or lease its properties as an
entirety or substantially as an entirety to the Company, unless: (i) in case the
Company consolidates with or merges into another Person or conveys or transfers
its properties substantially as an entirety to any Person, the successor Person
is organized under the laws of the United States or any State or the District of
Columbia, and such successor Person expressly assumes the Company's obligations
on the Junior Subordinated Debentures; (ii) immediately after giving effect
thereto, no Debenture Event of Default, and no event which, after notice or
lapse of time or both, would become a Debenture Event of Default, shall have
occurred and be continuing; and (iii) certain other conditions as prescribed in
the Indenture are met.
The general provisions of the Indenture do not afford holders of the
Exchange Junior Subordinated Debentures protection in the event of a highly
leveraged or other transaction involving the Company that may adversely affect
holders of the Exchange Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Exchange Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at maturity or called for redemption within one year, and the Company deposits
or causes to be deposited with the Debenture Trustee funds, in trust, for the
purpose and in an amount sufficient to pay and discharge the entire indebtedness
on the Exchange Junior Subordinated Debentures not previously delivered to the
Debenture Trustee for cancellation, for the principal (and premium, if any) and
interest to the date of the deposit or to the Stated Maturity Date, as the case
may be, then the Indenture will cease to be of further effect (except as to the
Company's obligations to pay all other sums due pursuant to the Indenture and to
provide the officers' certificates and opinions of counsel described therein),
and the Company will be deemed to have satisfied and discharged the Indenture.
SUBORDINATION
In the Indenture, the Company has covenanted and agreed that any Junior
Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, all Senior Indebtedness must be paid in
full before the holders of Junior Subordinated Debentures will be entitled to
receive or retain any payment in respect thereof.
In the event of the acceleration of the maturity of Junior Subordinated
Debentures, the holders of all Senior Indebtedness outstanding at the time of
such acceleration will first be entitled to receive payment in full of such
Senior Indebtedness before the holders of Junior Subordinated Debentures will be
entitled to receive or retain any payment in respect of the Junior Subordinated
Debentures.
No payments on account of principal, or premium, if any, or interest, if
any, in respect of the Junior Subordinated Debentures may be made if there shall
have occurred and be continuing a default in any payment with respect to Senior
Indebtedness, or an event of default with respect to any Senior Indebtedness
resulting in the acceleration of the maturity thereof, or if any judicial
proceeding shall be pending with respect to any such default.
'Indebtedness' shall mean (i) every obligation of the Company for money
borrowed; (ii) every obligation of the Company evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses; (iii) every
reimbursement obligation
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of the Company with respect to letters of credit, banker's acceptances or
similar facilities issued for the account of the Company; (iv) every obligation
of the Company issued or assumed as the deferred purchase price of property or
services (but excluding trade accounts payable or accrued liabilities arising in
the ordinary course of business); (v) every capital lease obligation of the
Company; (vi) all indebtedness of the Company whether incurred on or prior to
the date of the Indenture or thereafter incurred, for claims in respect of
derivative products, including interest rate, foreign exchange rate and
commodity forward contracts, options and swaps and similar arrangements; and
(vii) every obligation of the type referred to in clauses (i) through (vi) of
another Person and all dividends of another Person the payment of which, in
either case, the Company has guaranteed or is responsible or liable, directly or
indirectly, as obligor or otherwise.
'Indebtedness Ranking on a Parity with the Junior Subordinated Debentures'
shall mean (i) Indebtedness, whether outstanding on the date of execution of the
Indenture or thereafter created, assumed or incurred, to the extent such
indebtedness by its terms ranks equally with and not prior to the Junior
Subordinated Debentures in the right of payment upon the happening of the
dissolution or winding-up or liquidation or reorganization of the Company and
(ii) all other debt securities, and guarantees in respect of those debt
securities, issued to any other trust, or a trustee of such trust, partnership
or other entity affiliated with the Company that is a financing vehicle of the
Company (a 'financing entity') in connection with the issuance by such financing
entity of equity securities or other securities guaranteed by the Company
pursuant to an instrument that ranks pari passu with or junior in right of
payment to the Guarantee. The securing of any Indebtedness, otherwise
constituting Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures, shall not be deemed to prevent such Indebtedness from constituting
Indebtedness Ranking on a Parity with the Junior Subordinated Debentures.
'Indebtedness Ranking Junior to the Junior Subordinated Debentures' shall
mean any Indebtedness, whether outstanding on the date of execution of the
Indenture or thereafter created, assumed or incurred, to the extent such
indebtedness by its terms ranks junior to and not equally with or prior to the
Junior Subordinated Debentures (and any other Indebtedness Ranking on a Parity
with the Junior Subordinated Debentures) in right of payment upon the happening
of the dissolution or winding-up or liquidation or reorganization of the
Company. The securing of any Indebtedness, otherwise constituting Indebtedness
Ranking Junior to the Junior Subordinated Debentures, shall not be deemed to
prevent such Indebtedness from constituting Indebtedness Ranking Junior to the
Junior Subordinated Debentures.
'Senior Indebtedness' shall mean all Indebtedness, whether outstanding on
the date of execution of the Indenture or thereafter created, assumed or
incurred, except Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures or Indebtedness Ranking Junior to the Junior Subordinated Debentures,
and any deferrals, renewals or extensions of such Senior Indebtedness.
The Company is a holding company and almost all of the operating assets of
the Company are owned by the Company's subsidiaries. The Company relies
primarily on dividends from the Bank to meet its obligations for payment of
principal and interest on its outstanding debt obligations and corporate
expenses. The Company is a legal entity separate and distinct from its
subsidiaries. Holders of Exchange Junior Subordinated Debentures should look
only to the Company for payments on the Exchange Junior Subordinated Debentures.
There are regulatory limitations on the payment of dividends directly or
indirectly to the Company from the Bank. See '--General.' In addition, the Bank
is subject to certain restrictions imposed by federal law on any extensions of
credit to, and certain other transactions with, the Company and certain other
affiliates, and on investments in stock or other securities thereof. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by various types of collateral. Further,
such secured loans, other transactions and investments by the Bank are generally
limited in amount as to the Company and as to each of such other affiliates to
10% of the Bank's capital and surplus and as to the Company and all of such
other affiliates to an aggregate of 20% of the Bank's capital and surplus.
Accordingly, the Exchange Junior Subordinated Debentures will be effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries.
Because the Company is a holding company, the right of the Company to
participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise (and thus the ability of
holders of the Exchange Capital Securities to benefit indirectly from such
distribution), is subject to the prior claims of creditors of that subsidiary
(including depositors, in the case of the Bank), except to the extent the
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Company may itself be recognized as a creditor of that subsidiary. At June 30,
1998, the subsidiaries of the Company had total liabilities (excluding
liabilities owed to the Company) of $1.75 billion. Accordingly, the Exchange
Junior Subordinated Debentures will be effectively subordinated to all existing
and future liabilities of the Company's subsidiaries (including the
subsidiaries' deposit liabilities) and all liabilities of any future
subsidiaries of the Company. The Indenture does not limit the incurrence or
issuance of other secured or unsecured debt of the Company or any subsidiary,
including Senior Indebtedness. See '--Subordination.'
RESTRICTIONS ON TRANSFER
The Exchange Junior Subordinated Debentures will be issued, and may be
transferred, only in blocks having an aggregate principal amount of not less
than $100,000 (100 Exchange Junior Subordinated Debentures) and multiples of
$1,000 in excess thereof. Any such transfer of Exchange Junior Subordinated
Debentures in a block having an aggregate principal amount of less than $100,000
shall be deemed to be void and of no legal effect whatsoever. Any such
transferee shall be deemed not to be the holder of such Exchange Junior
Subordinated Debentures for any purpose, including but not limited to the
receipt of payments on such Exchange Junior Subordinated Debentures, and such
transferee shall be deemed to have no interest whatsoever in such Exchange
Junior Subordinated Debentures.
GOVERNING LAW
The Indenture and the Exchange Junior Subordinated Debentures will be
governed by and construed in accordance with the laws of the State of Delaware.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
Following the Exchange Offer and the qualification of the Indenture under
the Trust Indenture Act, the Debenture Trustee shall have and be subject to all
the duties and responsibilities specified with respect to an indenture trustee
under the Trust Indenture Act. Subject to such provisions, the Debenture Trustee
is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Exchange Junior Subordinated
Debentures, unless offered reasonable indemnity by such holder against the
costs, expenses and liabilities which might be incurred thereby. The Debenture
Trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the Debenture
Trustee reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
DESCRIPTION OF EXCHANGE GUARANTEE
The Exchange Guarantee will be executed and delivered by the Company
concurrently with the issuance by the Trust of the Exchange Capital Securities
for the benefit of the holders from time to time of the Exchange Capital
Securities. The terms of the Exchange Guarantee are identical in all material
respects to the terms of the Original Guarantee. Wilmington Trust Company will
act as Guarantee Trustee under the Exchange Guarantee. The Exchange Guarantee
has been qualified under the Trust Indenture Act. This summary of certain
provisions of the Exchange Guarantee does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Guarantee, including the definitions therein of certain terms, and the
Trust Indenture Act. The Guarantee Trustee will hold the Exchange Guarantee for
the benefit of the holders of the Capital Securities.
STATUS OF THE ORIGINAL GUARANTEE
If not all the Original Capital Securities are exchanged for Exchange
Capital Securities in the Exchange Offer, the Original Guarantee will not
terminate, but will continue to guarantee the obligations of the Company for the
benefit of the holders of the Original Capital Securities. The Original
Guarantee will terminate upon full payment of the applicable Redemption Price of
the Original Capital Securities, upon full payment of the Liquidation Amount
payable upon liquidation of the Trust or upon distribution of Original Junior
Subordinated Debentures to the holders of the Original Capital Securities. The
Original Guarantee will continue to be effective or will be reinstated, as the
case may be, if at any time any holder of the Original Capital Securities must
restore payment of any sums paid under the Original Capital Securities or the
Original Guarantee.
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GENERAL
The Company will irrevocably agree to pay in full on a subordinated basis,
to the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Exchange Capital Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust may have or assert
other than the defense of payment. The following payments with respect to the
Exchange Capital Securities, to the extent not paid by or on behalf of the Trust
(the 'Guarantee Payments'), will be subject to the Guarantee: (i) any
accumulated and unpaid Distributions required to be paid on the Exchange Capital
Securities, to the extent that the Trust has funds on hand legally available
therefor at such time, (ii) the applicable Redemption Price with respect to the
Exchange Capital Securities called for redemption, to the extent that the Trust
has funds on hand legally available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding-up or liquidation of the Trust
(other than in connection with the distribution of the Exchange Junior
Subordinated Debentures to holders of the Exchange Capital Securities or the
redemption of all Exchange Capital Securities), the lesser of (a) the
Liquidation Distribution, to the extent the Trust has funds legally available
therefor at the time, and (b) the amount of assets of the Trust remaining
available for distribution to holders of Exchange Capital Securities after
satisfaction of liabilities to creditors of the Trust as required by applicable
law. The Company's obligation to make a Guarantee Payment may be satisfied by
direct payment of the required amounts by the Company to the holders of the
Exchange Capital Securities or by causing the Trust to pay such amounts to such
holders.
The Exchange Guarantee will rank subordinate and junior in right of payment
to all Senior Indebtedness to the extent provided therein. See '--Status of the
Exchange Guarantee.' Because the Company is a holding company, the right of the
Company to participate in any distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization or otherwise is subject to the prior
claims of creditors of that subsidiary, except to the extent the Company may
itself be recognized as a creditor of that subsidiary. Accordingly, the
Company's obligations under the Guarantee effectively will be subordinated to
all existing and future liabilities of the Company's subsidiaries (including the
Bank's deposit liabilities), and all liabilities of any future subsidiaries of
the Company. Claimants should look only to the assets of the Company for
payments under the Exchange Guarantee. See 'Description of the Exchange Junior
Subordinated Debentures--General.' The Exchange Guarantee does not limit the
incurrence or issuance of other secured or unsecured debt of the Company,
including Senior Indebtedness, whether under the Indenture, any other indenture
that the Company may enter into in the future or otherwise.
The Company will, through the Exchange Guarantee, the Trust Agreement, the
Exchange Junior Subordinated Debentures and the Indenture, taken together,
fully, irrevocably and unconditionally guarantee all of the Trust's obligations
under the Exchange Capital Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Exchange Capital Securities. See 'Relationship
Among the Exchange Capital Securities, the Exchange Junior Subordinated
Debentures and the Exchange Guarantee.'
STATUS OF THE GUARANTEE
The Exchange Guarantee will constitute an unsecured obligation of the
Company and will rank subordinate and junior in right of payment to all Senior
Indebtedness in the same manner as the Exchange Junior Subordinated Debentures.
The Exchange Guarantee will rank pari passu with all Other Guarantees
issued by the Company after the Issue Date with respect to capital securities
(if any) issued by Other Trusts. The Exchange Guarantee will constitute a
guarantee of payment and not of collection (i.e., the guaranteed party may
institute a legal proceeding directly against the Company to enforce its rights
under the Exchange Guarantee without first instituting a legal proceeding
against any other person or entity). The Exchange Guarantee will be held for the
benefit of the holders of the Exchange Capital Securities. The Exchange
Guarantee will not be discharged except by payment of the Guarantee Payments in
full to the extent not paid by the Trust or upon distribution to the holders of
the Exchange Capital Securities of the Exchange Junior Subordinated Debentures.
The Exchange Guarantee does not place a limitation on the amount of additional
Senior Indebtedness that may be incurred by the Company.
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EVENTS OF DEFAULT
An event of default under the Exchange Guarantee will occur upon the
failure of the Company to perform any of its payment or other obligations
thereunder, provided, however, that except with respect to a default in payment
of any Guarantee Payment, the Company shall have received notice of default and
shall not have cured such default within 60 days after receipt of such notice.
The holders of not less than a majority in Liquidation Amount of the Exchange
Capital Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Exchange Guarantee or to direct the exercise of any trust or
power conferred upon the Guarantee Trustee under the Exchange Guarantee.
Any holder of the Exchange Capital Securities may institute a legal
proceeding directly against the Company to enforce its rights under the Exchange
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity.
The Company, as guarantor, will be required to file annually with the
Guarantee Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Exchange Guarantee.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the Exchange Capital Securities (in which case no vote
will be required), the Exchange Guarantee may not be amended without the prior
approval of the holders of a majority of the Liquidation Amount of such
outstanding Exchange Capital Securities. The manner of obtaining any such
approval will be as set forth under 'Description of Exchange Capital
Securities--Voting Rights; Amendment of the Trust Agreement.' All guarantees and
agreements contained in the Exchange Guarantee shall bind the successors,
assigns, receivers, trustees and representatives of the Company and shall inure
to the benefit of the holders of the Exchange Capital Securities then
outstanding.
TERMINATION OF THE GUARANTEE
The Exchange Guarantee will terminate and be of no further force and effect
upon full payment of the applicable Redemption Price of the Exchange Capital
Securities, upon full payment of the Liquidation Amount payable upon liquidation
of the Trust or upon distribution of Exchange Junior Subordinated Debentures to
the holders of the Exchange Capital Securities. The Exchange Guarantee will
continue to be effective or will be reinstated, as the case may be, if at any
time any holder of the Exchange Capital Securities must restore payment of any
sums paid under the Exchange Capital Securities or the Exchange Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Exchange Guarantee, will
undertake to perform only such duties as are specifically set forth in the
Exchange Guarantee and, in case a default with respect to the Exchange Guarantee
has occurred, must exercise the same degree of care and skill as a prudent
person would exercise or use in the conduct of his or her own affairs. Subject
to this provision, the Guarantee Trustee will be under no obligation to exercise
any of the powers vested in it by the Exchange Guarantee at the request of any
holder of the Exchange Capital Securities unless it is offered reasonable
indemnity against the costs, expenses and liabilities that might be incurred
thereby.
