SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by Registrant: /X/
Filed by a Party other than the Registrant: / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Materials Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
PBOC HOLDINGS, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction
applies: Common Stock, par value $0.01 per share
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(2) Aggregate number of securities to which transaction
applies: 11,520,431 shares of common stock and options to
purchase 502,250 shares of common stock at an average
exercise price of $9.00
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:
$115,706,560--Sale Price
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(4) Proposed maximum aggregate value of transaction:
$115,706,560
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(5) Total fee paid: $23,141.31
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[PBOC HOLDINGS, INC. LETTERHEAD]
, 2001
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders of
PBOC Holdings, Inc., a Delaware corporation and the holding company for People's
Bank of California, to be held at , Los Angeles, California at
.m., Pacific Time, on , 2001.
The attached Notice of Special Meeting of Shareholders and proxy statement
describe the formal business to be transacted at the special meeting. The
purpose of the special meeting is to consider and vote upon a proposal to
approve and adopt the Agreement and Plan of Merger by and among PBOC
Holdings, Inc. ("PBOC"), FBOP Corporation ("FBOP") and FBOP Acquisition Company
("Acquisition"), dated as of December 8, 2000, which provides for the merger of
Acquisition, a Delaware corporation and wholly-owned subsidiary of FBOP, with
and into PBOC, with PBOC continuing as the surviving corporation and as a
wholly-owned subsidiary of FBOP. In the merger, each share of PBOC's common
stock outstanding at the time of the merger would be converted into the right to
receive an amount of cash equal to $10.00. The merger will be a taxable
transaction to shareholders generally. Shareholders of PBOC will have no equity
interest in either PBOC or FBOP after completion of the merger. The closing
price per share for the PBOC common stock as reported on the Nasdaq Stock Market
on November 15, 2000, the last full trading day prior to the public announcement
of FBOP's agreement to acquire the shares of PBOC common stock owned by PBOC's
largest shareholder, and on December 8, 2000, the last full trading day prior to
the public announcement of the proposed merger, was $7.00 and $9.1875,
respectively. The accompanying proxy statement more fully describes the proposed
merger.
Consummation of the merger is subject to certain conditions, including the
approval by all applicable regulatory authorities and the approval of our
shareholders. The Board of Directors believes that the proposed merger is in the
best interests of PBOC and its shareholders, and has unanimously approved the
merger agreement and the merger. Under Section 251 of the Delaware General
Corporation Law, the affirmative vote of the holders of a majority of the
outstanding shares of PBOC common stock is required to approve and adopt the
merger agreement. In addition, because FBOP is considered to be an "interested
stockholder" of PBOC for purposes of Section 203 of the Delaware General
Corporation Law, the merger agreement must also be approved and adopted by the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of PBOC common stock that are not deemed to be owned by FBOP or any of its
affiliates. The Board of Directors unanimously recommends that you vote "FOR"
approval and adoption of the merger agreement. You are urged to carefully read
the accompanying proxy statement, which provides important information regarding
the merger and related matters.
Your vote is important, regardless of the number of shares that you own.
Because the merger agreement must be approved by the holders of a majority of
the outstanding shares of PBOC common stock as well as by the holders of
two-thirds of the outstanding shares of common stock entitled to vote at the
meeting which are not deemed to be owned by FBOP or its affiliates, a failure to
vote or a vote to abstain will have the same effect as a vote against the merger
agreement. On behalf of the Board of Directors, I urge you to sign, date and
return the enclosed proxy in the enclosed postage-paid envelope as soon as
possible, even if you currently plan to attend the special meeting. This will
not prevent you from voting in person but will assure that your vote is counted
if you are not able to attend the special meeting. Executed proxies with no
instructions indicated on such proxies will be voted "FOR" approval and adoption
of the merger agreement.
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We look forward to seeing you at this important special meeting. If you have
any questions regarding the special meeting or the proposed merger, you are
encouraged to call J. Michael Holmes, Corporate Secretary, Senior Executive Vice
President and Chief Financial Officer of PBOC, at (323) 954-6651.
Sincerely,
Rudolf P. Guenzel
President and Chief Executive Officer
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PBOC HOLDINGS, INC.
5900 WILSHIRE BOULEVARD
16TH FLOOR
LOS ANGELES, CALIFORNIA 90036-5013
(323) 938-6300
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 2001
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A special meeting of the shareholders of PBOC Holdings, Inc. ("PBOC") will
be held at at .m., Pacific Time, to consider the
following proposals:
1.To approve and adopt the Agreement and Plan of Merger by and among PBOC,
FBOP Corporation ("FBOP") and FBOP Acquisition Company ("Acquisition"),
dated as of December 8, 2000, pursuant to which:
- Acquisition, a Delaware corporation and a wholly-owned subsidiary of
FBOP, will merge with and into PBOC, with PBOC continuing as the
surviving corporation and a wholly-owned subsidiary of FBOP; and
- each outstanding share of PBOC's common stock outstanding at the time
of the merger would be converted into the right to receive an amount of
cash equal to $10.00.
2. To adjourn the special meeting, if necessary, to solicit additional
proxies.
3.Such other business as may properly come before the special meeting or
any adjournments or postponements thereof.
The Board of Directors has fixed , 2001, as the record date
for the determination of shareholders entitled to vote at the special meeting,
or any adjournments or postponements thereof. You have a right to dissent from
the merger and obtain payment of the fair value of your shares by complying with
the Delaware law provisions contained in Appendix C.
You are cordially invited to attend the special meeting. However, to ensure
your representation at the special meeting, please complete, sign, date and
promptly mail your proxy card in the enclosed postage-paid envelope. The proxy
card will not be used if you attend and vote at the special meeting in person.
If you are a stockholder whose shares are not registered in your name, you will
need additional documentation from the holder of record of your shares to vote
in person at the meeting. The prompt return of your proxy will save us the
expense of further requests for proxies.
The Board of Directors of PBOC unanimously recommends that shareholders
vote "FOR" approval of the merger agreement.
By Order of the Board of Directors,
Rudolf P. Guenzel
President and Chief Executive Officer
Los Angeles, California
, 2001
PLEASE DO NOT SEND ANY SHARE CERTIFICATES AT THIS TIME.
IF THE MERGER IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS
REGARDING YOUR CERTIFICATES.
TABLE OF CONTENTS
PAGE
--------
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 2
SUMMARY TERM SHEET.......................................... 4
THE COMPANIES............................................... 9
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF PBOC...... 10
RECENT DEVELOPMENTS......................................... 12
SPECIAL MEETING OF SHAREHOLDERS............................. 13
Purpose................................................... 13
Solicitation and Voting................................... 13
Revocability of Proxies................................... 14
Adjournments.............................................. 15
BENEFICIAL OWNERSHIP OF COMMON STOCK BY CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................... 15
THE PROPOSED MERGER......................................... 18
The Merger................................................ 18
Background of the Merger.................................. 18
Litigation................................................ 21
Reasons for the Merger and Recommendation of the Board of
Directors................................................. 21
Opinion of the Financial Advisor.......................... 23
Merger Consideration...................................... 29
Interests of Certain Persons in the Merger................ 29
Regulatory Approvals...................................... 30
Certain Federal Income Tax Consequences................... 31
Accounting Treatment...................................... 32
Dissenters' Rights........................................ 32
THE MERGER AGREEMENT........................................ 35
Effective Time............................................ 35
Conversion of Shares of PBOC's Common Stock............... 35
Treatment of PBOC Stock Options........................... 35
Representations and Warranties............................ 36
Covenants of PBOC, FBOP and Acquisition; Conduct of
Business Prior to the Merger.............................. 37
Conditions to Consummation of the Merger.................. 40
No Negotiations with Others............................... 42
Termination............................................... 42
Termination Fee........................................... 42
Amendment................................................. 43
ADJOURNMENT OF THE SPECIAL MEETING.......................... 43
MARKET PRICES AND DIVIDENDS................................. 43
WHERE YOU CAN FIND MORE INFORMATION......................... 44
FUTURE SHAREHOLDER PROPOSALS................................ 45
OTHER BUSINESS.............................................. 45
FORWARD-LOOKING STATEMENTS--CAUTIONARY STATEMENTS........... 45
APPENDIX A: Agreement and Plan of Merger by and among PBOC
Holdings, Inc., FBOP
Corporation and FBOP Acquisition Company, dated as of
December 8, 2000
APPENDIX B: Opinion of Keefe, Bruyette & Woods, Inc.
APPENDIX C: Dissenters' Rights Provisions--Section 262 of the Delaware
General
Corporation Law
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PBOC HOLDINGS, INC.
5900 WILSHIRE BOULEVARD
16TH FLOOR
LOS ANGELES, CALIFORNIA 90036-5013
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PROXY STATEMENT
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SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 2001
This proxy statement and the accompanying form of proxy are being provided
to you in connection with the solicitation of proxies by the Board of Directors
of PBOC from holders of outstanding shares of its common stock, par value $0.01
per share. The proxies will be voted at PBOC's special meeting of shareholders
to be held on , 2001, at the time and place and for the purpose
set forth in the accompanying Notice of Special Meeting of Shareholders and at
any adjournments or postponements of the special meeting. This proxy statement
and the accompanying proxy are first being mailed to shareholders on or about
, 2001.
At the special meeting, shareholders will consider and vote upon a proposal
to approve and adopt the Agreement and Plan of Merger by and among PBOC, FBOP
and Acquisition, dated as of December 8, 2000 (the "merger agreement"), pursuant
to which Acquisition, a Delaware corporation and a wholly-owned subsidiary of
FBOP, will merge with and into PBOC. As a result of the merger, PBOC will
continue as the surviving corporation and as a wholly-owned subsidiary of FBOP,
and Acquisition will cease to exist. In the merger, each share of PBOC's common
stock outstanding at the time of the merger will be converted into the right to
receive an amount of cash equal to $10.00. Shares held by shareholders properly
perfecting their dissenters' rights will be converted into cash pursuant to the
dissenters' rights statutes also described in this proxy statement. For a
discussion of the consideration to be received by PBOC's shareholders in the
merger, see "THE PROPOSED MERGER--MERGER CONSIDERATION." The merger will be a
taxable transaction to shareholders generally. Shareholders of PBOC will have no
equity interest in either PBOC or FBOP after completion of the merger. A copy of
the merger agreement is included as APPENDIX A to this proxy statement and is
incorporated herein by reference. The closing price per share for the PBOC
common stock as reported on the Nasdaq Stock Market on November 15, 2000, the
last full trading day prior to the public announcement of FBOP's agreement to
acquire the shares of PBOC common stock owned by PBOC's largest shareholder, and
on December 8, 2000, the last full trading day prior to the public announcement
of the proposed merger, was $7.00 and $9.1875, respectively.
Consummation of the merger is conditioned upon, among other things, approval
and adoption of the merger agreement by the requisite vote of PBOC's
shareholders and the receipt of all requisite regulatory approvals and consents.
Under Section 251 of the Delaware General Corporation Law, the affirmative vote
of the holders of a majority of the outstanding shares of PBOC common stock is
required to approve and adopt the merger agreement. In addition, because FBOP is
considered to be an "interested stockholder" of PBOC for purposes of
Section 203 of the Delaware General Corporation Law, the merger agreement must
also be approved and adopted by the affirmative vote of the holders of at least
two-thirds of the outstanding shares of PBOC common stock that are not deemed to
be owned by FBOP or any of its affiliates. For further information concerning
the required vote of PBOC's shareholders, see "SPECIAL MEETING OF
SHAREHOLDERS--SOLICITATION AND VOTING" and for further information concerning
the terms and conditions of the merger, see "THE PROPOSED MERGER--THE MERGER."
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The Board of Directors knows of no additional matters that will be presented
for consideration at the special meeting. No persons have been authorized to
give any information or to make any representations other than those contained
in this proxy statement in connection with the solicitation of proxies made
hereby, and, if given or made, such information or representations must not be
relied upon as having been authorized by PBOC or any other person.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why is the merger proposed:
A: PBOC is proposing this merger because its Board of Directors has concluded
that this merger is in the best interests of PBOC and its shareholders.
Q: What will I receive in this merger?
A: Under the merger agreement, you will have the right to receive cash in the
amount of $10.00 for each share of the PBOC common stock that you own.
Q: How do I vote?
A: Simply indicate on your proxy card how you want to vote and then sign and
mail your proxy card in the enclosed return envelope as soon as possible so
that your shares may be represented at PBOC's special meeting.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will not vote your shares for you unless you provide instructions
to your broker on how to vote. It is important therefore that you follow the
directions provided by your broker to vote your shares. If you fail to
instruct your broker how to vote your shares, the effect will be the same as
a vote against the merger agreement.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. You may change your vote at any time before your proxy is voted at the
special meeting. If your shares are held in your name, you may do this in
one of three ways. First, you may send written instructions to the Corporate
Secretary of PBOC revoking your proxy. Second, you may complete and submit a
new proxy card bearing a later date. If you choose either of these two
methods, you must submit your notice of revocation or your new proxy card to
PBOC at the address at the top of the PBOC's notice of special meeting.
Third, you may attend the meeting and vote in person if you tell the
Corporate Secretary that you want to cancel your proxy and vote in person.
Simply attending the special meeting, however, will not revoke your proxy.
If you have instructed a broker to vote your shares, you must follow
directions received from your broker to change your vote or to vote at
PBOC's meeting.
Q: Should I send in my certificates now?
A: No. After the merger is completed, we will send you written instructions for
exchanging your stock certificates for cash.
Q: When do you expect this merger to be completed?
A: We are working toward completing this merger as quickly as possible. We
currently expect to complete this merger in the second quarter of 2001.
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Q: Why have you sent me this document and who can help answer my questions?
A: This proxy statement contains important information regarding the proposed
merger, as well as information about PBOC and FBOP. It also contains
important information about what the PBOC's Board of Directors and
management considered in evaluating this proposed merger. We urge you to
read this proxy statement carefully, including its appendices.
If you have more questions about the merger or the meeting, you should
contact:
J. Michael Holmes
Corporate Secretary, Senior Executive
Vice President and Chief Financial Officer
PBOC Holdings, Inc.
5900 Wilshire Boulevard
16th Floor
Los Angeles, California 90036
Phone (323) 954-6651
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SUMMARY TERM SHEET
THE FOLLOWING IS A BRIEF SUMMARY TERM SHEET FOR THE MERGER, WHICH HIGHLIGHTS
SELECTED INFORMATION FROM THIS PROXY STATEMENT REGARDING THE MERGER AND THE
MERGER AGREEMENT. THIS TERM SHEET MAY NOT, HOWEVER, CONTAIN ALL OF THE
INFORMATION THAT IS IMPORTANT TO YOU AS A SHAREHOLDER OF PBOC. ACCORDINGLY, WE
ENCOURAGE YOU TO CAREFULLY READ THE ENTIRE PROXY STATEMENT AND THE APPENDICES TO
THIS PROXY STATEMENT, AS WELL AS THE DOCUMENTS WHICH ARE INCORPORATED BY
REFERENCE HEREIN. PAGE NUMBERS REFER TO PAGES OF THIS PROXY STATEMENT ON WHICH
MORE DETAILED INFORMATION MAY BE FOUND.
THE PROPOSED TRANSACTION
- THE PROPOSAL (page ). You are being asked to consider and vote upon a
proposal to approve the merger agreement that provides for Acquisition to
be merged with and into PBOC. As a result of the merger, PBOC will
continue as the surviving corporation and as a wholly-owned subsidiary of
FBOP.
- EACH PBOC SHARE WILL BE EXCHANGED FOR $10.00 IN CASH (page ). Upon
completion of the merger, you will be entitled to receive $10.00 in cash
for each of your shares of PBOC common stock.