GOVERNING LAW
The Exchange Guarantee will be governed by and construed in accordance with
the laws of the State of Delaware.
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DESCRIPTION OF ORIGINAL SECURITIES
The terms of the Original Securities are identical in all materials
respects to the Exchange Securities, except that (i) the Original Securities
have not been registered under the Securities Act, are subject to certain
restrictions on transfer and are entitled to certain rights under the Capital
Securities Registration Rights Agreement (which rights will terminate upon
consummation of the Exchange Offer, except under limited circumstances), (ii)
the Exchange Capital Securities will not provide for any increase in the
Distribution rate thereon and (iii) the Exchange Junior Subordinated Debentures
will not provide for any liquidated damages thereon. The Original Securities
provide that, if a registration statement relating to the Exchange Offer has not
been filed by August 14, 1998 and been declared effective by September 15, 1998,
then liquidated damages will accrue at the rate of 0.25% per annum on the
principal amount of the Original Junior Subordinated Debentures and
Distributions will accrue at the rate of 0.25% per annum on the Liquidation
Amount of the Original Capital Securities, for the period from the occurrence of
such event until such time as such registration statement has been filed or
declared effective, as the case may be. In addition, the Original Capital
Securities provide that, if the Trust has not exchanged Exchange Capital
Securities for all Original Capital Securities validly tendered by the 45th day
after the date on which the registration statement is declared effective, the
Distribution rate borne by the Original Capital Securities will increase by
0.25% per annum for the period from the occurrence of such event until such time
as the Exchange Offer has been consummated. The Exchange Securities are not, and
upon consummation of the Exchange Offer the Original Securities will not be,
entitled to any such additional interest or Distributions. Accordingly, holders
of Original Capital Securities should review the information set forth under
'Risk Factors--Consequences of a Failure to Exchange Original Capital
Securities' and 'Description of Exchange Securities.'
RELATIONSHIP AMONG THE EXCHANGE CAPITAL SECURITIES, THE EXCHANGE JUNIOR
SUBORDINATED DEBENTURES AND THE EXCHANGE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Exchange Capital
Securities (to the extent the Trust has funds on hand legally available for the
payment of such Distributions) will be irrevocably guaranteed by the Company as
and to the extent set forth under 'Description of Exchange Guarantee.' Taken
together, the Company's obligations under the Exchange Junior Subordinated
Debentures, the Indenture, the Trust Agreement and the Exchange Guarantee will
provide, in the aggregate, a full, irrevocable and unconditional guarantee of
payments of Distributions and other amounts due on the Exchange Capital
Securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes such guarantee. It is only the
combined operation of these documents that has the effect of providing a full,
irrevocable and unconditional guarantee of the Trust's obligations under the
Exchange Capital Securities. If and to the extent that the Company does not make
the required payments on the Exchange Junior Subordinated Debentures, the Trust
will not have sufficient funds to make the related payments, including
Distributions, on the Exchange Capital Securities. The Exchange Guarantee will
not cover any such payment when the Trust does not have sufficient funds on hand
legally available therefor. In such event, the remedy of a holder of Exchange
Capital Securities is to institute a Direct Action. The obligations of the
Company under the Exchange Guarantee will be subordinate and junior in right of
payment to all Senior Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Exchange Junior Subordinated Debentures, such payments will be sufficient to
cover Distributions and other payments due on the Exchange Capital Securities,
primarily because: (i) the aggregate principal amount or Prepayment Price of the
Exchange Junior Subordinated Debentures will be equal to the sum of the
Liquidation Amount or Redemption Price, as applicable, of the Trust Securities;
(ii) the interest rate and interest and other payment dates on the Exchange
Junior Subordinated Debentures will match the Distribution rate and Distribution
and other payment dates for the Trust Securities; (iii) the Company, as Sponsor,
shall pay for all and any costs, expenses and liabilities of the Trust except
the Trust's obligations to holders of Trust Securities under such Trust
Securities;
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and (iv) the Trust Agreement will provide that the Trust is not authorized to
engage in any activity that is not consistent with the limited purposes thereof.
ENFORCEMENT RIGHTS OF HOLDERS OF EXCHANGE CAPITAL SECURITIES
A holder of any Exchange Capital Security may institute a legal proceeding
directly against the Company to enforce its rights under the Exchange Guarantee
without first instituting a legal proceeding against the Guarantee Trustee, the
Trust or any other person or entity.
A default or event of default under any Senior Indebtedness would not
constitute a default or Event of Default under the Trust Agreement. However, in
the event of payment defaults under, or acceleration of, Senior Indebtedness,
the subordination provisions of the Indenture will provide that no payments may
be made in respect of the Exchange Junior Subordinated Debentures until such
Senior Indebtedness has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on Exchange Junior
Subordinated Debentures would constitute an Event of Default under the Trust
Agreement.
LIMITED PURPOSE OF THE TRUST
The Exchange Capital Securities will represent beneficial interests in the
Trust, and the Trust exists for the sole purpose of issuing and selling the
Trust Securities, using the proceeds from the sale of the Trust Securities to
acquire the Exchange Junior Subordinated Debentures, exchanging the Exchange
Capital Securities and the Original Junior Subordinated Debentures in the
Exchange Offer and engaging in only those other activities necessary, advisable
or incidental thereto. A principal difference between the rights of a holder of
a Exchange Capital Security and a holder of a Exchange Junior Subordinated
Debenture is that a holder of a Exchange Junior Subordinated Debenture will be
entitled to receive from the Company the principal amount of (and premium, if
any) and interest on Exchange Junior Subordinated Debentures held, while a
holder of Exchange Capital Securities is entitled to receive Distributions from
the Trust (or, in certain circumstances, from the Company under the Guarantee)
if and to the extent the Trust has funds on hand legally available for the
payment of such Distributions.
RIGHTS UPON TERMINATION
Unless the Exchange Junior Subordinated Debentures are distributed to
holders of the Trust Securities, upon any voluntary or involuntary termination,
winding-up or liquidation of the Trust, after satisfaction of the liabilities of
creditors of the Trust as required by applicable law, the holders of the Trust
Securities will be entitled to receive, out of assets held by the Trust, the
Liquidation Distribution in cash. See 'Description of Exchange Capital
Securities--Liquidation of the Trust and Distribution of Exchange Junior
Subordinated Debentures.' Upon any voluntary or involuntary liquidation or
bankruptcy of the Company, the Property Trustee, as holder of the Exchange
Junior Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated in right of payment to all Senior Indebtedness as set forth in the
Indenture, but entitled to receive payment in full of principal (and premium, if
any) and interest, before any stockholders of the Company receive payments or
distributions. Since the Company will be the guarantor under the Exchange
Guarantee and will agree to pay for all costs, expenses and liabilities of the
Trust (other than the Trust's obligations to the holders of its Trust
Securities), the positions of a holder of Exchange Capital Securities and a
holder of Exchange Junior Subordinated Debentures relative to other creditors
and to stockholders of the Company in the event of liquidation or bankruptcy of
the Company are expected to be substantially the same.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Patton Boggs LLP, special federal income tax counsel to
the Company and the Trust ('Tax Counsel'), the following is a summary of the
principal United States federal income tax consequences under current law of the
purchase, ownership and disposition of Capital Securities held as capital assets
by a holder who purchases such Capital Securities upon initial issuance. In the
opinion of Tax Counsel, the summary addresses all material United States federal
income tax consequences of the transactions contemplated in this Prospectus. It
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does not deal with special classes of holders such as banks, thrifts, real
estate investment trusts, regulated investment companies, insurance companies,
dealers in securities or currencies, tax-exempt investors, United States Alien
Holders (as defined below) engaged in a U.S. trade or business or persons that
will hold the Capital Securities as a position in a 'straddle,' as part of a
'synthetic security' or 'hedge,' as part of a 'conversion transaction' or other
integrated investment, or as other than a capital asset. This summary also does
not address the tax consequences to persons that have a functional currency
other than the U.S. dollar or the tax consequences to shareholders, partners or
beneficiaries of a holder of Capital Securities. Further, it does not include
any description of any alternative minimum tax consequences or the tax laws of
any state or local government or of any foreign government that may be
applicable to the Capital Securities. This summary is based on the Code,
Treasury regulations thereunder and the administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. An opinion of Tax Counsel is not
binding on the IRS or the courts. No rulings have been or are expected to be
sought from the IRS with respect to any of the transactions described herein and
no assurance can be given that the IRS will not take contrary positions.
Moreover, no assurance can be given that the opinions expressed herein will not
be challenged by the IRS or, if challenged, that such a challenge would not be
successful.
EXCHANGE OF CAPITAL SECURITIES
The exchange of Original Capital Securities for Exchange Capital Securities
will not be a taxable event to holders for United States federal income tax
purposes. The exchange of Original Capital Securities for Exchange Capital
Securities pursuant to the Exchange Offer will not be treated as an 'exchange'
for United States federal income tax purposes because the Exchange Capital
Securities will not be considered to differ materially in kind or extent from
the Original Capital Securities and because the exchange will occur by operation
of the terms of the Original Capital Securities. Accordingly, the Exchange
Capital Securities will have the same issue price as the Original Capital
Securities, and a holder will have the same adjusted tax basis and holding
period in the Exchange Capital Securities immediately after the exchange as the
holder had in the Original Capital Securities immediately before the exchange.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
In connection with the issuance of the Junior Subordinated Debentures, Tax
Counsel has rendered its opinion generally to the effect that, under then
current law and assuming full compliance with the terms of the Indenture (and
certain other documents), and based on certain facts and assumptions contained
in such opinion, the Junior Subordinated Debentures will be classified for
United States federal income tax purposes as indebtedness of the Company. The
Company, the Trust and the holders of the Capital Securities (by acceptance of a
beneficial interest in a Capital Security) will agree to treat the Junior
Subordinated Debentures as indebtedness of the Company for all United States
federal income tax purposes.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Capital Securities, Tax Counsel has
rendered its opinion generally to the effect that, under then current law and
assuming full compliance with the terms of the Trust Agreement and the Indenture
(and certain other documents), and based on certain facts and assumptions
contained in such opinion, the Trust will be classified for United States
federal income tax purposes as a grantor trust and not as an association taxable
as a corporation. Accordingly, for United States federal income tax purposes,
each holder of Capital Securities generally will be considered the owner of an
undivided interest in the Junior Subordinated Debentures, and each holder will
be required to include in its gross income any interest (or OID accrued) with
respect to its allocable share of those Junior Subordinated Debentures.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under recently issued Treasury regulations (the 'Regulations') applicable
to debt instruments issued on or after August 13, 1996, a 'remote' contingency
that stated interest will not be timely paid will be ignored in determining
whether a debt instrument is issued with OID. The Company believes that the
likelihood of its exercising its option to defer payments of interest is
'remote' since exercising that option would, among other things, prevent the
Company from declaring dividends on any class of its equity securities.
Accordingly, the
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Company intends to take the position based on the advice of Tax Counsel that the
Junior Subordinated Debentures will not be considered to be issued with OID and,
accordingly, stated interest on the Junior Subordinated Debentures generally
will be taxable to a holder as ordinary income at the time it is paid or accrued
in accordance with such holder's method of tax accounting.
Under the Regulations, if the Company were to exercise its option to defer
payments of interest, the Junior Subordinated Debentures would at that time be
treated as issued with OID, and all stated interest on the Junior Subordinated
Debentures would thereafter be treated as OID as long as the Junior Subordinated
Debentures remain outstanding. In such event, all of a holder's taxable interest
income with respect to the Junior Subordinated Debentures would thereafter be
accounted for on an economic accrual basis regardless of such holder's method of
tax accounting, and actual distributions of stated interest would not be
reported as taxable income. Consequently, a holder of Capital Securities would
be required to include in gross income OID even though the Company would not
make actual cash payments during an Extension Period. Moreover, under the
Regulations, if the option to defer the payment of interest was determined not
to be 'remote,' the Junior Subordinated Debentures would be treated as having
been originally issued with OID. In such event, all of a holder's taxable
interest income with respect to the Junior Subordinated Debentures would be
accounted for on an economic accrual basis regardless of such holder's method of
tax accounting, and actual distributions of stated interest would not be
reported as taxable income.
The Regulations have not yet been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take a
position contrary to the interpretation described herein.
Because income on the Capital Securities will constitute interest or OID,
corporate holders of the Capital Securities will not be entitled to a
dividends-received deduction with respect to any income recognized with respect
to the Capital Securities.
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
The Company will have the right at any time to liquidate the Trust and
cause the Junior Subordinated Debentures to be distributed to the holders of the
Trust Securities. Under current law, such a distribution, for United States
federal income tax purposes, would be treated as a nontaxable event to each
holder, and each holder would receive an aggregate tax basis in the Junior
Subordinated Debentures equal to such holder's aggregate tax basis in its
Capital Securities. A holder's holding period in the Junior Subordinated
Debentures so received in liquidation of the Trust would include the period
during which the Capital Securities were held by such holder.
Under certain circumstances described herein (see 'Description of Capital
Securities'), the Junior Subordinated Debentures may be redeemed for cash and
the proceeds of such redemption distributed to holders in redemption of their
Capital Securities. Under current law, such a redemption would, for United
States federal income tax purposes, constitute a taxable disposition of the
redeemed Capital Securities, and a holder could recognize gain or loss as if it
sold such redeemed Capital Securities for cash. See '--Sales of Capital
Securities.'
SALES OF CAPITAL SECURITIES
A holder that sells Capital Securities (including a redemption of the
Capital Securities by the Company) will recognize gain or loss equal to the
difference between its adjusted tax basis in the Capital Securities and the
amount realized on the sale of such Capital Securities (other than with respect
to accrued and unpaid interest which has not yet been included in income, which
will be treated as ordinary income). A holder's adjusted tax basis in the
Capital Securities generally will be its initial purchase price increased by OID
(if any) previously includable in such holder's gross income to the date of
disposition and decreased by payments (if any) received on the Capital
Securities in respect of OID. Such gain or loss generally will be a capital gain
or loss and generally will be a long-term capital gain or loss if the Capital
Securities have been held for more than one year.
The Capital Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
Junior Subordinated Debentures. A holder who uses the accrual method of
accounting for tax purposes (and a cash method holder, if the Junior
Subordinated Debenture are deemed to have been issued with OID) who disposes of
his Capital Securities between record dates for payments of distributions
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thereon will be required to include accrued but unpaid interest on the Junior
Subordinated Debentures through the date of disposition in income as ordinary
income (i.e., interest or, if applicable, OID), and to add such amount to his
adjusted tax basis in his pro rata share of the underlying Junior Subordinated
Debentures deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis (which will include all accrued but unpaid interest)
a holder will recognize a capital loss. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a 'United States Alien Holder' is any
corporation, individual, partnership, estate or trust that is not a U.S. Holder
for United States federal income tax purposes.
A 'U.S. Holder' is a holder of Capital Securities who or which is (i) a
citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for United States federal income tax purposes,
(ii) a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision thereof, (iii) an estate the
income of which is includable in its gross income for United States federal
income tax purposes without regard to its source or (iv) a trust over which (A)
a court within the United States is able to exercise primary supervision over
the administration of the trust and (B) one or more United States trustees have
the authority to control all substantial decisions of the trust.
Under present United States federal income tax laws: (i) payments by the
Trust or any of its paying agents to any holder of a Capital Security who or
which is a United States Alien Holder will not be subject to United States
federal withholding tax; provided that, (a) the beneficial owner of the Capital
Security does not actually or constructively own 10 percent or more of the total
combined voting power of all classes of stock of the Company entitled to vote,
(b) the beneficial owner of the Capital Security is not a controlled foreign
corporation that is related to the Company through stock ownership, and (c)
either (A) the beneficial owner of the Capital Security certifies to the Trust
or its agent, under penalties of perjury, that it is not a United States holder
and provides its name and address or (B) a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business (a 'Financial Institution'), and holds
the Capital Security in such capacity, certifies to the Trust or its agent,
under penalties of perjury, that such statement has been received from the
beneficial owner by it or by a Financial Institution between it and the
beneficial owner and furnishes the Trust or its agent with a copy thereof; and
(ii) a United States Alien Holder of a Capital Security will not be subject to
United States federal withholding tax on any gain realized upon the sale or
other disposition of a Capital Security.
As discussed above, changes in legislation affecting the United States
federal income tax treatment of the Junior Subordinated Debentures are possible,
and could adversely affect the ability of the Company to deduct the interest
payable on the Junior Subordinated Debentures. Moreover, any such legislation
could adversely affect United States Alien Holders by characterizing income
derived from the Junior Subordinated Debentures as dividends, generally subject
to a 30% income tax (on a withholding basis) when paid to a United States Alien
Holder, rather than as interest which, as discussed above, is generally exempt
from income tax in the hands of a United States Alien Holder.
A United States Alien Holder that holds Capital Securities in connection
with the active conduct of a United States trade or business will be subject to
income tax on all income and gains recognized with respect to its proportionate
share of the Junior Subordinated Debentures.
INFORMATION REPORTING TO HOLDERS
Generally, income on the Capital Securities will be reported to holders on
Forms 1099, which forms should be mailed to holders of Capital Securities by
January 31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Capital Securities may
be subject to a 'backup' withholding tax of 31 percent unless the holder
complies with certain identification requirements. Any withheld amounts will be
allowed as a credit against the holder's United States federal income tax,
provided the required information is provided to the IRS.
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THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE MAY NOT BE
APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE CAPITAL SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Each of the Company (the obligor with respect to the Exchange Junior
Subordinated Debentures held by the Trust), and its affiliates and the Property
Trustee may be considered a 'party in interest' (within the meaning of ERISA) or
a 'disqualified person' (within the meaning of Section 4975 of the Code) with
respect to many Plans that are subject to ERISA and certain employee
benefit-related provisions of the Code. The purchase and/or holding of Exchange
Capital Securities by a Plan that is subject to the fiduciary responsibility
provisions of ERISA or the prohibited transaction provisions of Section 4975 of
the Code (including individual retirement arrangements and other plans described
in Section 4975(e)(1) of the Code) and with respect to which the Company, the
Property Trustee or any affiliate is a service provider (or otherwise is a party
in interest or a disqualified person) may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless such Exchange
Capital Securities are acquired pursuant to and in accordance with an applicable
exemption, such as Prohibited Transaction Class Exemption ('PTCE') 84-14 (an
exemption for certain transactions determined by an independent qualified
professional asset manager), PTCE 91-38 (an exemption for certain transactions
involving bank collective investment funds), PTCE 90-1 (an exemption for certain
transactions involving insurance company pooled separate accounts), PTCE 95-60
(an exemption for transactions involving certain insurance company general
accounts) or PTCE 96-23 (an exemption for certain transactions determined by an
in-house asset manager). In addition, a Plan fiduciary considering the purchase
of Exchange Capital Securities should be aware that the assets of the Trust may
be considered 'plan assets' for ERISA purposes. In such event, any persons
exercising discretion with respect to the Exchange Junior Subordinated
Debentures may become fiduciary parties in interest or disqualified persons with
respect to investing Plans. In order to avoid certain prohibited transactions
under ERISA and the Code that could thereby result, each investing Plan, by
purchasing the Exchange Capital Securities, will be deemed to have directed the
Trust to invest in the Exchange Junior Subordinated Debentures and to have
consented to the appointment of the Property Trustee. In this regard, it should
be noted that, in an Event of Default, the Company may not remove the Property
Trustee without the approval of a majority of the holders of the Exchange
Capital Securities.
A Plan fiduciary should consider whether the purchase of Exchange Capital
Securities could result in a delegation of fiduciary authority to the Property
Trustee, and, if so, whether such a delegation of authority is permissible under
the Plan's governing instrument or any investment management agreement with the
Plan. In making such determination, a Plan fiduciary should note that the
Property Trustee is a U.S. bank qualified to be an investment manager (within
the meaning of Section 3(38) of ERISA) to which such a delegation of authority
generally would be permissible under ERISA. Further, prior to an Event of
Default with respect to the Exchange Junior Subordinated Debentures, the
Property Trustee will have only limited custodial and ministerial authority with
respect to Trust assets.
THE SALE OF INVESTMENTS TO PLANS IS IN NO RESPECT A REPRESENTATION BY THE
TRUST, THE COMPANY, THE PROPERTY TRUSTEE OR ANY OTHER PERSON ASSOCIATED WITH THE
SALE OF THE CAPITAL SECURITIES THAT SUCH SECURITIES MEET ALL RELEVANT LEGAL
REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY OR ANY PARTICULAR
PLAN, OR THAT SUCH SECURITIES ARE OTHERWISE APPROPRIATE FOR PLANS GENERALLY OR
ANY PARTICULAR PLAN. ANY PURCHASER PROPOSING TO ACQUIRE CAPITAL SECURITIES WITH
ASSETS OF ANY PLAN SHOULD CONSULT WITH ITS COUNSEL.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Capital Securities for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Capital Securities.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Capital
Securities received in exchange for Original Capital Securities where such
Original Capital Securities were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Trust and the Company
have agreed that, starting on the Expiration Date and ending on the close of
business on the 90th day following the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, for a period of 90 days after
the Expiration Date, all dealers effecting transactions in the Exchange
Securities may be required to deliver a prospectus.
The Trust and the Company will not receive any proceeds from any issuance
of Exchange Capital Securities. Exchange Capital Securities received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions, in the over-the-counter market,
in negotiated transactions, through the writing of options on the Exchange
Capital Securities or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Capital Securities. Any broker-dealer that
resells Exchange Capital Securities that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Capital Securities may be deemed to be an
'underwriter' within the meaning of the Securities Act, and any profit of any
such resale of Exchange Capital Securities and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an 'underwriter' within the meaning of the Securities
Act.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996 and the
consolidated statements of operations, of stockholders' equity and of cash flows
for the years ended December 31, 1997, 1996 and 1995 included in this Prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Exchange
Capital Securities, the enforceability of the Trust Agreement and the formation
of the Trust will be passed upon by Richards, Layton & Finger, P.A., Wilmington,
Delaware, special counsel to the Company and the Trust. The validity of the
Exchange Junior Subordinated Debentures and the Exchange Guarantee will be
passed upon for the Company by Patton Boggs LLP, Washington, D.C., counsel to
the Company.
Patton Boggs LLP will rely on the opinions of Richards, Layton & Finger,
P.A. as to matters of Delaware law. Certain matters relating to United States
federal income tax considerations will be passed upon for the Company by Patton
Boggs LLP.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'SEC') a registration statement under the Securities Act with respect to the
Exchange Securities offered hereby. As permitted by the rules and regulations of
the SEC, this Prospectus does not contain all the information set forth in the
registration statement. Such information can be examined without charge at the
public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of such material can be obtained from the SEC
at
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prescribed rates. In addition, the SEC maintains a web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including the
Company. This Prospectus contains a description of the material terms and
features of all material contracts, reports or exhibits to the Registration
Statement required to be described, however, the statements contained in this
Prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
The Company has registered its Common Stock with the SEC under Section
12(g) of the Exchange Act and, therefore the Company is subject to the annual
and periodic reporting and certain other requirements of the Exchange Act.
A copy of the Certificate of Incorporation and the Bylaws of the Company
are available without charge from the Company.
No separate financial statements of the Trust have been included herein.
The Company and the Trust do not consider that such financial statements would
be material to holders of the Trust Securities because the Trust is a
newly-formed special purpose entity, has no operating history or independent
operations and is not engaged in and does not propose to engage in any activity
other than holding as trust assets the Junior Subordinated Debentures and
issuing the Capital Securities. In addition, the Company does not expect that
the Trust will file reports, proxy statements and other information under the
Exchange Act with the SEC.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997.................................... F-2
Consolidated Statements of Operations for the Six Months Ended June 30, 1998 and 1997.................... F-3
Consolidated Statements of Changes in Stockholders' Equity for Six Months Ended June 30, 1998............ F-4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997.................... F-5
Notes to Consolidated Financial Statements for the Six Months Ended June 30, 1998 and 1997............... F-6
Report of Independent Accountants........................................................................ F-14
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................. F-15
Consolidated Statements of Operations For Years Ended December 31, 1997, 1996 and 1995................... F-16
Consolidated Statements of Changes in Stockholders' Equity For Years Ended December 31, 1997, 1996 and
1995................................................................................................... F-17
Consolidated Statements of Cash Flows For Years Ended December 31, 1997, 1996 and 1995................... F-18
Notes to Consolidated Financial Statements For Years Ended December 31, 1997, 1996 and 1995.............. F-20
</TABLE>
F-1
<PAGE>
UCBH HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -------------
UNAUDITED
<S> <C> <C>
ASSETS
Cash and due from banks............................................................ $ 15,855 $ 13,853
Federal funds sold................................................................. -- 21,000
Investment securities available for sale, at market value.......................... 98,614 --
Investment securities, at cost (market value $3,998 at December 1997).............. -- 4,000
Mortgage-backed securities available for sale, at market value..................... 302,942 84,308
Mortgage-backed securities, at cost (market value $168,258 at June 30, 1998 and
$174,972 at December 31, 1997)................................................... 173,754 181,795
Federal Home Loan Bank stock....................................................... 14,900 13,914
Loans.............................................................................. 1,272,151 1,214,237
Allowance for loan losses.......................................................... (13,207) (12,142)
----------- -----------
Net loans.......................................................................... 1,258,944 1,202,095
----------- -----------
Accrued interest receivable........................................................ 11,515 8,594
Premises and equipment, net........................................................ 23,487 23,931
Other assets....................................................................... 10,368 8,160
----------- -----------
Total assets.................................................................. $ 1,910,379 $ 1,561,650
----------- -----------
----------- -----------
LIABILITIES
Deposits........................................................................... $ 1,474,270 $ 1,468,987
Federal funds purchased............................................................ 96,000 --
Other borrowings................................................................... 202,000 --
Long-term debt to affiliates (including capitalized interest)...................... -- 20,060
Accrued interest payable........................................................... 2,513 452
Other liabilities.................................................................. 7,487 9,599
----------- -----------
Total liabilities............................................................. 1,782,270 1,499,098
----------- -----------
Guaranteed preferred beneficial interests in junior subordinated debentures........ 30,000 --
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01, 10,000,000 shares authorized, none outstanding at
June 30, 1998; none authorized or outstanding at December 31, 1997............... -- --
Common stock, par value $.01, authorized 25,000,000 shares; 9,333,333 shares issued
and outstanding at June 30, 1998; par value $0.00167, 18,000,000 shares
authorized, 6,000,000 shares issued and outstanding at December 31, 1997......... 93 10
Additional paid-in capital......................................................... 60,044 30,278
Accumulated other comprehensive income............................................. (419) (1,728)
Retained earnings-substantially restricted......................................... 38,391 33,992
----------- -----------
Total stockholders' equity.................................................... 98,109 62,552
----------- -----------
Total liabilities and stockholders' equity.................................... $ 1,910,379 $ 1,561,650
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
UCBH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------
1998 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Interest income:
Interest on loans....................................................................... $47,954 $41,197
Interest on funds sold and securities purchased under agreements to resell.............. 471 1,081
Interest on investment and mortgage-backed securities................................... 9,766 9,828
--------- -------
Total interest income................................................................ 58,191 52,106
--------- -------
Interest expense:
Interest on deposits.................................................................... 31,254 28,999
Interest on short-term borrowings....................................................... 66 798
Interest on guaranteed preferred beneficial interests in junior subordinated
debentures........................................................................... 570 --
Interest on long-term borrowings........................................................ 1,270 --
Interest on long-term debt to affiliates................................................ 599 893
--------- -------
Total interest expense............................................................... 33,759 30,690
--------- -------
Net interest income.................................................................. 24,432 21,416
Provision for loan losses................................................................. 1,401 132
--------- -------
Net interest income after provision for loan losses.................................. 23,031 21,284
--------- -------
Noninterest income:
Commercial banking fees................................................................. 565 429
Service charges on deposit accounts..................................................... 544 482
Gain on sale of loans, securities and servicing rights.................................. 307 (530)
Loan servicing income................................................................... 292 526
Miscellaneous income.................................................................... 24 258
--------- -------
Total noninterest income............................................................. 1,732 1,165
--------- -------
Noninterest expense:
Personnel............................................................................... 8,247 7,169
Occupancy............................................................................... 2,447 2,306
Data processing......................................................................... 1,180 979
Furniture and equipment................................................................. 1,170 852
Deposit insurance....................................................................... 457 1,142
Communication........................................................................... 201 172
Professional fees and contracted services............................................... 902 882
Foreclosed assets expense............................................................... (3) 393
Miscellaneous expense................................................................... 2,693 2,050
--------- -------
Total noninterest expense............................................................ 17,294 15,945
--------- -------
Income before taxes....................................................................... 7,469 6,504
Income tax expense........................................................................ 3,070 2,677
--------- -------
Net income......................................................................... $ 4,399 $ 3,827
--------- -------
--------- -------
Basic earnings per share.................................................................. $ 0.60 $ 0.64
Diluted earnings per share................................................................ $ 0.56 $ 0.55
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
UCBH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
NUMBER OF COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES STOCK CAPITAL INCOME EARNINGS EQUITY
---------- ------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997...... 6,000,000 $ 10 $ 30,278 $(1,728) $ 33,992 $ 92,830
Net income...................... -- -- -- -- 4,399 4,399
Change in accumulated other
comprehensive income, net of
taxes........................ -- -- -- 1,309 -- 1,309
Conversion of long-term debt to
affiliates to common stock... 1,974,000 3 20,597 -- -- 41,253
Common stock issued............. 9,333,333 93 129,156 -- -- 269,156
Common stock redeemed........... (7,974,000) (13) (119,987) -- -- (239,987)
---------- ------ ---------- ------------- -------- -------------
Balance at June 30, 1998.......... 9,333,333 $ 93 $ 60,044 $ (419) $ 38,391 $ 168,960
---------- ------ ---------- ------------- -------- -------------
---------- ------ ---------- ------------- -------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
UCBH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................................ $ 4,399 $ 3,827
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Amortization of investment and mortgage-backed securities premium..................... (94) 97
Amortization of loan discount......................................................... 403 123
Provision for loan losses............................................................. 1,401 132
Increase in accrued interest receivable............................................... (2,921) (419)
Depreciation and amortization of premises and equipment............................... 1,323 1,057
Amortization of servicing assets...................................................... 91 250
(Increase) decrease in other assets................................................... (3,401) 1,554
Increase in accrued interest payable.................................................. 2,061 1,341
Decrease in other liabilities......................................................... (2,113) (1,190)
Gain on sale of servicing rights...................................................... -- (214)
Gain on sale of foreclosed assets..................................................... (99) (181)
(Gain) loss on sale of loans.......................................................... (307) 744
-------- --------
Net cash provided by operating activities.......................................... 743 7,120
-------- --------
INVESTING ACTIVITIES
Investments and mortgage-backed securities held to maturity:
Principal payments and maturities....................................................... 11,859 12,601
Purchases............................................................................... (612) (200)
Investments and mortgage-backed securities, available for sale:
Principal payments and maturity......................................................... 2,957 8,934
Purchases............................................................................... (318,084) --
Sales of securities..................................................................... -- --
Securities called....................................................................... -- --
Net decrease in credit card loans......................................................... 351 38
Loans purchased........................................................................... (217) (797)
Loans originated net of principal collections............................................. (62,612) (38,151)
Proceeds from sale of loans............................................................... 3,816 4,152
Purchases of premises and equipment....................................................... (942) (424)
Proceeds from sale of premises and equipment.............................................. 63 87
Proceeds from sale of servicing rights.................................................... -- 1,317
Proceeds from sale of foreclosed assets................................................... 607 2,573
-------- --------
Net cash used in investing activities................................................... (362,814) (9,869)
-------- --------
FINANCING ACTIVITIES
Net increase in NOW accounts, money market accounts and passbook accounts................. 24,090 7,398
Net (decrease) increase in time deposits.................................................. (18,807) 63,454
Net increase in short-term borrowings..................................................... 96,000 --
Net increase in long-term borrowings...................................................... 202,000 --
Net (decrease) increase in long-term debt to affiliates................................... (20,060) 1,500
Proceeds from issuance of common stock, net of redemptions and of issue costs............. 29,850 --
Proceeds from issuance of guaranteed preferred beneficial interests in subordinated
debentures, gross....................................................................... 30,000 --
Net cash provided by financing activities............................................... 343,073 72,352
-------- --------
(Decrease) increase in cash and cash equivalents............................................ (18,998) 60,603
Cash and cash equivalents at beginning of period............................................ 34,853 18,394
-------- --------
Cash and cash equivalents at end of period.................................................. $ 15,855 $ 87,997
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................................................. $ 31,698 $ 29,349
Cash paid during the period for income taxes.............................................. 2,575 450
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Receivable resulting from sale of servicing rights........................................ -- 146
Real estate acquired through foreclosure.................................................. 392 3,363
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
Basis of Presentation
The Consolidated Balance Sheet as of June 30, 1998 and the Consolidated
Statements of Operations and Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 have been prepared by UCBH Holdings, Inc.