- EACH PBOC OPTION WILL BE EXCHANGED FOR $10.00 LESS THE PER-SHARE EXERCISE
PRICE IN CASH (pages and ). Upon completion of the merger,
optionholders will be entitled to receive, for each of their options to
acquire a share of PBOC common stock which is outstanding and unexercised
immediately prior to the effective time of the merger, the amount in cash
equal to $10.00 less the per-share exercise price of the option.
PBOC'S FINANCIAL ADVISOR SAYS THE CASH CONSIDERATION IS FAIR FROM A FINANCIAL
POINT OF VIEW TO PBOC SHAREHOLDERS (PAGE AND APPENDIX B)
On December 8, 2000, Keefe, Bruyette & Woods, Inc. ("KBW"), one of PBOC's
financial advisors, delivered their opinion to PBOC's Board of Directors that,
as of the date of such opinion, the consideration to be received by PBOC
shareholders in the merger is fair from a financial point of view. KBW
subsequently updated its opinion as of the date of this proxy statement.
KBW provided its advisory services and its opinion for the information and
assistance of the PBOC Board of Directors in connection with its consideration
of the merger. KBW's opinion is not a recommendation as to how any PBOC
shareholder should vote at the special meeting. THE OPINION IS ATTACHED AS
APPENDIX B TO THIS PROXY STATEMENT. YOU ARE URGED TO READ THE OPINION IN ITS
ENTIRETY.
THE MERGER WILL BE A TAXABLE TRANSACTION TO YOU (PAGE )
As a result of the merger, you will generally recognize a gain or loss for
United States income tax purposes measured by the difference between the cash
received pursuant to the merger agreement and your adjusted tax basis in the
shares of PBOC's common stock exchanged for such cash. Because determining the
tax consequences of the merger can be complicated, you should consult with your
tax advisor as to the specific tax consequences of the merger to you, including
the applicability and effect of federal, state, local, foreign and other tax
laws.
PBOC'S RECOMMENDATION TO SHAREHOLDERS (PAGE )
Your Board of Directors has determined, by unanimous vote, that the merger
is fair to and in the best interests of PBOC and its shareholders and has
unanimously approved and adopted the merger agreement and the merger. Your Board
of Directors unanimously recommends that shareholders vote FOR approval of the
merger agreement at the special meeting.
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MARKET PRICE INFORMATION (PAGE )
PBOC's common stock is traded on the Nasdaq National Market under the symbol
"PBOC." The closing price per share for the PBOC common stock as reported on the
Nasdaq National Market on November 15, 2000, the last full trading day prior to
the public announcement of FBOP's agreement to acquire the shares of PBOC common
stock owned by PBOC's largest shareholder, and on December 8, 2000, the last
full trading day prior to the public announcement of the proposed merger, was
$7.00 and $9.1875, respectively.
THE SPECIAL MEETING
- TIME, PLACE AND DATE OF THE SPECIAL MEETING (PAGE ). The special meeting
of PBOC shareholders will be held at .m., Pacific Time, on
, 2001, at , , Los Angeles,
California.
- REQUIRED VOTE (PAGE ). As of the record date, 19,876,205 shares of PBOC
common stock were issued and outstanding. FBOP owns 975,400 shares of PBOC
common stock, has outstanding agreements (which agreements are subject to
certain conditions including the receipt of all requisite regulatory
approvals and which agreements do not give FBOP the right to vote the
underlying shares) to acquire an additional 7,479,320 shares of PBOC
common stock and holds irrevocable proxies to vote an aggregate of
1,019,571 shares, which were granted by certain directors and executive
officers of PBOC and its subsidiaries and other entities in connection
with the execution of the merger agreement, which represents in the
aggregate 47.7% of the total issued and outstanding shares of PBOC common
stock. PBOC is subject to Section 203 of the Delaware General Corporation
Law, which governs business combinations with interested stockholders.
Subject to certain exceptions, Section 203 provides that a corporation
shall not engage in any business combination with any interested
stockholder for a three-year period following the time that a stockholder
becomes an interested stockholder unless, among other things, the business
combination is approved by the Board of Directors of the corporation and
by the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the outstanding voting stock which is not
owned by the interested stockholder. Accordingly, because FBOP is
considered to be an interested stockholder under Section 203, approval of
the merger requires both the affirmative vote of the holders of a majority
of the outstanding shares of PBOC common stock as well as the affirmative
vote of the holders of two-thirds of the outstanding shares of PBOC common
stock, excluding the 8,454,720 shares of PBOC common stock which are
deemed to be owned by FBOP for purposes of Section 203 of the Delaware
General Corporation Law.
- SHAREHOLDERS ENTITLED TO VOTE (PAGE ). You are entitled to vote at the
special meeting if you owned shares of PBOC common stock at the close of
business on , 2001, the record date for the special
meeting. You will have one vote for each share of PBOC common stock you
owned on the record date. shares of PBOC common stock were
outstanding as of the record date and are entitled to vote at the special
meeting.
- PROCEDURE FOR VOTING (PAGE ). You may vote by completing and returning
the enclosed proxy card, or by appearing at the special meeting and voting
in person. If you complete and return the enclosed proxy but wish to
revoke it, you must either file a written, signed notice of revocation
with PBOC's corporate secretary, submit a later-dated proxy to PBOC, or
attend the meeting and vote in person.
- SOLICITATION OF PROXIES (PAGE ). PBOC will pay all of the costs of
soliciting proxies. In addition to soliciting proxies by mail, PBOC's
directors, officers and employees, without receiving additional
compensation, may solicit proxies by personal interview, mail, telephone
and facsimile. Arrangements will also be made with brokerage firms and
other custodians, nominees and
5
fiduciaries to forward solicitation materials to the beneficial owners of
shares held of record by such persons, and PBOC will reimburse such
brokerage firms, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them. Innisfree M&A Incorporated has
been retained by PBOC to assist it in the solicitation of proxies at a
cost of $10,000.00, plus the reimbursement of certain expenses.
THE MERGER
- STRUCTURE OF THE MERGER (PAGE ). Upon completion of the merger:
-- Acquisition will be merged with and into PBOC, and PBOC will be the
surviving corporation after the merger;
-- PBOC will be 100% owned by FBOP; and
-- Each share of PBOC common stock issued and outstanding immediately
prior to the effective time of the merger (other than shares as to
which dissenters' rights are perfected), and each option to acquire a
share of PBOC common stock that is outstanding and unexercised
immediately prior to the effective time, will be converted into the
right to receive a cash payment in accordance with the merger
agreement. PBOC shareholders will have no equity interest in PBOC or
FBOP after the merger.
-- Upon consummation of the merger and the receipt of regulatory approval,
People's Bank of California, a federal savings institution and
wholly-owned subsidiary of PBOC, may merge with and into California
National Bank, a national banking institution and wholly-owned
subsidiary of FBOP, with California National Bank the surviving
corporation of such merger.
- ACCOUNTING TREATMENT (PAGE ). The merger will be accounted for as a
"purchase" in accordance with generally accepted accounting principles.
Consequently, the aggregate consideration paid by FBOP in connection with
the merger will be allocated to PBOC's assets and liabilities based upon
their fair values, with any excess being treated as goodwill.
- RIGHTS OF DISSENTING SHAREHOLDERS (PAGE ). Under Delaware law, if
holders of the shares of PBOC's common stock dissent and do not vote for
approval and adoption of the merger agreement and the merger, they are
entitled to appraisal rights, provided that they strictly comply with
certain statutory procedures further explained in detail in this proxy
statement. A copy of Section 262 of the Delaware General Corporation Law,
which sets forth the rights of dissenting shareholders under Delaware law,
is attached as APPENDIX C to this proxy statement.
- REASONS FOR THE MERGER (PAGE ). In arriving at its determination that
the merger is fair to, and in the best interests of, the PBOC
shareholders, the PBOC Board of Directors considered a number of factors,
including, without limitation, the following:
-- The merger represents an opportunity for PBOC shareholders to realize a
premium over recent market prices for their shares;
-- In the opinion of PBOC's financial advisor, the price per share of
common stock to be received by you is fair from a financial point of
view;
-- PBOC and People's Bank of California compete against many larger and
better capitalized financial institutions and are vulnerable to
competitive factors;
-- The financial and operating performance of PBOC over recent periods
does not compare favorably with prior periods as well as with its peer
group (see "RECENT DEVELOPMENTS," "THE PROPOSED MERGER--BACKGROUND OF
THE
6
MERGER" and "--OPINION OF THE FINANCIAL ADVISOR--SELECTED PEER GROUP
ANALYSIS;" and
-- The Board of Directors has explored strategic alternatives and believes
that the merger offers the best opportunity to maximize the value of
PBOC common stock.
- INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE ). The officers and
directors of PBOC and its subsidiaries have interests in the merger as
employees and directors that are different from, or in addition to, your
interests as shareholders.
PARTIES TO THE MERGER
- PBOC (PAGE ). PBOC is a $3.3 billion thrift holding company subject to
supervision by the Office of Thrift Supervision. PBOC directly owns 100%
of the shares of common stock of People's Bank of California, Los Angeles,
California, which presently operates 26 branch offices in Los Angeles,
Orange and Ventura Counties, California.
- FBOP (PAGE ). FBOP is a $5.4 billion Illinois corporation and registered
bank holding company subject to supervision by the Board of Governors of
the Federal Reserve System. FBOP is based in Oak Park, Illinois and
conducts its operations through subsidiary banks operating in Illinois,
Texas and California.
- ACQUISITION (PAGE ). Acquisition is a Delaware corporation and
wholly-owned subsidiary of FBOP which was formed solely for the purpose of
effecting the merger.
THE MERGER AGREEMENT
- EFFECTIVE TIME OF THE MERGER (PAGE ). The merger of PBOC and Acquisition
will become effective upon the filing of a certificate of merger with the
Secretary of State of the State of Delaware. The filing is expected to
occur after approval of the merger agreement by PBOC's shareholders at the
special meeting and satisfaction or waiver of the other conditions to the
merger contained in the merger agreement. There can be no assurance that
all conditions to the merger contained in the merger agreement will be
satisfied or waived.
- REPRESENTATIONS AND WARRANTIES OF PBOC, FBOP AND ACQUISITION (PAGE ).
The merger agreement contains various customary representations and
warranties made by each of the parties to the merger agreement.
- COVENANTS OF PBOC, FBOP AND ACQUISITION; CONDUCT OF BUSINESS PRIOR TO THE
MERGER (PAGE ). The merger agreement contains various customary
covenants, including a covenant that during the period from the date of
the merger agreement until consummation of the merger, PBOC will conduct
its business in the usual and ordinary course.
- CONDITIONS TO CONSUMMATION OF THE MERGER (PAGE ). The completion of the
merger depends upon satisfaction of a number of conditions, including,
among other things:
-- approval of the merger agreement by the shareholders of PBOC holding
not less than two-thirds of the outstanding shares of common stock
entitled to vote at the meeting which are not deemed to be owned by
FBOP or its affiliates;
-- receipt of all applicable regulatory approvals; and
-- the absence of a material adverse change in the financial condition,
results of operations or business of PBOC and People's Bank of
California since September 30, 2000.
- NO NEGOTIATIONS WITH OTHERS (PAGE ). Subject to certain exceptions, PBOC
may not, directly or indirectly, nor permit either People's Bank of
California or their respective directors, officers,
7
employees, representatives, agents or affiliates to solicit, initiate,
encourage, or respond favorably to inquiries or proposals from, or provide
any confidential information or access to People's Bank of California's or
PBOC's premises, or participate in any discussions or negotiations with,
any person (other than Acquisition and FBOP and their directors, officers,
employees, representatives and agents) concerning:
-- any merger, sale of assets not in the ordinary course of business,
acquisition, business combination, change of control or other similar
transaction involving PBOC or People's Bank of California; or
-- any purchases or other acquisition by any person of any shares of
capital stock of PBOC or People's Bank of California; or
-- any issuance by PBOC or People's Bank of California of any shares of
its capital stock.
- TERMINATION OF MERGER AGREEMENT (PAGE ). The merger agreement provides
that the merger agreement and the merger may be terminated by the mutual
consent of the parties, or by either party upon the occurrence or
non-occurrence of certain events.
- TERMINATION FEE (PAGE ). If PBOC and Acquisition fail to consummate the
merger and PBOC or People's Bank of California enters into a letter of
intent, commitment letter or other written agreement with a third party
regarding a merger, consolidation, sale of assets or other similar
transaction involving PBOC or People's Bank of California within twelve
months following the termination of the merger and the merger agreement
(except for terminations under certain specified circumstances), PBOC
shall, upon execution of any such letter or agreement, promptly pay
$10 million to FBOP.
MANAGEMENT OWNERSHIP (PAGE )
As of the record date, , 2001, the directors and executive
officers of PBOC and its subsidiaries owned or had power to vote (excluding
options), in the aggregate, 540,389 shares of outstanding PBOC common stock,
representing an aggregate of approximately 2.7% of the outstanding shares of
PBOC common stock. The table beginning on page contains more detailed
information regarding the share ownership of executive officers and directors.
8
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF PBOC
The following table presents selected historical consolidated financial and
other data for the five years ended December 31, 1999 and for the nine months
ended September 30, 2000 and 1999 for PBOC. The selected historical consolidated
financial and other data set forth below should be read in conjunction with, and
is qualified in its entirety by, the historical consolidated financial
statements of the Company, including the related notes, incorporated by
reference herein.
AT OR FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Selected Financial Condition Data:
Total assets......................... $3,276,687 $3,585,301 $3,398,228 $3,335,027 $2,213,054 $1,747,918 $1,579,760
Cash and cash equivalents............ 29,039 19,461 19,582 22,401 14,113 14,720 7,258
Federal funds sold................... 28,800 -- 2,000 24,000 7,004 7,200 11,800
Securities purchased under agreements
to resell.......................... -- -- -- -- -- -- 35,000
Securities available-for-sale........ 514,585 992,352 771,864 1,004,937 571,160 502,301 241,645
Mortgage-backed securities
held-to-maturity................... 3,924 4,345 4,326 6,282 9,671 10,971 --
Loans receivable, net................ 2,531,929 2,431,929 2,462,837 2,148,857 1,533,212 1,141,707 1,228,152
Real estate held for investment and
sale, net.......................... 1,006 1,932 846 2,723 15,191 22,561 16,288
Deposits............................. 2,000,631 1,691,116 1,647,337 1,542,162 1,266,615 1,371,243 1,473,318
Securities sold under agreements to
repurchase......................... 135,000 428,901 381,109 364,000 340,788 192,433 --
FHLB advances........................ 871,000 1,245,000 1,123,700 1,198,000 472,000 80,000 31,746
Senior debt (1)...................... -- -- -- -- 11,113 11,398 10,000
Trust originated preferred and other
borrowings......................... 10,000 -- 4,621 -- -- -- --
Minority interest (2)................ 33,250 33,250 33,250 33,250 33,250 -- --
Stockholders' equity (3)............. 214,513 164,925 179,457 180,606 79,602 64,822 56,613
Selected Operating Data:
Interest, fees and dividend income... $ 191,592 $ 169,134 $ 230,428 $ 180,873 $ 130,979 $ 122,896 $ 122,926
Interest expense..................... 135,455 120,405 161,677 140,358 97,205 90,791 97,977
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.................. 56,137 48,729 68,751 40,515 33,774 32,105 24,949
Provision for loan losses............ 5,500 3,300 4,747 2,000 2,046 2,884 8,823
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................... 50,637 45,429 64,004 38,515 31,728 29,221 16,126
Gain (loss) on sale of
mortgage-backed securities, net.... (8,203) 200 (3,217) 1,682 1,275 3,638 641
Gain (loss) on loan and servicing
sales, net......................... 4 49 49 613 3,413 (53) (166)
Income (loss) from other real estate
operations, net.................... (37) 533 513 1,479 (1,805) 1,946 (2,067)
Other noninterest income............. 2,848 1,982 2,547 2,662 2,234 2,593 2,095
Operating expenses................... 34,042 27,364 38,123 46,962 29,543 27,816 30,751
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before income tax
benefit, minority interest and
extraordinary item................. 11,207 20,829 25,773 (2,011) 7,302 9,529 (14,122)
Income tax benefit................... 21,184 3,500 4,500 16,390 4,499 3,015 2,644
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before minority
interest and extraordinary item.... 32,391 24,329 30,273 14,379 11,801 12,544 (11,478)