(the Company) and are not audited.
The unaudited financial statement information presented was prepared on the
same basis as the audited financial statements for the year ended December 31,
1997. In the opinion of management such unaudited financial statements reflect
all adjustments necessary for a fair statement of the results of operations and
balances for the interim periods presented. Such adjustments are of a normal
recurring nature. The results of operations for the six months ended June 30,
1998 are not necessarily indicative of the results to be expected for the full
year.
On April 17, 1998, the Company completed a 6,000-for-1 stock split.
Accordingly, the financial statements for all periods presented have been
restated to reflect the impact of the stock split. On April 17, 1998, the
Company's long-term debt to affiliates was converted to 1,974,000 shares of
common stock, as adjusted for the aforementioned stock split. Given the
occurrence of this conversion, management has considered this long-term debt to
affiliates as convertible debt for purposes of its calculation of diluted
earnings per share.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. There have been no changes in the
subsidiaries of the Company between December 31, 1997 and June 30, 1998. All
significant intercompany balances and transactions have been eliminated in
consolidation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
The provisions of Statement of Financial Accounting Standards ('SFAS') No.
125, 'Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,' that were deferred by SFAS No. 127, 'Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125--An
Amendment of FASB Statement No. 125,' became effective as to repurchase
agreements, dollar rolls, securities lending and certain other transactions
after December 31, 1997. Management does not believe implementation of such
provisions will have a significant effect on the Company's financial position,
results of operations, or capital.
As of December 31, 1997, the Company adopted SFAS No. 128, 'Earnings per
Share,' which specifies the computation, presentation and disclosure
requirements for earnings per share ('EPS'). Basic EPS is computed by dividing
net income by the weighted average number of shares outstanding during the
period. Diluted EPS considers the possible dilutive effect of instruments such
as convertible debt, convertible preferred stock, and stock options. Prior
period EPS has been expanded to comply with the provisions of SFAS No. 128.
SFAS No. 130, 'Reporting Comprehensive Income,' is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes presentation
and disclosure requirements for comprehensive income; however, it does not
affect existing recognition or measurement standards. For the Company,
comprehensive income consists of net income and the change in unrealized gains
and losses on available-for-sale securities. For the six months ended June 30,
1998 and 1997, total comprehensive income was $5.7 million and $3.6 million,
respectively.
SFAS No. 131, 'Disclosures about Segments of an Enterprise and Related
Information,' is effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 establishes standards for reporting information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131 does not affect
existing
F-6
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. RECENT ACCOUNTING PRONOUNCEMENTS--(CONTINUED)
recognition or measurement standards. The provisions of SFAS No. 131 need not be
applied to interim financial statements in the initial year of its application.
Accordingly, such disclosures have not been presented herein.
SFAS No. 133, 'Accounting for Derivative Instruments and Hedging
Activities' will become effective for fiscal years beginning after June 15,
1999. SFAS 133 defines derivative instruments and requires that they be
recognized as assets or liabilities in the statement of financial position,
measured at fair value. It further specifies the nature of changes in the fair
value of the derivatives which are included in the current period results of
operations and those which are included in other comprehensive income.
Management has not yet quantified the impact that SFAS 133 will have on the
financial statements of the Company, if any.
3. INVESTMENT SECURITIES
The Company had no investment securities classified as available for sale
at December 31, 1997. The amortized cost and approximate market value of
investment securities classified as available for sale at June 30, 1998 are
shown in the table below (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available for sale
Trust Preferred Securities................... $73,935 $735 $ -- $74,670
Municipals................................... 23,845 113 14 23,944
Other........................................ -- -- -- --
--------- ---------- --- -------
$97,780 $848 $ 14 $98,614
--------- ---------- --- -------
--------- ---------- --- -------
</TABLE>
The amortized cost and approximate value of investment securities
classified as available for sale at June 30, 1998, by contractual maturity are
shown in the table below (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------
AMORTIZED MARKET
COST VALUE
--------- -------
<S> <C> <C>
Available for sale
Due after ten years.................................................. $97,780 $98,614
--------- -------
$97,780 $98,614
--------- -------
--------- -------
</TABLE>
F-7
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. MORTGAGE-BACKED SECURITIES
The amortized cost and approximate market value of mortgage-backed
securities classified as held to maturity and available for sale at June 30,
1998 and December 31, 1997 are shown in the table below (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Held to maturity
FHLMC................................... $ 45,935 $ -- $1,556 $ 44,379
FNMA.................................... 113,859 -- 3,541 110,318
Other................................... 13,960 -- 399 13,561
--------- ---------- ---------- --------
$ 173,754 $ -- $5,496 $168,258
--------- ---------- ---------- --------
--------- ---------- ---------- --------
Available for sale
FNMA.................................... $ 84,602 $ 37 $2,271 $ 82,368
GNMA.................................... 120,202 572 -- 120,774
Other................................... 99,682 118 -- 99,800
--------- ---------- ---------- --------
$ 304,486 $727 $2,271 $302,942
--------- ---------- ---------- --------
--------- ---------- ---------- --------
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Held to maturity
FHLMC................................... $ 48,536 $-- $1,918 $ 46,618
FNMA.................................... 117,184 -- 4,396 112,788
Other................................... 16,075 -- 509 15,566
--------- --- ---------- --------
$ 181,795 $-- $6,823 $174,972
--------- --- ---------- --------
--------- --- ---------- --------
Available for sale
FNMA.................................... $ 87,237 $-- $2,929 $ 84,308
--------- --- ---------- --------
--------- --- ---------- --------
</TABLE>
Approximately $246.5 million and $45.6 million of mortgage-backed
securities have been pledged to secure contractual arrangements entered into by
the Company at June 30, 1998 and December 31, 1997, respectively.
There were no sales of available for sale securities during the six months
ended June 30, 1998. Proceeds from the sale of available for sale securities
during 1997 totaled $23.4 million.
Mortgage-backed securities sold under agreements to repurchase as of June
30, 1998 and December 31, 1997 were (dollars in millions):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Book value.............................................. $-- $--
Market value............................................ -- --
Obligations............................................. -- --
Weighted average interest rate at end of period......... -- --
Weighted average interest rate during the period........ 5.79% 5.47%
Average balance during the period....................... 95.0 5.3
Maximum amount outstanding at any month end during the
year.................................................. -- --
</TABLE>
F-8
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. MORTGAGE-BACKED SECURITIES--(CONTINUED)
When the Company enters into these transactions, the obligations generally
mature within one year and generally represent agreements to repurchase the same
securities.
As of June 30, 1998 and December 31, 1997, remaining maturities on
mortgage-backed securities classified as held to maturity and available for sale
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
--------------------- ---------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Held to maturity
In one year or less..................... $ -- $ -- $ 1,413 $ 1,406
After one year through five years....... -- -- -- --
After five years through ten years...... 2,343 2,299 2,961 2,881
After ten years......................... 171,411 165,959 177,421 170,685
--------- -------- --------- --------
$ 173,754 $168,258 $ 181,795 $174,972
--------- -------- --------- --------
--------- -------- --------- --------
Available for sale
After ten years......................... $ 304,486 $302,942 $ 87,237 $ 84,308
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
5. BORROWINGS
The Company maintains a secured credit facility with the Federal Home Loan
Bank of San Francisco ('FHLB-SF') against which the Company may take advances.
The terms of this credit facility require the Company to maintain in safekeeping
with the FHLB-SF eligible collateral of at least 100% of outstanding advances.
At June 30, 1998, the Company had a total of $298 million of outstanding
advances, of which $96 million were short-term and $202 million were long-term.
The advances were secured with mortgage-backed securities. The fixed rate
long-term debt of $202 million matures in 2008. The weighted average contractual
maturity as of June 30, 1998 was seven years. Included in the long-term debt as
of June 30, 1998 were $185 million of advances with provisions which allow the
FHLB-SF, at their option, to terminate the advances at quarterly intervals at
specified periods ranging from three to five years beyond the advance dates. For
the six months ended June 30, 1998, the following advances were outstanding:
<TABLE>
<S> <C>
Average outstanding advances during the period.................................... $ 46,927
Maximum advances outstanding at any month end during the period................... $298,000
</TABLE>
The interest rate on this debt ranged from 5.30% to 6.03% and the weighted
average interest rate was 5.64% at June 30, 1998 and 5.49% for the six months
then ended. Interest is paid quarterly on substantially all of these advances
and principal is due at maturity. The interest expense on such advances was
$1,336,000 for the six months ended June 30, 1998.
At June 30, 1998, the unused credit available under this facility was
approximately $64 million.
6. LONG-TERM DEBT TO AFFILIATES
Included in the liabilities of the Company as of December 31, 1997, is
long-term debt payable to affiliates in the aggregate amount of $20,060,000.
Such debt was comprised of two promissory notes with interest rates of 10%. In
conjunction with the Private Offerings which closed on April 17, 1998, such
notes were exchanged for shares of Common Stock of the Company. Subsequently,
the Company redeemed all of the stock owned by affiliates with the proceeds
raised in the Private Offerings. The Selling Shareholders are no longer
affiliated with the Company.
F-9
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S JUNIOR SUBORDINATED
DEBENTURES
On April 17, 1998, UCBH Trust Co. (the 'Trust'), a Delaware statutory
business trust owned by the Company, issued $30 million of 9.375% Guaranteed
Preferred Beneficial Interest in the Company's Subordinated Debentures ('Capital
Securities'). The Trust exists for the sole purpose of issuing the Capital
Securities and investing the proceeds thereof in 9.375% Junior Subordinated
Debentures issued by the Company. The Junior Subordinated Debentures mature on
May 1, 2028. Payment of distributions out of the monies held by the Trust and
payments on liquidation of the Trust or the redemption of the Capital Securities
are guaranteed by the Company to the extent the Trust has funds available
therefore. The obligations of the Company under the Guarantee and the Junior
Subordinated Debentures are subordinate and junior in right of payment to all
indebtedness of the Company and will be structurally subordinated to all
liabilities and obligations of the Company's subsidiaries. Distributions on the
Capital Securities are payable semi-annually in arrears on May 1 and November 1
of each year, commencing November 1, 1998. The Junior Subordinated Debentures
are not redeemable prior to May 1, 2005, unless certain events have occurred.
The proceeds from the issuance of the Capital Securities were used primarily to
provide additional capital for the Bank.
Interest expense on the Capital Securities was $570,000 for the six months
ended June 30, 1998.
8. STOCKHOLDERS' EQUITY
The Company and United Commercial Bank (the Bank) are subject to various
regulatory capital requirements administered by the federal banking agencies.
Under these capital requirements, the Bank must meet specific minimum capital
requirements (described below) 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 judgements by the regulators about components,
risk weightings, and other factors.
Specifically, current federal capital regulations require the Bank to
maintain minimum ratios (set forth in the table below) of total and Tier I
capital to risk-weighted assets (as defined). Tier I capital is defined as
common equity, retained earnings and qualifying perpetual preferred stock, less
certain intangibles. The remainder of capital may consist of certain
subordinated debt, certain hybrid capital instruments and other qualifying
preferred stock, and a limited amount of loan loss allowance. Each of the
federal banking agencies also has established minimum leverage capital
requirements. In addition, under the prompt corrective action provisions of
federal law, financial institutions are categorized as 'well capitalized,'
'adequately capitalized,' 'undercapitalized,' or 'critically undercapitalized,'
depending on their capital level. 'Well capitalized' banks are defined as
institutions that have a total risk-based capital ratio of 10%, a Tier I
risk-based capital ratio of 6%, and a leverage ratio of 5%. An 'adequately
capitalized' bank is defined as an institution with a total risk-based capital
ratio of 8%, a Tier I risk-based capital ratio of 4% and a leverage ratio of 4%.
If the Bank were to fail to meet the minimum capital requirements and/or were to
fall within the 'undercapitalized' or 'critically undercapitalized' categories
of the prompt corrective action provisions could cause the regulators to
initiate certain mandatory-- and possibly additional discretionary--actions
that, if undertaken, could have a direct material effect on the Bank and on the
Company's financial statements.
As of December 31, 1997, the most recent notification from the Office of
Thrift Supervision (the former regulator of the Bank) categorized the Bank as
'well capitalized' under the prompt corrective action provisions. There are no
conditions or events since that notification that management believes have
changed the institution's category. As of December 31, 1996, the Office of
Thrift Supervision categorized the Bank as 'adequately capitalized' under the
regulatory framework for prompt corrective action.
The Company converted from a unitary savings and loan holding company to a
bank holding company under Section 3(a)(1) of the Bank Holding Company Act of
1956 effective on July 31, 1998. The Bank simultaneously converted from a
federally chartered savings bank to a state chartered non-member commercial
bank.
F-10
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY--(CONTINUED)
As a result of the conversion, the Company's primary regulator is now the
Board of Governors of the Federal Reserve System ('Federal Reserve'). Under the
Federal Reserve's capital adequacy guidelines for bank holding companies, the
minimum standard of total capital to risk-weighted assets is 8%; and the minimum
standards of Tier I capital to risk-weighted assets is 4%. The Federal Reserve
also requires bank holding companies to maintain a minimum leverage ratio of
Tier I capital to adjusted average quarterly assets equal to 3%, if such
companies meet certain specified criteria, including that they have the highest
regulatory rating. All other bank holding companies generally are required to
maintain a leverage ratio of at least 100 to 200 basis points above the stated
minimum.
The Bank's primary federal regulator now is the Federal Deposit Insurance
Corporation (FDIC). The FDIC has adopted minimum risk-based and leverage capital
ratio regulations at 12 CFR 325 that are substantially similar to those
requirements imposed by the Federal Reserve on bank holding companies described
above.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the following table (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- --------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total Capital (to risk weighted assets)
United Commercial Bank............... $137,729 13.61% $80,985 8.00 %
UCBH Holdings, Inc. ................. 140,901 13.90 81,115 8.00 $101,393 10.00%
Tier I Capital (to risk weighted
assets)
United Commercial Bank............... $125,068 12.35% $40,492 4.00 %
UCBH Holdings, Inc. ................. 128,220 12.65 40,557 4.00 $ 60,836 6.00%
Tier I Capital (to average assets)
(Leverage Ratio)
United Commercial Bank............... $125,068 7.47% $67,009 4.00 %
UCBH Holdings, Inc. ................. 128,220 7.64 67,109 4.00 $ 83,887 5.00%
</TABLE>
F-11
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY--(CONTINUED)
The following is a reconciliation of capital under Generally Accepted
Accounting Principles ('GAAP') with regulatory capital at June 30, 1998 (dollars
in thousands):
<TABLE>
<CAPTION>
TIER I CAPITAL RISK-BASED CAPITAL
--------------------------------- ---------------------------------
UNITED UCBH UNITED UCBH
COMMERCIAL BANK HOLDINGS, INC. COMMERCIAL BANK HOLDINGS, INC.
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
GAAP Capital......................... $ 124,957 $ 98,109 $ 124,957 $ 98,109
Nonallowable components:
Unrealized losses on securities
available for sale.............. 419 419 419 419
Goodwill........................... (301) (301) (301) (301)
Mortgage servicing rights--
excess.......................... (7) (7) (7) (7)
Additional capital components:
Guaranteed preferred beneficial
interests in junior subordinated
debentures...................... 30,000 30,000
Allowance for loan losses--
limited......................... 12,662 12,662
--------------- -------------- --------------- --------------
Regulatory capital................... $ 125,068 $128,220 $ 137,730 $140,882
--------------- -------------- --------------- --------------
--------------- -------------- --------------- --------------
</TABLE>
On March 31, 1998, the Company entered into an Exchange and Redemption
Agreement ('Agreement') with its Selling Stockholders. In conjunction with the
Private Offerings and pursuant to the terms of the Agreement, the $20,600,000 of
Long-term Debt to Affiliates, which was payable to the Selling Stockholders, was
exchanged for shares of Common Stock. Subsequently, the Company used
approximately $120,000,000 of the proceeds raised by the Private Offerings to
redeem all of the shares of Common Stock then owned by the Selling Shareholders,
which included the shares of Common Stock exchanged for the notes. As a result,
the Selling Shareholders are no longer affiliated with the Company.
F-12
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominator of the
basic and diluted earnings per share (Dollars in thousands, except for per share
data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic:
Net income............................................................. $ 4,399 7,370,370 $0.60
Effect of long-term debt to affiliates................................... 353 1,162,467
----------- -------------
Diluted:
Net income and assumed conversion...................................... $ 4,752 8,532,837 $0.56
----------- -------------
----------- -------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic:
Net income............................................................. $ 3,827 6,000,000 $0.64
Effect of long-term debt to affiliates................................... 527 1,974,000
----------- -------------
Diluted:
Net income and assumed conversion...................................... $ 4,354 7,974,000 $0.55
----------- -------------
----------- -------------
</TABLE>
10. DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
The Company is a party to derivative financial instruments and financial
instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. The Company does not hold or issue financial
instruments for trading purposes. Financial instruments in the normal course of
business include commitments to extend and purchase credit, forward commitments
to sell loans, long put and call options, letters of credit and interest-rate
swaps and caps. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
statement of financial position. The contract or notional amounts of those
instruments reflects the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. For interest-rate swap
and cap transactions and forward commitments to sell loans, the contract or
notional amounts do not represent exposure to credit loss. The Company controls
the credit risk of its interest-rate swap and cap agreements and forward
commitments to sell loans through credit approvals, limits, and monitoring
procedures. The Company does not require collateral or other security to support
interest-rate swap transactions with credit risk.
F-13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of UCBH Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of UCBH Holdings, Inc. and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
March 30, 1998, except for paragraph 3 of Note 1,
as to which the date is June 26, 1998
F-14
<PAGE>
UCBH HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks............................................................... $ 13,853 $ 16,044
Federal funds sold.................................................................... 21,000 2,350
Investment securities, at cost (market value $3,998 in 1997 and $15,617 in 1996)...... 4,000 15,670
Mortgage-backed securities available for sale, at market value........................ 84,308 119,514
Mortgage-backed securities, at cost (market value $174,972 in 1997 and $199,483 in
1996)............................................................................... 181,795 208,555
Federal Home Loan Bank stock.......................................................... 13,914 13,082
Loans................................................................................. 1,214,237 1,066,368
Allowance for loan losses............................................................. (12,142) (11,682)
---------- ----------
Net loans............................................................................. 1,202,095 1,054,686
---------- ----------
Accrued interest receivable........................................................... 8,594 8,002
Premises and equipment, net........................................................... 23,931 22,839
Other assets.......................................................................... 8,160 13,875
---------- ----------
Total assets..................................................................... $1,561,650 $1,474,617
---------- ----------
---------- ----------
LIABILITIES
Deposits.............................................................................. $1,468,987 $1,393,125
Accrued interest payable.............................................................. 452 500
Long-term debt to affiliates (including capitalized interest)......................... 20,060 16,736
Other liabilities..................................................................... 9,599 9,912
---------- ----------
Total liabilities................................................................ 1,499,098 1,420,273
---------- ----------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Common stock, par value $0.00167 authorized 18,000,000 shares; 6,000,000 shares issued
and outstanding..................................................................... 10 10
Additional paid-in capital............................................................ 30,278 30,278
Unrealized loss on mortgage-backed securities available for sale...................... (1,728) (2,637)
Retained earnings-substantially restricted............................................ 33,992 26,693
---------- ----------
Total stockholders' equity....................................................... 62,552 54,344
---------- ----------
Total liabilities and stockholders' equity....................................... $1,561,650 $1,474,617
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
UCBH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Interest income:
Interest on loans............................................................ $ 86,141 $ 78,711 $72,742
Interest on funds sold and securities purchased under agreements to resell... 2,760 1,417 398
Interest on investment and mortgage-backed securities........................ 18,690 22,836 25,894
-------- -------- -------
Total interest income..................................................... 107,591 102,964 99,034
-------- -------- -------
Interest expense:
Interest on deposits......................................................... 61,513 59,273 56,038
Interest on short-term borrowings............................................ 294 998 6,550
Interest on Federal Home Loan Bank advances.................................. 620 2,044 5,867
Interest on long-term debt to affiliates..................................... 1,825 1,640 1,741
-------- -------- -------
Total interest expense.................................................... 64,252 63,955 70,196
-------- -------- -------
Net interest income....................................................... 43,339 39,009 28,838
Provision for loan losses...................................................... 1,154 1,476 8,777
-------- -------- -------
Net interest income after provision for loan losses....................... 42,185 37,533 20,061
-------- -------- -------
Noninterest income:
Commercial banking fees...................................................... 977 421 92
Service charges on deposit accounts.......................................... 888 615 566
Gain on sale of loans, securities and servicing rights....................... 155 1,200 1,137
Loan servicing income........................................................ 601 680 272
Miscellaneous income......................................................... 473 481 1,700
-------- -------- -------
Total noninterest income.................................................. 3,094 3,397 3,767
-------- -------- -------
Noninterest expense:
Personnel.................................................................... 14,087 14,875 12,000
Occupancy.................................................................... 4,811 4,754 4,355
Data processing.............................................................. 2,059 1,859 1,696
Furniture and equipment...................................................... 1,902 1,814 1,357
Deposit insurance............................................................ 1,798 3,519 3,051
SAIF recapitalization assessment............................................. -- 7,716 --
Communication................................................................ 400 383 317
Professional fees and contracted services.................................... 2,242 1,551 1,303
Foreclosed assets expense.................................................... 671 686 2,785
Miscellaneous expense........................................................ 4,220 4,256 3,278
-------- -------- -------
Total noninterest expense................................................. 32,190 41,413 30,142
-------- -------- -------
Income (loss) before taxes..................................................... 13,089 (483) (6,314)
Income tax expense (benefit)................................................... 5,790 (177) (3,406)
-------- -------- -------
Net income (loss)....................................................... $ 7,299 $ (306) $(2,908)
-------- -------- -------
-------- -------- -------
Basic earnings (loss) per share................................................ $ 1.22 $ (0.05) $ (0.48)
-------- -------- -------
-------- -------- -------
Diluted earnings (loss) per share.............................................. $ 1.05 $ (0.05) $ (0.48)
-------- -------- -------
-------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
UCBH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ADDITIONAL ON SECURITIES TOTAL
COMMON PAID-IN AVAILABLE RETAINED STOCKHOLDERS'
STOCK CAPITAL FOR SALE EARNINGS EQUITY
------ ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994....................... $ 10 $ 30,278 $ (845) $ 29,907 $59,350
Net loss......................................... (2,908) (2,908)
Change in unrealized net loss on securities
available for sale, after applicable taxes.... (985) (985)
------ ---------- ------------- -------- -------------
Balance at December 31, 1995....................... 10 30,278 (1,830) 26,999 55,457
Net loss......................................... (306) (306)
Change in unrealized net loss on securities
available for sale, after applicable taxes.... (807) (807)
------ ---------- ------------- -------- -------------
Balance at December 31, 1996....................... 10 30,278 (2,637) 26,693 54,344
Net income....................................... 7,299 7,299
Change in unrealized net loss on securities
available for sale, after applicable taxes.... 909 909
------ ---------- ------------- -------- -------------
Balance at December 31, 1997....................... $ 10 $ 30,278 $(1,728) $ 33,992 $62,552
------ ---------- ------------- -------- -------------
------ ---------- ------------- -------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
UCBH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss)........................................................... $ 7,299 $ (306) $ (2,908)
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Amortization of investment and mortgage-backed securities premium....... 138 193 762
Amortization of loan discount........................................... 66 76 (571)
Provision for loan losses............................................... 1,154 1,476 8,777
Decrease (increase) in accrued interest receivable...................... (592) 1,140 (1,038)
Depreciation and amortization of premises and equipment................. 2,254 1,981 1,576
Amortization of servicing rights........................................ (590) 849 1,527
Decrease in other assets................................................ 2,808 1,439 3,426
Decrease in accrued interest payable.................................... (49) (663) (186)
Increase (decrease) in other liabilities................................ (313) 133 (2,967)
Gain on sale of servicing rights........................................ (1,165) (672) (755)
Gain on sale of foreclosed assets....................................... (401) (602) (684)
Loss on sale of loans................................................... 204 -- 28
Gain on branch sale..................................................... -- -- (656)
Loss on sale of securities.............................................. 806 335 --
--------- --------- ---------
Net cash provided by operating activities............................ 11,619 5,379 6,331
--------- --------- ---------
Investing activities
Investments and mortgage-backed securities held to maturity:
Principal payments and maturities and securities called................... 37,980 56,095 33,899
Purchases................................................................. (200) (80) (75)
Investments and mortgage-backed securities, available for sale:
Principal payments and maturities and securities called................... 12,124 18,217 1,373
Sale of securities........................................................ 23,495 8,800 --
Net increase in credit card loans........................................... (39) (131) (1,121)
Loans purchased............................................................. (44,416) (7,643) (16,677)
Loans originated net of principal collections............................... (151,334) (41,217) (49,698)
Proceeds from sale of loans................................................. 43,350 478 8,384
Purchases of premises and equipment......................................... (3,453) (2,540) (2,035)
Proceeds from sale of premises and equipment................................ 106 61 74
Proceeds from sale of servicing rights...................................... 3,760 672 227
Proceeds from sale of foreclosed assets..................................... 4,280 4,532 6,766
Proceeds from sale of branch deposits....................................... -- -- (28,770)
Purchase of branch deposits................................................. -- -- 10,582
--------- --------- ---------
Net cash (used in) provided by investing activities....................... (74,347) 37,244 (37,071)
--------- --------- ---------
Financing activities
Net increase (decrease) in NOW accounts, money market accounts and passbook
accounts.................................................................. (90) 14,719 (51,794)
Net increase in time deposits............................................... 75,952 66,802 213,993
Net decrease in short-term borrowings....................................... -- (128,600) (136,741)
Increase (decrease) in long-term debt to affiliates......................... 1,500 -- (500)
Increase in capitalized interest component of long-term debt to
affiliates................................................................ 1,825 1,640 --
--------- --------- ---------
Net cash provided by (used in) financing activities....................... 79,187 (45,439) 24,958
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.............................. 16,459 (2,816) (5,782)
Cash and cash equivalents at beginning of year................................ 18,394 21,210 26,992
--------- --------- ---------
Cash and cash equivalents at end of year...................................... $ 34,853 $ 18,394 $ 21,210
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
UCBH HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information
Cash paid during the year for interest........................................ $62,475 $62,978 $ 70,098
Cash paid during the year for income taxes.................................... 4,083 832 495
Supplemental schedule of noncash investing and financing activities
Receivable resulting from sale of servicing rights............................ $ 371 $ -- $ 528
Real estate acquired through foreclosure...................................... 4,260 4,443 5,373
Securities transferred to available for sale securities....................... -- -- 125,987
Long-term debt resulting from refinance of long-term debt to affiliates and
related accrued interest................................................... -- 15,048 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
Organization
UCBH Holdings, Inc. (the Company), is a savings institution holding company
that conducts its business through its principal subsidiary, United Commercial
Bank (United), a federally chartered savings bank based in California. Through
December 31, 1997, United was known as United Savings Bank, F.S.B. and through
March 30, 1998, the Company was known as USB Holdings, Inc. The Company is a
wholly-owned subsidiary of Chief Investments, Ltd.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. The Company's business consists primarily of
attracting retail deposits from consumers and business customers and originating
loans. The Company originates loans secured by mortgages on residential real
estate and loans secured by commercial real estate, including multi-family
housing, mixed use properties, retail and other commercial uses. The Company
also offers commercial loans and lines of credit, trade finance lines and other
commercial loans, as well as a variety of consumer loan products. The Company
also provides a variety of fee-generating services to both commercial customers
and consumers. Substantially all loans are originated for portfolio and held for
investment. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
years' consolidated financial statements to conform to the December 31, 1997
presentation.
On April 17, 1998, the Company completed a 6,000-for-1 stock split.
Accordingly, the financial statements for all years presented have been restated
to reflect the impact of the stock split. On April 17, 1998, the Company's
long-term debt to affiliates was converted to 1,974,000 shares of common stock,
as adjusted for the aforementioned stock split. Given the occurrence of this
conversion, management has considered this long-term debt to affiliates as
convertible debt for purposes of its calculation of diluted earnings per share.
Risks and Uncertainties
In the normal course of its business, the Company encounters two
significant types of risk: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk and market risk.
The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or on a
different basis, than its interest-earning assets. Related to interest rate risk
is prepayment risk. Prepayment risk is the risk associated with the prepayment
of assets, and the write-off of premiums associated with those assets, should
interest rates fall dramatically. Credit risk is the risk of default, primarily
in the Company's loan portfolio that results from the borrowers' inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of securities, the value of collateral underlying loans
receivable and the valuation of real estate owned.
The Company is subject to the regulations of various governmental agencies.
These regulations change significantly from period to period. Such regulations
can also restrict the growth of the Company and United as a result of capital
requirements. The Company also undergoes periodic examinations by the regulatory
agencies which may subject it to further changes with respect to asset
valuations, amounts of required loss allowances and operating restrictions. Such
changes may result from the regulators' judgments based on information available
to them at the time of their examination.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-20
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES--(CONTINUED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and noninterest bearing deposits,
federal funds sold and securities purchased under agreements to resell. For
purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities when purchased of three months
or less to be cash equivalents.