Minority interest.................... 2,607 2,607 3,476 3,476 859 -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before extraordinary
item............................... 29,784 21,722 26,797 10,903 10,942 12,544 (11,478)
Extraordinary item gain on sale of
FHLB advances...................... -- -- 6,678 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss).................. 29,784 21,722 33,475 10,903 10,942 12,544 (11,478)
Dividends on preferred stock......... -- -- -- 2,160 7,340 6,555 3,385
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss) available to
common stockholders................ $ 29,784 $ 21,722 $ 33,475 $ 8,743 $ 3,602 $ 5,989 $ (14,863)
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share basic and
diluted before extraordinary
item............................... $ 1.50 $ 1.06 $ 1.31 $ 0.59 $ 1.14 $ 1.90 $ (3.41)
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share, basic and
diluted (4)........................ $ 1.50 $ 1.06 $ 1.63 $ 0.59 $ 1.14 $ 1.90 $ (3.41)
========== ========== ========== ========== ========== ========== ==========
Weighted average number of shares
outstanding........................ 19,877,821 20,533,824 20,487,111 14,793,644 3,152,064 3,152,064 4,361,280
========== ========== ========== ========== ========== ========== ==========
10
AT OR FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Key Operating Ratios:(5)
Return on average assets................ 1.12% 0.85% 0.97% 0.39% 0.57% 0.72% (0.65)%
Return on average assets, as
adjusted(6)........................... 0.34 0.85 0.87 0.72 0.57 0.72 (0.65)
Return on average equity................ 20.95 16.97 19.49 7.79 15.37 22.00 (38.21)
Return on average equity, as
adjusted(6)........................... 6.44 16.97 17.59 14.37 15.37 22.00 (38.21)
Average equity to average assets........ 5.33 4.98 4.96 4.98 3.72 3.29 1.70
Dividend payout ratio................... -- -- -- -- -- -- --
Average interest-earning assets to
average interest-bearing
liabilities........................... 105.68 105.49 105.51 103.79 100.69 100.00 100.00
Interest rate spread(7)................. 1.84 1.65 1.75 1.30 1.80 1.91 1.46
Net interest margin(7).................. 2.14 1.92 2.01 1.49 1.84 1.92 1.45
Operating expenses to average assets.... 1.28 1.07 1.10 1.67 1.55 1.60 1.74
Operating expenses to average assets, as
adjusted (6).......................... 1.28 1.07 1.10 1.12 1.55 1.60 1.74
Efficiency ratio(8)..................... 67.08 53.14 55.54 100.02 72.17 64.52 89.72
Efficiency ratio, as adjusted (6)(8).... 57.30 53.14 52.90 66.80 72.17 64.52 89.72
Asset Quality Data:
Total non-performing assets and troubled
debt restructurings(9)................ $18,599 $11,897 $10,494 $14,806 $33,123 $46,218 $52,640
Non-performing loans as a percent of
loans, net............................ 0.55% 0.20% 0.13% 0.40% 0.65% 1.60% 2.90%
Non-performing assets as a percent of
total assets(9)....................... 0.45 0.14 0.12 0.34 1.05 2.21 2.94
Non-performing assets and troubled debt
restructurings as a percent of total
assets (9)............................ 0.57 0.33 0.31 0.44 1.50 2.64 3.33
Allowance for loan losses as a percent
of loans, gross....................... 1.00 0.79 0.81 0.86 1.15 1.99 2.50
Allowance for loan losses as a percent
of non- performing loans (9).......... 190.12 412.95 662.40 222.14 179.97 127.65 88.71
Allowance for loan losses as a percent
of non-performing loans and troubled
debt restructurings (9)............... 149.67 204.21 218.19 156.39 89.84 90.30 75.67
Net charge-offs to average loans, net... 0.09 0.08 0.11 0.05 0.63 0.95 0.55
Bank Regulatory Capital Ratios:
Tier 1 leverage......................... 6.85% 6.12% 6.78% 6.30% 5.43% 4.57% 4.18%
Tier 1 risk-based....................... 10.45 10.67 11.08 11.48 10.74 9.15 7.56
Total risk-based........................ 11.55 11.53 11.96 12.36 11.99 10.38 8.43
- --------------------------
(1) The senior debt was repaid in connection with PBOC's initial public
offering.
(2) Minority interest consists of the interest in People's Preferred Capital
Corporation held by persons other than People's Bank of California.
(3) At September 30, 2000 and 1999, and at December 31, 1999, 1998 and 1997,
stockholders' equity is net of $32.8 million, $44.9 million, $38.7 million,
$13.6 million and $2.0 million of unrealized losses on securities
available-for-sale, respectively.
(4) Based on a weighted average number of shares of common stock of 19,877,821,
20,533,824, 20,487,111, 14,793,644, 3,152,064, 3,152,064 and 4,361,280 for
the nine months ended September 30, 2000 and 1999 and for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
(5) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods.
(6) For the nine months ended September 30, 2000, earnings are fully
tax-effected and exclude the effect of loss on investment securities sales
and the income tax benefit recognized during the period. For the year ended
11
December 31, 1999, exclude effect of extraordinary item and loss on
investment securities sales. For the year ended December 31, 1998, excludes
effect of one-time initial public offering-related expenses.
(7) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(8) Efficiency ratio represents operating expenses as a percent of the aggregate
of net interest income and non-interest income.
(9) Non-performing assets consist of nonaccrual loans and real estate owned.
Nonaccrual loans are loans that PBOC has removed from accrual status because
the loans are 90 or more days delinquent as to principal and/or interest or,
in management's opinion, full collectibility of the loans is in doubt. Real
estate owned consists of real estate acquired in settlement of loans. A loan
is considered a troubled debt restructuring if, as a result of the
borrower's financial condition, PBOC has agreed to modify the loan by
accepting below market terms either by granting an interest rate concession
or by deferring principal or interest payments. As used in this table, the
term "troubled debt restructurings" means a restructured loan on accrual
status. Troubled debt restructurings on nonaccrual status are reported in
the nonaccrual loan category.
RECENT DEVELOPMENTS
On January 29, 2001, PBOC reported net earnings of $31.6 million, or $1.59
per diluted share, for the year ended December 31, 2000, which included a
one-time $25.0 million income tax benefit that was based on projections of
future taxable income. Excluding the one-time $25.0 million income tax benefit,
and on a pro forma fully-taxable basis, net earnings for the year ended
December 31, 2000 would have been $5.7 million, or $.29 per diluted share,
compared to pro forma fully-taxable earnings before extraordinary item of
$11.8 million, or $.58 per diluted share for the year ended December 31, 1999.
For the three months ended December 31, 2000, PBOC earned $1.8 million, or $.09
per diluted share, compared to pro forma fully-taxable earnings before
extraordinary item of $2.1 million, or $.10 per diluted share, for the three
months ended December 31, 1999.
12
SPECIAL MEETING OF SHAREHOLDERS
PURPOSE
The special meeting will be held at .m., Pacific Time, on
, 2001 at , , Los Angeles, California.
At the special meeting, shareholders of PBOC will be asked to consider and vote
on a proposal to approve and adopt the merger agreement. The merger agreement
provides for the merger of Acquisition, a Delaware corporation and a
wholly-owned subsidiary of FBOP, with and into PBOC. Upon consummation of the
merger, PBOC will be the surviving corporation and will be a wholly-owned
subsidiary of FBOP. Pursuant to the merger agreement, upon consummation of the
proposed merger (i) each share of PBOC's common stock outstanding immediately
prior to the effective time of the merger will be canceled and converted into
the right to receive $10.00 in cash, and (ii) each option to acquire shares of
PBOC common stock which is outstanding and unexercised immediately prior to the
effective time of the merger will be canceled and converted into the right to
receive the amount in cash equal to $10.00 less the per-share exercise price of
each such option to acquire shares of PBOC common stock. The aggregate purchase
price to be paid by FBOP for PBOC's issued and outstanding common stock shall
not exceed $198,762,050, plus the cash payment for all outstanding and
unexercised options, provided, however, that to the extent that any of such
options are exercised prior to the effective time, the $198,762,050 amount shall
be increased by an amount equal to the product of (A) the number of shares of
PBOC common stock issued pursuant to the exercise of such options and
(B) $10.00. See "THE PROPOSED MERGER--THE MERGER."
The Board of Directors of PBOC believes that the merger is in the best
interests of PBOC and its shareholders and unanimously recommends that you vote
"FOR" approval and adoption of the merger agreement.
SOLICITATION AND VOTING
In addition to the solicitation of proxies by use of the mail, officers,
directors and regular employees of PBOC may solicit the return of proxies by
personal interview, mail, telephone and facsimile. These persons will not be
additionally compensated but will be reimbursed for out-of-pocket expenses. PBOC
will also request brokerage houses and other custodians, nominees and
fiduciaries to forward solicitation material to the beneficial owners of shares.
PBOC will reimburse such persons and the transfer agent for their reasonable
out-of-pocket expenses in forwarding such materials.
Innisfree M&A Incorporated has been retained by PBOC to assist it in the
solicitation of proxies. Innisfree M&A Incorporated will receive a fee of
$10,000.00 for its assistance, plus reimbursement for out-of-pocket expenses.
PBOC will bear all of the costs of the solicitation of proxies. Shareholders are
urged to send in their proxies without delay.
All shareholders of PBOC as of the close of business on the record date set
for the special meeting are eligible to vote at the special meeting. The record
date for the special meeting has been set as of the close of business on
, 2001. As of the record date, 21,876,205 shares of PBOC's
common stock were issued and 19,876,205 shares were outstanding. At that date,
such shares were held of record by approximately shareholders. The
presence, in person or by proxy, of at least a majority of all the outstanding
shares of PBOC's common stock entitled to vote at the special meeting is
necessary to constitute a quorum at the special meeting. Shareholders as of the
record date are entitled to one vote for each share of PBOC's common stock that
they own.
Under Section 251 of the Delaware General Corporation Law, the affirmative
vote of the holders of a majority of the outstanding shares of a company's
common stock is generally required to approve and adopt a merger agreement.
However, Section 203 of the Delaware General Corporation Law prohibits "business
combinations," including mergers, sales and leases of assets, issuances of
securities
13
and similar transactions by a corporation or a subsidiary with an "interested
stockholder" who owns 15 percent or more of a corporation's voting stock, within
three years after the person or entity becomes an interested stockholder,
unless:
- the transaction that will cause the person to become an interested
stockholder is approved by the Board of Directors of the target prior to
the transaction;
- after the completion of the transaction in which the person becomes an
interested stockholder, the interested stockholder holds at least 85% of
the voting stock of the corporation not including (a) shares held by
officers and directors of interested stockholders and (b) shares held by
specified employee benefit plans; or
- after the person becomes an interested stockholder, the business
combination is approved by the Board of Directors and holders of at least
66 2/3% of the outstanding voting stock, excluding shares owned by the
interested stockholder.
As of the close of business on , 2001, FBOP owned 975,400
shares of PBOC common stock, had agreements (which agreements do not give FBOP
the right to vote the underlying shares and which agreements are subject to
certain conditions including the receipt of all requisite regulatory approvals)
to acquire an additional 7,479,320 shares of PBOC common stock and holds
irrevocable proxies to vote an aggregate of 1,019,571 shares, which were granted
by certain directors and executive officers of PBOC and its subsidiaries
together with Arbur, Inc. in connection with the execution of the merger
agreement, which represents in the aggregate 47.7% of the total issued and
outstanding shares of PBOC common stock. The Board of Directors of PBOC was not
requested to and did not give prior approval of FBOP's acquisition or agreements
to acquire these shares of PBOC common stock. Accordingly, the merger agreement
must be approved by:
- the affirmative vote of the holders of a majority of the outstanding
shares of PBOC common stock; and
- the affirmative vote of the holders of at least two-thirds of the
outstanding shares of PBOC common stock that are not owned by FBOP or any
of its affiliates.
The 9,474,291 shares of PBOC common stock which are owned by FBOP or subject
to agreements pursuant to which FBOP may acquire such shares will be counted in
determining the majority vote required pursuant to Section 251 of the Delaware
General Corporation Law but will not be counted in determining the vote required
pursuant to Section 203 of the Delaware General Corporation Law. Consequently, a
failure to return a properly executed proxy or to vote in person at the special
meeting will have the same effect as a vote "AGAINST" approval and adoption of
the merger agreement.
Abstentions and broker nonvotes will be counted as shares present at the
special meeting for purposes of determining the presence of a quorum.
Abstentions and broker nonvotes will have the same effect as a vote "AGAINST"
approval of the merger agreement. A broker nonvote occurs when a nominee holding
shares for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power for that particular item and
has not received instructions from the beneficial owner.
REVOCABILITY OF PROXIES
PBOC encourages the personal attendance of its shareholders at the special
meeting. An execution of the accompanying proxy will not affect a shareholder's
right to attend the special meeting and to vote in person.
14
Proxies may be revoked if you:
- Deliver a signed, written revocation letter, dated any time before the
proxy is voted, to J. Michael Holmes, Corporate Secretary, PBOC
Holdings, Inc., at PBOC's principal executive offices, 5900 Wilshire
Boulevard, 16th Floor, Los Angeles, California 90036-5013;
- Sign and deliver a proxy, dated later than the first one, to PBOC's
Corporate Secretary at the above address; or
- Attend the meeting and vote in person. Attending the special meeting alone
will not revoke your proxy. A revocation letter or a later-dated proxy
will not be effective unless received by PBOC prior to the shareholder
vote at the special meeting.
ADJOURNMENTS
The special meeting may be adjourned for the purpose of soliciting
additional proxies to a date not more than 30 days after the date of the special
meeting. Any adjournment may be made without notice, other than by an
announcement made at the special meeting. Any adjournment of the special meeting
for the purpose of soliciting additional proxies will allow PBOC shareholders
who have already sent in their proxies to revoke them at any time prior to their
use. See "ADJOURNMENT OF THE SPECIAL MEETING."
BENEFICIAL OWNERSHIP OF COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of PBOC's common
stock as of , 2001, and certain other information with respect
to (i) each person or entity, including any "group" as that term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), who or which was known to PBOC to be a beneficial owner of more
than 5% of the issued and outstanding common stock, (ii) each director of PBOC,
(iii) each executive officer of PBOC and its subsidiaries and (iv) all directors
and executive officers of PBOC and its subsidiaries as a group.
AMOUNT AND NATURE OF
NAME OF BENEFICIAL BENEFICIAL OWNERSHIP PERCENT OF
OWNER OR NUMBER OF AS OF OUTSTANDING
PERSONS IN GROUP , 2001(1) COMMON STOCK
- ------------------ -------------------- ------------
Trustees of the Estate of Bernice Pauahi Bishop ............ 4,759,848(2) 22.9%
(the "Bishop Estate")
567 South King Street, Suite 200
Honolulu, Hawaii 96813
BIL Securities (Offshore) Limited ("BIL") .................. 1,912,272(2) 9.2%
P.O. Box 5018
Level 12, Colonial Building
117 Customhouse Quay
Wellington, New Zealand
Directors and Executive Officers:
Rudolf P. Guenzel......................................... 600,000(3) 2.9%
J. Michael Holmes......................................... 268,153(4) 1.3%
Murray Kalis.............................................. 30,000(5) *
Robert W. MacDonald....................................... 50,000(6) *
John F. Davis............................................. 33,000(7) *
15
AMOUNT AND NATURE OF
NAME OF BENEFICIAL BENEFICIAL OWNERSHIP PERCENT OF
OWNER OR NUMBER OF AS OF OUTSTANDING
PERSONS IN GROUP , 2001(1) COMMON STOCK
- ------------------ -------------------- ------------
William W. Flader......................................... 297,715(8) 1.4%
Doreen J. Blauschild...................................... 25,651(9) *
William G. Carroll........................................ 72,121(10) *
Richard Delaney........................................... -- --
Carl LoBue................................................ 24,665(11) *
C. Stephen Mansfield...................................... 500 *
Ronald S. Crane........................................... -- --
Lisa Alexander............................................ 22,500(12) *
Michael Hilton............................................ 22,500(13) *
Jeff Tanner............................................... 12,500(14) *
All directors and executive officers as a group (15 1,459,305(15) 7.0%
persons)..................................................