Securities Purchased Under Agreements to Resell
The Company periodically purchases securities under agreements to resell
(repurchase agreements). The amounts advanced under such agreements represent
short-term loans. During the agreement period, the securities are maintained by
the dealer under a written custodial agreement that explicitly recognizes the
Company's interest in the securities.
Investment and Mortgage-backed Securities
In accordance with Statement of Financial Accounting Standards No. 115
(SFAS 115) 'Accounting for Certain Investments in Debt and Equity Securities,'
the Company has designated a portion of the investment and mortgage-backed
securities portfolio as 'held to maturity' securities. As such, this portion of
the portfolio is carried at cost, adjusted for the amortization of premiums and
accretion of discounts. Cost is determined on a specific identification basis.
Inasmuch as the Company has the ability and intent to hold the 'held to
maturity' securities in its portfolio until maturity, the carrying value has not
been adjusted to reflect decreases in market value from book value, if any. Also
in accordance with SFAS 115, the Company has designated a portion of the
mortgage-backed securities portfolio as 'available for sale.' Such securities
are carried at fair value. Fair value is the quoted market price. Unrealized
holding gains or losses for 'available for sale' securities are excluded from
earnings and reported in a separate component of stockholders' equity, net of
tax. Premiums and discounts on investment and mortgage-backed securities are
amortized against interest income, using the interest method, with the
amortization period extending to the maturity date of the securities. Gains or
losses on the sale of securities are recognized when sold.
In November 1995, the Financial Accounting Standards Board issued a Special
Report, 'A Guide to Implementation of Statement 115 on Accounting for Certain
Debt and Equity Securities.' Concurrent with the implementation of the Guide,
but not later than December 31, 1995, all institutions could conduct a one time
reassessment of the classification of all securities held at that time. In
accordance with the provisions of the Guide, management elected to transfer
securities with a fair value of $123.3 million and amortized cost of $126
million from the held-to-maturity classification to the available-for-sale
classification. The unrealized holding gain (loss) at the transfer date of $1.6
million (tax effected) has been reflected as a separate component of
shareholder's equity.
Loans
Loans are carried at the principal balance outstanding adjusted for the
amortization of premiums and the accretion of discounts. Premiums and discounts
are recognized as an adjustment of loan yield by the interest method based on
contractual term of the loans. Interest is accrued as earned.
Loans are generally placed on nonaccrual status when the payments become 90
days past due, or earlier if, in management's opinion, the full and timely
collection of principal or interest becomes uncertain. Any accrued and unpaid
interest on such loans is reversed and charged against current income.
F-21
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES--(CONTINUED)
The Company recognizes interest income on nonaccrual loans to the extent
received in cash. However, where there is doubt regarding the ultimate
collectibility of the loan principal, cash receipts, whether designated as
principal or interest, are applied to reduce the carrying value of the loan.
Loan origination fees, net of certain direct origination costs, are
deferred and recognized as an adjustment of the loan yield over the contractual
life of the loan. Amortization of deferred loan fees is discontinued on
nonperforming loans.
On January 1, 1995, the Company adopted prospectively the provisions of
Statement of Financial Standards No. 114, (SFAS 114) 'Accounting by Creditors
for Impairment of a Loan' as amended by Statement of Financial Standards No. 118
(SFAS 118), 'Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures.' These standards require the Company to evaluate
loans for possible impairment. The Company considers a loan to be impaired when,
based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement, including scheduled interest payments. For a loan that has been
restructured, the contractual terms of the loan agreement refer to the
contractual terms specified by the original loan agreement, not the contractual
terms specified by the restructuring agreement.
When evaluating loans for possible impairment, the Company makes an
individual assessment for impairment when and while such loans are on nonaccrual
status, or the loan has been restructured. When a loan has been identified as
being impaired, the amount of impairment will be measured by the Company using
discounted cash flows, except when it is determined that the primary remaining
source of repayment for the loan is the operation or liquidation of the
underlying collateral. In such cases, the current fair value of the collateral,
reduced by estimated costs to sell, will be used in place of discounted cash
flows. The Company does not apply the loan-by-loan evaluation process described
above to large groups of smaller balance homogeneous loans that are evaluated
collectively for impairment, such as residential mortgage (1 to 4 family) loans
with balances up to $500,000, home equity, and other consumer loans.
If the measurement of the impaired loan is less than the recorded
investment in the loan (including accrued interest, net deferred loan fees or
costs and unamortized premium or discount), an impairment is recognized by
creating or adjusting an existing allocation of the allowance for loan losses.
The Company's charge-off policy with respect to impaired loans is similar to its
charge-off policy for all loans. Specifically, loans are charged off in the
month in which they are considered uncollectible.
The adoption of SFAS 114 and 118 did not affect the Company's accounting
policies regarding income recognition, charge-offs, or recoveries and did not
affect the comparability of the Company's disclosures regarding classification
of nonaccrual or other problem loans.
Allowance for Loan Losses
The allowance for loan losses is based on management's continuous
evaluation of various factors affecting collectibility of the loan portfolio.
These factors include, but are not limited to, changes in the composition of the
portfolio, current and forecasted economic conditions, overall portfolio
quality, review of specific problem loans, and historical loan-loss experience.
The allowance for loan losses is based on estimates, and ultimate losses may
vary from the current estimates. These estimates are reviewed periodically and,
as adjustments become necessary, they are reported in earnings in the period in
which they become known. The allowance is increased by provisions charged to
expense and reduced by loan losses, net of recoveries.
The determination of the allowance for loan losses is based on estimates
that are susceptible to changes in the economic environment and market
conditions. Management believes that, as of December 31, 1997 and 1996, the
allowance for loan losses is adequate based on information currently available.
If recent improvements in the economies of the Company's principal market areas
are not sustainable, the Company's loan portfolios could be
F-22
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES--(CONTINUED)
adversely affected and higher charge-offs and increases in non-performing assets
could result. Such an adverse impact could also require a larger allowance for
loan losses.
Mortgage Banking Activities
Through 1996, the Company operated a mortgage banking division. This
division was closed in early 1997 and mortgage banking activities are no longer
a significant business activity for the Company. The Company periodically sells
some of its mortgage loan production for cash proceeds equal to the market value
of the loans. Gain or loss is recognized to the extent of the difference between
the cash proceeds received and the carrying value of the loans sold. In
addition, for loans sold in which servicing has been retained by the Company,
gain is recognized and an asset is recorded at the time of sale based upon the
present value of amounts expected to be received resulting from the difference
between the borrowers' contractual interest rates and the rates paid to the
investors.
Through December 31, 1996, the Company accounted for its loan servicing
assets in accordance with the provisions of Statement of Financial Standards No.
122 (SFAS 122) 'Accounting for Mortgage Servicing Rights,' which required that
rights to service mortgage loans be recognized as separate assets, whether
originated or acquired. Management implemented this Statement on December 31,
1995.
On January 1, 1997, the Company adopted Statements of Financial Accounting
Standards No. 125, 'Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities' (SFAS 125). SFAS 125 requires application of
a financial components approach that focuses on control. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. The statement also distinguishes transfers of financial
assets that are sales from transfers of financial assets that are secured
borrowings.
SFAS 125 supersedes the provisions SFAS 122; however, mortgage banking
activities are now an insignificant part of the Company's business, and there
are no significant differences in The Company's accounting for mortgage banking
activities or mortgage servicing rights under SFAS 125.
Implementation of the provisions of SFAS 125 did not have a significant
effect on the Company's financial position or results of operations.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Provisions for depreciation and amortization are determined on
a straight-line basis over the lesser of the estimated useful lives or the terms
of the leases. Terms range from three to ten years for furniture, equipment, and
computer software, and from forty to fifty years for premises.
Foreclosed Assets
Foreclosed assets (other real estate owned) consist of properties acquired
through, or in lieu of, foreclosure and are carried at the lower of cost or fair
value (less estimated selling costs). Cost includes the unpaid loan balance
adjusted for applicable accrued interest, unamortized deferred loan fees and
acquisition costs. In the event that the fair value (less estimated selling
costs) is less than cost at the time of acquisition, the shortfall is charged to
the allowance for loan losses. Subsequent write-downs, if any, and disposition
gains and losses are reflected as charges to current operations.
F-23
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES--(CONTINUED)
Goodwill
Goodwill resulted from a variety of transactions, including branch
acquisitions and is generally amortized over seven years. Goodwill is included
in other assets.
Securities Sold Under Agreements to Repurchase
The Company periodically enters into sales of securities under agreements
to repurchase (reverse repurchase agreements). Fixed-coupon reverse repurchase
agreements are treated as financings. Accordingly, the securities underlying the
agreement remain in the asset accounts and the obligations to repurchase
securities sold are reflected as a liability in the consolidated balance sheets.
The securities underlying the agreements are delivered to the dealers who
arrange the transactions. Under some agreements, the dealers may sell, lend, or
otherwise dispose of the securities to other parties and agree to resell to the
Company substantially identical securities at the maturities of the agreements.
Interest Rate Swap and Cap Agreements
The Company periodically enters into interest rate swap and cap agreements
as a means of managing its interest rate exposure. The differential to be paid
or received on interest rate swap agreements entered into to reduce the impact
of changes in interest rates is recognized over the life of the agreements.
Premiums paid on cap agreements are amortized over the life of the agreements.
The results of swap and cap transactions are recognized currently as an
adjustment to interest expense.
Accounting for Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), 'Accounting for Income
Taxes.' SFAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. The Company provides a
valuation allowance against net deferred tax assets to the extent that
realization of the assets is not considered more likely than not.
The Company and United file a consolidated federal income tax return and a
combined California tax return. The Company allows all tax benefits generated
within the consolidated group to be retained by United.
Impairment of Long-Lived Assets
On January 1, 1996, the Company adopted prospectively, the provisions of
Statement of Financial Accounting Standards No. 121 (SFAS 121), 'Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of.' This Statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. Long-lived assets and identifiable
intangibles held by the Company consist of premises and equipment, other real
estate owned, and goodwill. Implementation of SFAS 121 did not have an effect on
the financial position or results of operations of the Company since management
determined that there was no impairment with respect to premises and equipment
or goodwill. The Company's previous accounting treatment of other real estate
owned was substantially identical to the treatment required under SFAS 121.
Accordingly, no adjustment was required in connection with the implementation of
SFAS 121.
2. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell averaged $44.0 million and
$22.1 million during 1997 and 1996, respectively, and the maximum amounts
outstanding at any month-end during 1997 and 1996 were
F-24
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL--(CONTINUED)
$70 million and $20 million, respectively. At December 31, 1997 and 1996, there
were no securities purchased under agreements to resell.
3. INVESTMENT SECURITIES
The amortized cost and approximate market value of investment securities
classified as held to maturity at December 31, 1997 and 1996 were (dollars in
thousands):
<TABLE>
<CAPTION>
1997
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Held to maturity
FHLB Note................................. $ 2,000 $-- $ 2 $ 1,998
FNMA Note................................. 2,000 -- -- 2,000
--------- --- --- -------
$ 4,000 $-- $ 2 $ 3,998
--------- --- --- -------
--------- --- --- -------
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Held to maturity
FHLB Note................................. $ 8,670 $2 $ 43 $ 8,629
FHLB CD................................... 2,000 -- -- 2,000
Other..................................... 5,000 -- 12 4,988
--------- --- --- -------
$15,670 $2 $ 55 $15,617
--------- --- --- -------
--------- --- --- -------
</TABLE>
For 1996, other investments consisted primarily of medium-term notes and
certificates of deposit with financial institutions and medium-term notes with
governmental agencies.
The amortized cost and approximate market value of investment securities
classified as held to maturity at December 31, 1997 and 1996, by contractual
maturity, are shown below (dollars in thousands):
<TABLE>
<CAPTION>
1997
--------------------
AMORTIZED MARKET
COST VALUE
--------- -------
<S> <C> <C>
Held to maturity
Due in one year or less................................. $ 2,000 $ 1,998
Due after one year through five years................... 2,000 2,000
--------- -------
$ 4,000 $ 3,998
--------- -------
--------- -------
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------
AMORTIZED MARKET
COST VALUE
--------- -------
<S> <C> <C>
Held to maturity
Due in one year or less................................. $11,670 $11,662
Due after one year through five years................... 4,000 3,955
--------- -------
$15,670 $15,617
--------- -------
--------- -------
</TABLE>
During 1996, $29 million of securities classified as investments held to
maturity were called by the issuer.
F-25
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. MORTGAGE-BACKED SECURITIES
The amortized cost and approximate market value of mortgage-backed
securities classified as held to maturity and available for sale at December 31,
1997 and 1996, were (dollars in thousands):
<TABLE>
<CAPTION>
1997
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Held to maturity
FHLMC................................... $ 48,536 -- $1,918 $ 46,618
FNMA.................................... 117,184 -- 4,396 112,788
Other................................... 16,075 -- 509 15,566
--------- --- ---------- --------
$ 181,795 $-- $6,823 $174,972
--------- --- ---------- --------
--------- --- ---------- --------
Available for sale
FNMA.................................... $ 87,237 $-- $2,929 $ 84,308
--------- --- ---------- --------
--------- --- ---------- --------
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Held to maturity
FHLMC................................... $ 61,629 -- $2,615 $ 59,014
FNMA.................................... 124,710 -- 5,489 119,221
Other................................... 22,216 -- 968 21,248
--------- --- ---------- --------
$ 208,555 $-- $9,072 $199,483
--------- --- ---------- --------
--------- --- ---------- --------
Available for sale
FNMA.................................... $ 123,982 $-- $4,468 $119,514
--------- --- ---------- --------
--------- --- ---------- --------
</TABLE>
Approximately $45.6 million and $75.5 million of mortgage-backed securities
have been pledged to secure contractual arrangements entered into by the Company
at December 31, 1997 and 1996, respectively.
Proceeds from the sale of available for sale securities during 1997 and
1996 totaled $23.4 million and $8.8 million, respectively. There were no sales
of available for sale securities during 1995. Gross realized losses totaled
$806,000 and $335,000 for 1997 and 1996, respectively.
Mortgage-backed securities sold under agreements to repurchase as of
December 31, 1997 and 1996 were (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Book value.................................................... $-- $--
Market value.................................................. -- --
Obligations................................................... -- --
Weighted average interest rate at end of period............... -- --
Weighted average interest rate during the period.............. 5.47% 6.31%
Average balance during the year............................... 5.3 15.8
Maximum amount outstanding at any month end during the year... -- 74.4
</TABLE>
When the Company enters into these transactions, the obligations generally
mature within one year and generally represent agreements to repurchase the same
securities.
F-26
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. MORTGAGE-BACKED SECURITIES--(CONTINUED)
As of December 31, 1997 and 1996, remaining maturities on mortgage-backed
securities classified as held to maturity and available for sale were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997
---------------------
AMORTIZED MARKET
COST VALUE
--------- --------
<S> <C> <C>
Held to maturity
In one year or less.................................... $ 1,413 $ 1,406
After one year through five years...................... -- --
After five years through ten year...................... 2,961 2,881
After ten years........................................ 177,421 170,685
--------- --------
$ 181,795 $174,972
--------- --------
--------- --------
Available for sale
After ten years........................................ $ 87,237 $ 84,308
--------- --------
--------- --------
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------
AMORTIZED MARKET
COST VALUE
--------- --------
<S> <C> <C>
Held to maturity:
In one year or less.................................... $ 4,595 $ 4,485
After one year through five years...................... 1,845 1,820
After five years through ten year...................... 3,096 2,995
After ten years........................................ 199,019 190,183
--------- --------
$ 208,555 $199,483
--------- --------
--------- --------
Available for sale
After ten years........................................ $ 123,982 $119,514
--------- --------
--------- --------
</TABLE>
F-27
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LOANS
As of December 31, 1997 and 1996, the composition of the loan portfolio was
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Consumer
Residential mortgage (one to four family).......... $ 691,167 $ 541,156
Home equity........................................ 16,743 10,673
Other.............................................. 2,732 2,642
---------- ----------
710,642 554,471
---------- ----------
Commercial
Secured by real estate - multifamily............... 339,257 361,591
Secured by real estate - nonresidential............ 115,366 123,003
Construction....................................... 26,603 19,892
Lines of credit.................................... 21,146 6,595
---------- ----------
502,372 511,081
---------- ----------
Gross loans............................................. 1,213,014 1,065,552
Net deferred loan costs................................. 1,223 816
Allowance for loan losses............................... (12,142) (11,682)
---------- ----------
Net loans............................................... $1,202,095 $1,054,686
---------- ----------
---------- ----------
</TABLE>
In the table above, construction loans are presented net of undrawn
commitments of $71.0 million and $25.8 million at December 31, 1997 and 1996,
respectively.