- ------------------------
* Represents less than 1% of the outstanding shares of PBOC common stock.
(1) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals. Under regulations promulgated
pursuant to the Exchange Act, shares of common stock are deemed to
beneficially owned by a person if he or she directly or indirectly has or
shares (i) voting power, which includes the power to vote or to direct the
voting of the shares, or (ii) investment power, which includes the power to
dispose or to direct the disposition of the shares. Unless otherwise
indicated, the named beneficial owner has sole voting and dispositive power
with respect to the shares.
(2) On November 1, 2000 and November 7, 2000, the Bishop Estate and BIL
respectively entered into contracts with FBOP to sell all of their
outstanding shares of PBOC common stock, subject to, among other things,
FBOP's receipt of all requisite regulatory approvals.
(3) Includes 3,090 shares held by Mr. Guenzel's spouse and 315,000 shares which
may be acquired by Mr. Guenzel upon the exercise of stock options.
(4) Includes 193,750 shares which may be acquired by Mr. Holmes upon the
exercise of stock options.
(5) Includes 25,000 shares which may be acquired by Mr. Kalis upon the exercise
of stock options.
(6) Includes 50,000 shares which may be acquired by Mr. MacDonald upon the
exercise of stock options.
(7) Includes 8,000 shares which are held by Mr. Davis' children and 25,000
shares which may be acquired by Mr. Davis upon the exercise of stock
options.
(8) Includes 119,806 shares held with Mr. Flader's spouse who serves as a
co-trustee of a family trust, 14,909 shares held in an individual retirement
account and 160,000 shares which may be acquired by Mr. Flader upon the
exercise of stock options.
(9) Includes 23,833 shares which may be acquired by Ms. Blauschild upon the
exercise of stock options.
(10) Includes 3,273 shares held in Mr. Carroll's spouse's individual retirement
account and 68,833 shares which may be acquired by Mr. Carroll upon the
exercise of stock options.
16
(11) Includes 7,840 shares held in an individual retirement account by
Mr. LoBue's spouse and 4,485 shares which are held by Mr. LoBue's son.
(12) Includes 22,500 shares which may be acquired by Ms. Alexander upon the
exercise of stock options.
(13) Includes 22,500 shares which may be acquired by Mr. Hilton upon the
exercise of stock options.
(14) Includes 12,500 shares which may be acquired by Mr. Tanner upon the
exercise of stock options.
(15) Includes 918,916 shares which may be acquired by all directors and
executive officers of the PBOC as a group upon the exercise of stock
options.
17
THE PROPOSED MERGER
The following is a summary description of the material aspects of the
merger. This description does not purport to be complete and is qualified in its
entirety by reference to the appendices attached to this proxy statement,
including the merger agreement, which is attached as APPENDIX A to this proxy
statement. We urge you to read the appendices in their entirety.
THE MERGER
Under the terms of the merger agreement, at the effective time, Acquisition,
a Delaware corporation and a wholly-owned subsidiary of FBOP, which was formed
solely to facilitate the merger, will merge with and into PBOC with PBOC
continuing as the surviving corporation. As a result of the merger, PBOC will
become a wholly-owned subsidiary of FBOP and will succeed to all of the assets
and liabilities of Acquisition. The separate corporate existence of Acquisition
will cease following consummation of the merger. Upon completion of the merger,
shareholders of PBOC will no longer own any shares of PBOC's common stock and
will not, as a result of the merger, own any common stock either of FBOP or
Acquisition.
As consideration for the merger of Acquisition with and into PBOC, each of
the outstanding shares of PBOC's common stock will be converted at the effective
time of the merger into the right to receive $10.00 in cash, and each option to
acquire a share of PBOC's common stock that is outstanding and unexercised
immediately prior to the effective time of the merger will be converted into the
right to receive $10.00 less the per-share exercise price for the option.
After the merger of Acquisition with and into PBOC and subject to the
receipt of regulatory approval, FBOP may cause People's Bank of California to be
merged with and into California National Bank, a national banking institution
and wholly-owned subsidiary of FBOP, with California National Bank as the
surviving entity. Immediately after the consummation of these transactions,
California National Bank would be a wholly-owned subsidiary of FBOP.
BACKGROUND OF THE MERGER
Management and the Board of Directors have, from time to time, discussed
intensifying competition in, and the continuing consolidation of, the bank,
thrift and financial services industries. Management and the Board of Directors
continually are reviewing strategic alternatives in order to enhance shareholder
value, and at various times in the past, management and the Board of Directors
have considered the possibility of a sale of PBOC as a way to enhance
shareholder value. Management and certain members of the Board of Directors also
have been contacted from time to time by officers and other representatives of
various financial institutions, with inquiries about the willingness of the
Board of Directors to consider a sale of PBOC; however, none of such inquiries
matured into a formal offer or resulted in a letter of intent for the sale of
PBOC.
Beginning in December 1999, KBW representatives began advising PBOC with
respect to a possible acquisition by PBOC of BYL Bancorp and its wholly-owned
subsidiary, BYL Bank Group (collectively, "BYL"). These discussions resulted in
PBOC providing a non-binding indication of interest letter to BYL on
February 24, 2000.
Beginning in April 2000, the management of PBOC, including from time to time
the Board of Directors of PBOC, and KBW began a series of meetings relating to
the on-going strategic direction of PBOC and the effect of various strategies on
shareholder value over both a short term and longer term perspective.
On April 12, 2000, Rudolf P. Guenzel, President and Chief Executive Officer
of PBOC, and J. Michael Holmes, Senior Executive Vice President and Chief
Financial Officer of PBOC, met with representatives of KBW. At that meeting, KBW
indicated to PBOC management that internal growth would probably not be
sufficient for PBOC to justify remaining independent, and that the most
attractive strategy to enhance shareholder value would be a potential sale of
control of PBOC preceded
18
by strategic acquisitions of commercial banking franchises, if available. As a
result, PBOC determined to continue discussions with BYL.
In April 2000, a super-regional bank indicated preliminary interest in
acquiring PBOC. Subsequent to learning of that indication of interest, on
May 4, 2000, PBOC engaged KBW to act as general financial advisor to the PBOC
and to evaluate and pursue a possible transaction with the super-regional bank.
On May 17, 2000, KBW met with representatives of the super-regional bank to
discuss their potential interest with respect to the acquisition of PBOC. At the
conclusion of that meeting, KBW received a non-binding indication of interest
letter, which was subject to, among other things, the completion of due
diligence and the negotiation of a definitive agreement.
On May 19, 2000, the Board of Directors of People's Bank of California met
to discuss the indication of interest from the super-regional bank and the
status of the investigation of and negotiations with BYL.
Subsequent to the May 19, 2000 Board of Directors meeting, KBW advised the
super-regional bank that PBOC was interested in continuing discussions. A
confidentiality agreement was negotiated and signed on May 30, 2000, and
arrangements were made to supply the super-regional bank with confidential
information relating to the business, operations and prospects of PBOC.
On June 16, 2000, PBOC entered into a supervisory agreement with the Office
of Thrift Supervision ("Supervisory Agreement") which required People's Bank of
California to reduce its interest rate risk, strengthen its lending
infrastructure and fill open positions on its Board of Directors.