As of December 31, 1997, loans at fixed interest rates amounted to $241.5
million, and loans at variable interest rates amounted to $971.5 million. Loans
of approximately $9.9 million and $19.5 million were on nonaccrual status at
December 31, 1997 and 1996, respectively.
As of December 31, 1997, the portfolio above contained $685.0 million of
loans that were interest-rate sensitive within one year, $304.2 million from one
to five years, $12.3 million from five to ten years, $175.2 million from ten to
twenty years and $36.3 million over twenty years.
As of December 31, 1997, loans with a book value and market value of $245.3
million were pledged to secure FHLB advances (see Note 10).
The Company serviced real estate loans for others of $11.0 million and
$300.0 million at December 31, 1997 and 1996, respectively. These loans are not
included in the consolidated balance sheets. In connection therewith, the
Company held trust funds of approximately $2.1 million and $4.7 million as of
December 31, 1997 and 1996, respectively, all of which were segregated in
separate accounts and included in the respective balance sheets.
Some agreements with investors to whom the Company has sold loans have
provisions which could require repurchase of loans under certain circumstances.
Management does not believe that any such repurchases will be significant.
F-28
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LOANS--(CONTINUED)
The following table sets forth impaired loan disclosures as of and for the
year ended December 31, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Impaired loans with an allowance................................. $1,359 $2,894
Impaired loans without an allowance.............................. 20 6,218
------ ------
Total impaired loans........................................ $1,379 $9,112
------ ------
------ ------
Allowance for impaired loans under SFAS 114...................... $ 109 $ 315
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Interest income recognized on impaired loans during the
period........................................................ $ 68 $ 181 $ 167
------ ------- ------
------ ------- ------
Average recorded investment in impaired loans................... $3,425 $10,394 $2,268
</TABLE>
In the table above, loans included in the 'Impaired loans without an
allowance' category are those loans for which the discounted cash flows,
collateral value (net of estimated selling costs) or market price equals or
exceeds the carrying value of the loan. Such loans do not require an allowance.
For the years ended December 31, 1997, 1996 and 1995, the activity in the
allowance for loan losses was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year................................. $11,682 $13,699 $ 7,550
Provision for loan losses.................................... 1,154 1,476 8,777
Loans charged off............................................ (1,069) (4,562) (2,696)
Recoveries of loans previously charged off................... 375 1,069 68
------- ------- -------
Balance at end of year....................................... $12,142 $11,682 $13,699
------- ------- -------
------- ------- -------
</TABLE>
6. PREMISES AND EQUIPMENT
As of December 31, 1997 and 1996, premises and equipment were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and buildings........................................... $ 19,054 $ 18,866
Leasehold improvements....................................... 8,420 7,901
Equipment, furniture and fixtures............................ 11,853 9,936
-------- --------
39,327 36,703
Less accumulated depreciation and amortization............... (15,396) (13,864)
-------- --------
Total................................................... $ 23,931 $ 22,839
-------- --------
-------- --------
</TABLE>
Depreciation and amortization expense was $2.3 million, $2.0 million and
$1.6 million for the years ended December 31, 1997, 1996 and 1995, respectively.
F-29
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SERVICING ASSETS
Included in other assets are servicing assets. For the years ended December
31, 1997, 1996 and 1995, activity with respect to servicing assets was as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1997
--------------------------------------
CAPITALIZED PURCHASED ORIGINATED
EXCESS MORTGAGE MORTGAGE
SERVICING SERVICING SERVICING
FEES RIGHTS RIGHTS
----------- --------- ----------
<S> <C> <C> <C>
Beginning balance, net................................... $ 546 $ 1,832 $ 382
Sales............................................... (5) (2,532) (428)
Additions........................................... -- -- 44
Amortization:
Normal......................................... (206) (150) (51)
Decrease in valuation allowance..................... -- 850 147
----------- --------- ----------
Ending balance, net...................................... $ 335 $ -- $ 94
----------- --------- ----------
----------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------
CAPITALIZED PURCHASED ORIGINATED
EXCESS MORTGAGE MORTGAGE
SERVICING SERVICING SERVICING
FEES RIGHTS RIGHTS
----------- --------- ----------
<S> <C> <C> <C>
Beginning balance, net................................... $ 672 $ 2,509 $ --
Additions........................................... -- -- 576
Amortization:
Normal......................................... (126) (627) (47)
Increase in valuation allowance..................... -- (50) (147)
----------- --------- ----------
Ending balance, net...................................... $ 546 $ 1,832 $ 382
----------- --------- ----------
----------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------
CAPITALIZED PURCHASED ORIGINATED
EXCESS MORTGAGE MORTGAGE
SERVICING SERVICING SERVICING
FEES RIGHTS RIGHTS
----------- --------- ----------
<S> <C> <C> <C>
Beginning balance, net................................... $ 902 $ 3,806 $ --
Additions........................................... -- -- --
Amortization:
Normal......................................... (230) (497) --
Increase in valuation allowance..................... -- (800) --
----------- --------- ----------
Ending balance, net...................................... $ 672 $ 2,509 $ --
----------- --------- ----------
----------- --------- ----------
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, the activity in the
valuation allowance for servicing assets was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ---- ----
<S> <C> <C> <C>
Balance, beginning of year............................................ $ 997 $800 $ --
Provision for impairment.............................................. -- 197 800
Reversal of valuation allowance....................................... (997) -- --
Write-downs........................................................... -- -- --
----- ---- ----
Balance, end of year.................................................. $ -- $997 $800
----- ---- ----
----- ---- ----
</TABLE>
F-30
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. FORECLOSED ASSETS
As of December 31, 1997 and 1996, other assets include $412,000 and $1.6
million, respectively, in real estate acquired through foreclosure.
9. DEPOSITS
As of December 31, 1997 and 1996, deposit balances were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1997
----------------------
WEIGHTED
AVERAGE
BALANCE RATE
---------- --------
<S> <C> <C>
NOW and checking accounts.................................. $ 111,984 0.80%
Money market accounts...................................... 20,986 2.48%
Passbook accounts.......................................... 212,013 2.11%
Time deposits:
Less than $100,000.................................... 831,292 5.12%
$100,000 or greater................................... 292,712 5.41%
---------- --------
Total................................................. $1,468,987 4.38%
---------- --------
---------- --------
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------
WEIGHTED
AVERAGE
BALANCE RATE
---------- --------
<S> <C> <C>
NOW and checking accounts.................................. $ 106,491 0.79%
Money market accounts...................................... 22,111 2.39%
Passbook accounts.......................................... 216,471 2.20%
Time deposits:
Less than $100,000.................................... 773,571 4.87%
$100,000 or greater................................... 274,481 5.16%
---------- --------
Total................................................. $1,393,125 4.17%
---------- --------
---------- --------
</TABLE>
As of December 31, 1997, remaining maturities on time deposits were as
follows (dollars in thousands):
<TABLE>
<S> <C>
1998.................................................................. $1,111,927
1999.................................................................. 10,324
2000.................................................................. 1,753
----------
Total................................................................. $1,124,004
----------
----------
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, interest expense on
deposits was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
NOW and demand deposit accounts.............................. $ 875 $ 826 $ 781
Money market accounts........................................ 517 561 654
Passbook accounts............................................ 4,834 4,772 4,797
Time deposits................................................ 55,570 53,360 50,046
Less penalties for early withdrawal.......................... (283) (246) (240)
------- ------- -------
Total................................................... $61,513 $59,273 $56,038
------- ------- -------
------- ------- -------
</TABLE>
F-31
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. DEPOSITS--(CONTINUED)
As of December 31, 1997 and 1996, the composition of deposits by interest
rate was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Under 3%................................................ $ 345,473 $ 345,027
3.00% to 3.99%.......................................... 45,148 49,750
4.00% to 4.99%.......................................... 262,607 423,922
5.00% to 5.99%.......................................... 681,977 562,446
6.00% to 6.99%.......................................... 133,313 11,099
7.00% to 7.99%.......................................... -- 251
8.00% to 8.99%.......................................... 469 630
---------- ----------
Total.............................................. $1,468,987 $1,393,125
---------- ----------
---------- ----------
</TABLE>
10. FEDERAL HOME LOAN BANK ADVANCES
The Company maintains a secured credit facility with the Federal Home Loan
Bank of San Francisco (FHLB-SF) against which the Company may take advances. The
terms of this credit facility require the Company to maintain in safekeeping
with the FHLB-SF eligible collateral of least 100% of outstanding advances.
There were no advances outstanding at December 31, 1997 or 1996. At December 31,
1997, credit availability under this facility was approximately $291 million.
11. LONG-TERM DEBT TO AFFILIATES
The Company has a promissory note to United Holdings Int'l Ltd. (UHIL)
dated April 1, 1996 for a principal sum of $15,548,000. This note refinanced
previous affiliate debt and related accrued interest. Interest is capitalized on
the note through December 31, 1999 and calculated at a compound annual interest
rate of 10%. As of January 1, 2000, accrued interest is payable annually within
60 days after each year end. The Company has an additional promissory note to
Chief Investments Limited (Chief) dated February 28, 1997 for a principal sum of
$1,500,000. Interest is capitalized on the note through December 31, 1999 and
calculated at a compound annual interest rate of 10%. Annual payments
representing the lesser of $1,000,000 or the outstanding balance of the note are
to be paid within 60 days of each calendar year end, effective December 31,
1999. Chief is the Company's parent and UHIL is another related party.
At December 31, 1997, future principal payments (including capitalized
interest) on long term debt are payable as follows (dollars in thousands):
<TABLE>
<S> <C>
1998..................................................................... $ --
1999..................................................................... --
2000..................................................................... 1,000
2001..................................................................... 3,127
2002..................................................................... 3,000
Aggregate thereafter..................................................... 12,933
-------
Total............................................................... $20,060
-------
-------
</TABLE>
F-32
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
The Company and United are subject to various regulatory 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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, United
must meet specific capital guidelines that involve quantitative measures of
United's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. United'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 United to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that United
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Office of
Thrift Supervision categorized United as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
United must maintain minimum total risk-based, Tier I risk-based, Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category. As of December 31, 1996, the Office of Thrift Supervision categorized
United as adequately capitalized under the regulatory framework for prompt
corrective action.
United's actual capital amounts and ratios are also presented in the
following table (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------- --------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to risk weighted assets)... $94,547 11.15% $67,837 8.00 % $84,796 10.00%
Core Capital (to adjusted tangible
assets)................................. 83,927 5.37% 62,519 4.00 % 78,148 5.00%
Tier I Capital (to risk weighted
assets)................................. 83,927 9.90% 33,919 4.00 % 50,864 6.00%
Tangible Capital (to tangible assets)..... 83,927 5.37% 23,444 1.50 % N/A N/A
</TABLE>
The following table is a reconciliation of United's capital under Generally
Accepted Accounting Principles ('GAAP') with its regulatory capital at December
31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
<S> <C> <C> <C>
GAAP Capital.......................................................... $ 82,556 $82,556 $ 82,556
Nonallowable components:
Unrealized losses on securities available for sale.................. 1,728 1,728 1,728
Goodwill............................................................ (348) (348) (348)
Mortgage servicing rights-excess.................................... (9) (9) (9)
Additional capital components:
Allowance for loan losses--allowable in risk-based capital.......... -- -- 10,620
-------- ------- ----------
United regulatory capital............................................. $ 83,927 $83,927 $ 94,547
-------- ------- ----------
-------- ------- ----------
</TABLE>
F-33
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS--(CONTINUED)
The Company, as a savings institution holding company, is not subject to
regulatory capital requirements separate from its subsidiary, United.
United is prohibited by federal regulations from paying dividends if the
payment would reduce United's net worth below certain minimum requirements. The
Company has agreed that United would not declare or pay in any year a dividend
that exceeds 50% of The Company's net operating income (dividends may be
deferred and paid in a subsequent year) without the prior written consent of the
Office of Thrift Supervision (OTS). At December 31, 1997, $5.1 million of
United's retained earnings were available for distribution as dividends to the
Company.
13. FEDERAL AND STATE TAXES ON INCOME
Following is a summary of the provision for taxes on income (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1997 1996 1995
------ ----- -------
<S> <C> <C> <C>
Current tax (benefit) expense:
Federal........................................................ $3,244 $ 174 $ (783)
State.......................................................... 1,881 28 317
------ ----- -------
5,125 202 (466)
------ ----- -------
Deferred tax (benefit) expense:
Federal........................................................ 1,155 (327) (2,199)
State.......................................................... (490) (52) (741)
------ ----- -------
665 (379) (2,940)
------ ----- -------
$5,790 $(177) $(3,406)
------ ----- -------
------ ----- -------
</TABLE>
F-34
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. FEDERAL AND STATE TAXES ON INCOME--(CONTINUED)
Deferred tax liabilities (assets) are comprised of the following (dollars
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Deferred loan fees............................................................. $ 3,356 $ 3,812
FHLB dividends................................................................. 2,803 2,456
Amortization of excess servicing fees.......................................... 138 225
Market value adjustments on certain loans and securities....................... 81 1,409
Purchase accounting adjustments................................................ 229 306
Capitalized originated mortgage servicing...................................... 39 153
-------- --------
6,646 8,361
-------- --------
Deferred tax assets:
Net operating loss carryforwards............................................... (84) (3,282)
Loan and OREO loss allowances.................................................. (4,162) (4,028)
Servicing rights impairment allowance.......................................... -- (331)
AMT credit carryover........................................................... (1,166) (1,707)
State taxes.................................................................... (539) (129)
Depreciation................................................................... (396) (270)
Unrealized losses on securities available for sale............................. (1,130) (1,707)
Deferred compensation.......................................................... (132) (211)
Other deferred deduction items................................................. (2,562) (1,749)
-------- --------
(10,171) (13,414)
-------- --------
Deferred tax assets valuation allowance.......................................... -- 286
-------- --------
Net deferred tax assets.......................................................... $ (3,525) $ (4,767)
-------- --------
-------- --------
</TABLE>
The following table reconciles the statutory income tax rate to the
consolidated effective income tax rate:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1997 1996 1995
---- ----- -----
<S> <C> <C> <C>
Federal income tax rate........................................... 34.0% (34.0)% (34.0)%
State franchise tax rate, net of federal income tax effects....... 7.2% (7.6)% (7.6)%
---- ----- -----
Statutory income tax rate......................................... 41.2% (41.6)% (41.6)%
(Reduction) increase in tax rate resulting from:
Amortization of intangibles..................................... 0.2% 2.0% 0.4%
Reversal of taxes previously provided........................... -- -- (16.0)%
Reversal of valuation allowance................................. (2.2)% -- --
Other items, net................................................ 5.0% 3.0% 3.3%
---- ----- -----
44.2% (36.6)% (53.9)%
---- ----- -----
---- ----- -----
</TABLE>
F-35
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. FEDERAL AND STATE TAXES ON INCOME--(CONTINUED)
Taxes on income included the following (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Net deferred (asset) liability:
Federal income tax..................................................... $(3,429) $(5,004)
State franchise tax.................................................... (96) 237
------- -------
(3,525) (4,767)
(Prepaid income taxes) taxes payable..................................... 40 (656)
------- -------
$(3,485) $(5,423)
------- -------
------- -------
</TABLE>
The Company computes its bad debt deduction using the experience method for
Federal and state tax purposes which considers current year charge-offs together
with those from the previous five years.
During 1996, legislation was enacted which eliminated the Company's tax
exposure relating to tax bad debt reserve that arose prior to 1988. In
accordance with SFAS 109, a deferred tax liability of $946,000 had not been
recognized at December 31, 1995 for $2,784,000 of these temporary differences.
Tax years 1996 through 1997 remain open for Internal Revenue Service
purposes and tax years 1994 through 1997 remain open for California Franchise
Tax Board purposes.
At December 31, 1997, the Company had regular Federal net operating loss
carryovers of $248,000 which expire 2005.
14. DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
The Company is a party to derivative financial instruments and financial
instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. The Company does not hold or issue financial
instruments for trading purposes. Financial instruments in the normal course of
business include commitments to extend and purchase credit, forward commitments
to sell loans, long put and call options, letters of credit and interest-rate
swaps and caps. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
statement of financial position. The contract or notional amounts of those
instruments reflects the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. For interest-rate swap
and cap transactions and forward commitments to sell loans, the contract or
notional amounts do not represent exposure to credit loss. The Company controls
the credit risk of its interest-rate swap and cap agreements and forward
commitments to sell loans through credit approvals, limits, and monitoring
procedures. The Company does not require collateral or other security to support
interest-rate swap transactions with credit risk.
F-36
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK--(CONTINUED)
Contract or notional amounts of derivative financial instruments and
financial instruments with off-balance-sheet risk as of December 31, 1997 and
1996 are as follows (dollars in millions):
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Consumer (including residential mortgage)......................................... $65.0 $47.0
Commercial (excluding construction)............................................... 10.8 16.0
Construction...................................................................... 78.7 29.5
Commitments to purchase loans........................................................ 0.1 0.4
Letters of credit.................................................................... 1.9 1.3
Financial instruments whose notional or contract amounts exceed the amount of credit
risk:
Forward commitments to sell loans.................................................... 3.5 4.2
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held generally includes residential or commercial real
estate, accounts receivable, or other assets.
Commitments to purchase loans are agreements to buy loans from a primary
broker/dealer as long as there are no violations of any condition established in
the contract. Commitments terminate on the final closing date mutually agreed
upon by the purchaser and seller as defined in the contract. The Company
evaluates each loan's worthiness on a loan-by-loan basis. Each loan is
collateralized by residential real estate.
Letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. These letters of credit are usually
secured by inventories or by deposits held at the Company.
Interest rate swap transactions generally involve the exchange of fixed-and
floating-rate interest payment obligations without the exchange of the
underlying principal amounts. Interest-rate swaps are entered into to reduce the
Company's exposure to interest rate movements and are used as part of
asset/liability management. The Company typically becomes a principal in the
exchange of fixed- and floating-rate interest payment obligations with another
party and, therefore, is exposed to loss if the other party defaults. The
Company minimizes this risk by performing normal credit reviews on its swap
counterparties.
Interest rate caps are interest rate protection instruments that involve
the payment from the seller to the buyer of an interest differential. This
differential represents the difference between current interest rates and
agreed-upon rate applied to a notional principal amount. The Company is a
purchaser of interest rate caps.
Entering into interest-rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the terms of the
contracts, but also the interest-rate risk associated with unmatched positions.
Notional principal amounts often are used to express the volume of these
transactions, but the amounts potentially subject to credit risk are much
smaller.
Forward contracts are contracts for delayed delivery of securities or loans
in which the seller agrees to make delivery at a specified future date of a
specified instrument at a specified price or yield. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movements in security values and interest rates. In order to minimize the
exposure arising from forward contracts, the Company entered into
F-37
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK--(CONTINUED)
long put options amounting to $1 million and $4 million as of December 31, 1997
and 1996, respectively. The Company had $0.6 million and $1.1 million of long
call options as of December 31, 1997 and 1996, respectively.
Interest rate swaps with a notional amount of $20 million matured in 1996.
For the years ended December 31, 1996 and 1995, costs associated with the
interest rate swaps and caps negatively impacted net interest income by $137,000
and $538,000, respectively.
15. CONCENTRATIONS OF CREDIT RISK
All of the Company's loan activity is with customers located throughout the
State of California. Substantially all residential and commercial real estate
loans are secured by properties located in the State of California. The Company
is required by law to maintain 70% of its portfolio assets--as defined by
regulations-- in qualifying residential or small business assets. As of December
31, 1997, 91.1% of the Company's portfolio assets consisted of such qualifying
assets.
Substantially all real estate loans in the portfolio are originated at 80%
loan-to-value or better. Management believes that the risk of significant losses
in excess of underlying collateral value is low.
16. LEASE COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments
The Company leases various premises under noncancelable operating leases,
many of which contain renewal options and some of which contain escalation
clauses.
Future minimum rental payments, which do not include common area costs, due
each year under existing operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1997, are
payable as follows (dollars in thousands):
<TABLE>
<S> <C>
1998..................................................................... $ 3,016
1999..................................................................... 2,017
2000..................................................................... 1,853
2001..................................................................... 1,382
2002..................................................................... 1,208
Aggregate thereafter..................................................... 10,642
-------
Total minimum payments required.......................................... $20,118
-------
-------
</TABLE>
Rental expense was approximately $3.2 million, $3.5 million and $3.0
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Contingent Liabilities
The Company is subject to pending or threatened actions and proceedings
arising in the normal course of business. In the opinion of management, the
ultimate disposition of all pending or threatened actions and proceedings will
not have a material adverse effect on the Company's operations or financial
condition.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, 'Disclosures about
Fair Value of Financial Instrument,' requires all entities to estimate the fair
value of all financial instrument assets, liabilities, and off-balance-sheet
transactions. Fair values are point-in-time estimates that can change
significantly based on
F-38
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
numerous factors. Accordingly, management cannot provide any assurance that the
estimated fair values presented below could actually be realized. The fair value
estimates for financial instruments were determined as of December 31, 1997 and
1996, by application of the described methods and significant assumptions.
Cash and Short-Term Investments
For these short-term instruments, the carrying value of $34,797,000 at
December 31, 1997 and $18,383,000 at December 31, 1996 is a reasonable estimate
of fair value.
Investment And Mortgage-Backed Securities
The aggregate fair value of investment and mortgage-backed securities is
$277,192,000 at December 31, 1997 and $347,696,000 at December 31, 1996. Fair
value equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Loans Receivable
The aggregate fair value of loans receivable is $1,212,105,000 at December
31, 1997 and $1,036,369,000 at December 31, 1996. Fair value is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings at the same remaining
maturities. In addition, the allowance for loan losses was considered a
reasonable adjustment for credit risk for the entire portfolio.
Capitalized Servicing Fees
Fair value is estimated by discounting estimated future cash flows using
current rates which are required for similar assets. Fair value is estimated to
be the same as the carrying value of $429,087 at December 31, 1997 and $929,000
at December 31, 1996.
Deposit Liabilities
Fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities. The aggregate fair value
of deposits is $1,426,274,000 at December 31, 1997 and $1,392,058,000 at
December 31, 1996.
Federal Home Loan Bank Advances
No Federal Home Loan Bank advances were outstanding at December 31, 1997 or
1996.
Long-term Debt to Affiliates
Due to the related party nature of the Company's long-term debt, management
does not believe that fair value estimates are meaningful. Accordingly, such
estimates have not been presented.
Securities Sold Under Agreement to Repurchase
No securities sold under agreement to repurchase were outstanding at
December 31, 1997 or 1996.
Interest Rate Swap and Cap Agreements
The fair value of the swap and cap agreements used for hedging purposes is
the estimated amount that the Company would receive or pay to terminate the
agreements at the reporting date, taking into account current
F-39
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
interest rates and the current creditworthiness of the swap and cap
counterparties. There were no swap of cap agreements at December 31, 1997 and
1996.
Commitments to Extend Credit, Commitments to Purchase Loans, Securities Sold
But Not Owned, and Options on Interest Rate Futures
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Fair values for securities
sold but not owned and options on interest rate futures are based on quoted
market prices or dealer quotes. The fair value of commitments to extend credit
and commitments to purchase loans cannot be readily determined. The fair value
of put options on interest rate futures is $56,875 at December 31, 1997 and
$50,625 at December 31, 1996. The fair value of call options on interest rate
futures is $28,437 at December 31, 1997 and $11,016 at December 31, 1996.
18. PARENT COMPANY
Condensed unconsolidated financial information of UCBH Holdings, Inc. is
presented below. See Note 11 for information regarding the Company's long-term
debt.
CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Cash and due from banks......................................................... $ 56 $ 11
Investment in subsidiary........................................................ 82,556 71,069
------- -------
Total assets................................................................. $82,612 $71,080
------- -------
------- -------
LIABILITIES
Long-term debt to affiliates.................................................... $20,060 $16,736
------- -------
Total liabilities............................................................ 20,060 16,736
------- -------
STOCKHOLDERS' EQUITY
Common stock.................................................................... 10 10
Additional paid-in capital...................................................... 30,278 30,278
Unrealized loss on subsidiary's mortgage-backed securities available for sale... (1,728) (2,637)
Retained earnings............................................................... 33,992 26,693
------- -------
Total stockholders' equity................................................... 62,552 54,344
------- -------
Total liabilities and stockholders' equity................................... $82,612 $71,080
------- -------
------- -------
</TABLE>
F-40
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. PARENT COMPANY--(CONTINUED)
CONDENSED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
INCOME
Dividends from subsidiary............................................... $ 250 $ -- $ 354
------- ------- -------
Total income....................................................... 250 -- 354
------- ------- -------
EXPENSE
Interest expense in long-term debt to affiliates........................ 1,825 1,640 1,741
Miscellaneous expense................................................... 205 -- --
------- ------- -------
Total expense...................................................... 2,030 1,640 1,741
------- ------- -------
Loss before taxes and equity in undistributed net income (loss) of
subsidiary............................................................ (1,780) (1,640) (1,387)
Income tax benefit...................................................... -- -- --
Equity in undistributed net income (loss) of subsidiary................. 9,078 1,334 (1,521)
------- ------- -------
Net income......................................................... $ 7,298 $ (306) $(2,908)
------- ------- -------
------- ------- -------
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................................................. $ 7,298 $ (306) $(2,908)
Adjustment to reconcile net income to net cash provided by (used for) operating
activities:
Equity in undistributed net (income) loss of subsidiary...................... (9,078) (1,334) 1,521
Increase in accrued interest payable......................................... -- -- 1,457
Decrease in dividends payable................................................ -- -- 417
------- ------- -------
Net cash (used for) provided by operating activities....................... (1,780) (1,640) 487
------- ------- -------
INVESTING ACTIVITIES
Capital contribution to subsidiary................................................ (1,500) -- --
------- ------- -------
Net cash used in investing activities...................................... (1,500) -- --
------- ------- -------
FINANCING ACTIVITIES
Long-term debt to affiliates issued............................................... 1,500 -- --
Long-term debt to affiliates repaid............................................... -- -- (500)
Increase in capitalized interest component of long-term debt to affiliates........ 1,825 1,640 --
------- ------- -------
Net cash provided by (used in) financing activities........................ 3,325 1,640 (500)
------- ------- -------
Net increase (decrease) in cash and cash equivalents.............................. 45 -- (13)
Cash and cash equivalents beginning of year....................................... 11 11 24
------- ------- -------
Cash and cash equivalents end of year............................................. $ 56 $ 11 $ 11
------- ------- -------
------- ------- -------
</TABLE>
F-41
<PAGE>
UCBH HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. LEGISLATION ENACTED IN 1996
Legislation was enacted in 1996 to recapitalize the FDIC's Savings
Association Insurance Fund (SAIF). Under this legislation, all institutions with
SAIF-insured deposits, including the Company's subsidiary United, were required
to pay a one-time assessment to recapitalize this insurance fund. For the
United, this assessment was approximately $7.7 million, which resulted in a
charge against 1996 earnings. This assessment was tax deductible and is expected
to substantially reduce the level of future periodic SAIF assessments paid by
United.
20. SUBSEQUENT EVENTS
On March 30, 1998, the Company changed its name from USB Holdings, Inc. to
UCBH Holdings, Inc.
21. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominator of the
basic and diluted earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
-------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
(Dollars in thousands, except per share amounts)
1997:
Basic:
Net income............................................ $ 7,299 6,000,000 $ 1.22
Effect of long-term debt to affiliates..................... 1,077 1,974,000
----------- -------------
Diluted:
Net income and assumed conversions.................... $ 8,376 7,974,000 $ 1.05
----------- -------------
----------- -------------
1996:
Basic:
Net loss.............................................. ($ 306) 6,000,000 ($ 0.05)
Effect of long-term debt to affiliates..................... 968 1,974,000
----------- -------------
Diluted:
Net income and assumed conversions.................... $ 662 7,974,000 ($ 0.05)
----------- -------------
----------- -------------
1995:
Basic:
Net loss.............................................. ($2,908) 6,000,000 ($ 0.48)
Effect of long-term debt to affiliates..................... 1,027 1,974,000
Diluted:
----------- -------------
Net loss and assumed conversions...................... ($1,881) 7,974,000 ($ 0.48)
----------- -------------
----------- -------------
</TABLE>
For the years ended December 31, 1996 and 1995, the assumed conversions of
long-term debt to affiliates would be considered anti-dilutive. Accordingly,
diluted loss per share for these periods is equal to basic loss per share.
F-42
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS EXCHANGE OFFER, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE TRUST. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN AFFAIRS OF THE COMPANY OR THE TRUST SINCE THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary........................................ 7
Selected Consolidated Financial Data........... 16
Risk Factors................................... 17
Use of Proceeds................................ 27
Ratios of Earnings to Combined Fixed Charges... 28
Accounting Treatment of Capital Securities..... 28
Consolidated Statements of Operations.......... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 30
Business....................................... 58
Supervision and Regulation..................... 70
Management of the Company and the Bank......... 76
UCBH Trust Co. ................................ 85
The Exchange Offer............................. 85
Description of Exchange Capital Securities..... 95
Description of Exchange Junior Subordinated
Debentures................................... 106
Description of Exchange Guarantee.............. 115
Description of Original Securities............. 118
Relationship among the Exchange Capital
Securities, the Exchange Junior Subordinated
Debentures and the Exchange Guarantee........ 118
Federal Income Tax Consequences................ 119
ERISA Considerations........................... 123
Plan of Distribution........................... 124
Experts........................................ 124
Legal Matters.................................. 124
Additional Information......................... 124
Index to Consolidated Financial Statements..... F-1
</TABLE>
UNTIL JANUARY 12, 1999 OR 90 DAYS AFTER THE FIRST DATE ON WHICH THE
REGISTERED SECURITIES ARE BONA FIDE OFFERED TO THE PUBLIC, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THE
EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
UCBH TRUST CO.
OFFER TO EXCHANGE ITS
9.375% CAPITAL SECURITIES, SERIES B
(LIQUIDATION AMOUNT $1,000
PER CAPITAL SECURITY)
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES
ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
9.375% CAPITAL SECURITIES, SERIES A
(LIQUIDATION AMOUNT $1,000
PER CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY
GUARANTEED, AS DESCRIBED
HEREIN, BY
UCBH HOLDINGS, INC.
------------------------
PROSPECTUS
------------------------
OCTOBER 14, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