On August 11, 2000, KBW met with senior executives of the super-regional
bank to discuss their offer. On August 18, 2000, following the completion of its
due diligence examination of PBOC and conversations with PBOC's senior
management, the super-regional bank submitted a revised indication of interest
letter to PBOC, which set forth an aggregate purchase price of $178.9 million,
or approximately $9.00 per share, and was subject to further due diligence as
well as the execution of a definitive agreement.
On August 21, 2000, KBW reviewed the results of its meeting with the
super-regional bank with PBOC's Board of Directors, provided a general overview
of the super-regional bank, and discussed the advisability of accepting such an
offer. At the conclusion of the meeting, the PBOC Board of Directors determined
that the consideration offered was inadequate to justify further discussions. On
August 23, 2000, PBOC sent a letter to the super-regional bank advising it of
the Board of Directors' decision.
On October 23, 2000, PBOC reported a net loss for the third quarter 2000 of
$6.0 million, or a $0.30 loss per diluted share compared to net earnings of $8.4
million, or $0.41 profit per diluted share during the same period in 1999. The
third quarter 2000 loss was the result of the sale of $197.4 million of
low-yielding fixed-rate securities from PBOC's available-for-sale portfolio. On
a pro forma fully-tax-effected basis and excluding the $8.7 million loss on the
sale of fixed-rate securities, net earnings for the third quarter would have
been $1.7 million, or $0.09 per diluted share, compared to fully-taxed earnings
in the third quarter of 1999 of $3.8 million, or $0.18 per diluted-share. The
third quarter 2000 earnings were materially below analysts' expectations.
During the week of October 23, 2000, KBW contacted two potential buyers of
PBOC (one of which was FBOP) to determine their potential interest in an
acquisition if the PBOC Board of Directors were to determine that such an
acquisition would be in the best interests of PBOC and its stockholders. KBW
approached both parties based on its knowledge of their potential interests.
Both parties that KBW approached indicated their potential interest in pursuing
an acquisition.
On November 2, 2000, PBOC announced that it had executed a definitive
agreement to acquire BYL for cash.
On November 16, 2000, the Bishop Estate, PBOC's largest shareholder, filed a
Schedule 13D with the Securities and Exchange Commission, which disclosed that
it had entered into a stock purchase
19
agreement on November 1, 2000 to sell to FBOP all of the shares of PBOC common
stock it owned, 4,759,848 shares or 23.9% of the outstanding PBOC common stock,
subject to certain conditions, including but not limited to receipt of requisite
regulatory approvals, at $10.00 per share. PBOC's common stock closed at $5.9375
the last full trading day prior to the day the agreement between the Bishop
Estate and FBOP was signed.
On November 20, 2000, PBOC's senior management and PBOC's Board of Directors
met to consider strategic alternatives in light of the recent announcement by
PBOC's largest shareholder. At that meeting, representatives of Sandler
O'Neill & Partners, LP ("Sandler O'Neill") and PBOC's outside counsel discussed
a range of responses, including continuing to seek out alternative parties that
might be interested in acquiring PBOC.
On November 22, 2000, BIL, PBOC's second largest shareholder, filed a
Schedule 13D with the Securities and Exchange Commission, which disclosed that
on November 7, 2000, it had entered into a stock purchase agreement to sell FBOP
all of its 1,912,272 shares or 9.6% of the outstanding PBOC common stock,
subject to certain conditions, including but not limited to receipt of requisite
regulatory approvals, for $10.00 per share. PBOC's common stock closed at $6.125
the last full trading day prior to the day the agreement between BIL and FBOP
was signed.
On November 29, 2000, PBOC publicly announced that KBW and Sandler O'Neill
had been engaged to explore various options to maximize shareholder value. KBW
and Sandler O'Neill were each engaged to assist PBOC in analyzing, structuring,
negotiating and effecting a transaction with a potential acquiror. PBOC selected
KBW and Sandler O'Neill as financial advisors because both firms are nationally
recognized investment-banking firms with substantial experience in transactions
similar to the merger and both firms are familiar with PBOC and its business. On
that date, PBOC also announced its intention to proceed with the acquisition of
BYL.
On November 30, 2000, representatives of FBOP met in Los Angeles with
representatives of KBW, Sandler O'Neill, PBOC's senior management and PBOC's
Chairman of the Board to discuss, among other things, whether FBOP would be
willing to make an offer for all of the outstanding shares of PBOC.
On December 1, 2000, KBW and Sandler O'Neill met with PBOC's Board of
Directors to review the status of discussions with FBOP and other potentially
interested parties. The Board of Directors discussed the relative merits of an
offer for all of PBOC's outstanding shares of common stock from FBOP, as well as
the possibility of receiving other potential indications of interest. KBW and
Sandler O'Neill were instructed to negotiate a potential transaction with FBOP
and to concurrently pursue negotiations with other potential acquirors.
Representatives of KBW and Sandler O'Neill proceeded to contact FBOP, and
subsequently FBOP forwarded a non-binding letter dated November 30, 2000 which
indicated FBOP's willingness to pay $10.00 a share for all of the outstanding
shares of PBOC common stock. KBW and Sandler O'Neill also immediately contacted
a number of other banking organizations to determine whether or not they might
have an interest in acquiring PBOC. Only one of them, a regional bank (which was
one of the two banking organizations KBW had contacted during the week of
October 23, 2000) (the "Regional Bank") indicated interest. The Regional Bank
subsequently executed a confidentiality agreement and conducted preliminary due
diligence.
During the week of December 3, 2000, representatives of KBW, Sandler
O'Neill, PBOC and PBOC's counsel negotiated with representatives of FBOP and its
counsel to reach a definitive merger agreement. KBW and Sandler O'Neill were
concurrently in discussions with other banking organizations in an attempt to
elicit alternative bids for PBOC.
On December 5, 2000, FBOP filed a Schedule 13D with the Securities and
Exchange Commission disclosing that between October 31, 2000 and November 28,
2000, FBOP had acquired 575,400 shares of PBOC common stock in the open market
at an average price of $7.45 per share. It was also disclosed in this filing
that on November 30, 2000, FBOP had entered into a stock purchase agreement
20
with Advisory Research, Inc. to acquire its 807,200 shares or 4.1% of the
outstanding PBOC common stock, subject to certain conditions, including but not
limited to receipt of requisite regulatory approvals, at $10.00 per share. FBOP
disclosed that upon the closing of the transactions contemplated by all of the
stock purchase agreements, it would own 40.5% of PBOC's outstanding common
stock.
On December 7, 2000, PBOC received an unsigned indication of interest letter
from the Regional Bank, which set forth a preliminary range of $11.00 to $12.00
per share, but was subject to a number of contingencies, including further due
diligence, negotiation of a definitive agreement, and a requirement that the
Regional Bank's name not be used publicly until such time as a definitive
agreement was executed. After considering this proposal, PBOC's Board of
Directors concluded in a Board meeting held on December 7, 2000 that given the
non-binding nature of the letter, the number of referenced conditions, and the
Regional Bank's unwillingness to disclose publicly its interest in acquiring
PBOC, consummation of a definitive agreement with the Regional Bank was highly
uncertain.
PBOC's Board of Directors continued to meet with representatives of KBW,
Sandler O'Neill and PBOC's counsel on December 6, 7 and 8, 2000 to discuss the
status of the negotiations with FBOP as well as the status of discussions with
other potential buyers. On December 8, 2000, PBOC received a signed indication
of interest letter from the Regional Bank, which still contained all of the same
contingencies. The PBOC Board of Directors met on December 8, 2000 to review the
Regional Bank's non-binding indication of interest and the terms of the merger
agreement negotiated with FBOP. The Board of Directors considered this
non-binding indication of interest from the Regional Bank insufficient in light
of the number of contingencies it contained, particularly in light of the
substantially negotiated definitive agreement with FBOP. Based on the foregoing,
and the presentation by KBW of its oral opinion (which was confirmed in writing
following the meeting) that the cash consideration to be paid by FBOP to all
PBOC shareholders is fair to the PBOC shareholders from a financial point of
view, the PBOC Board of Directors unanimously approved the proposed merger
agreement.
On December 11, 2000, PBOC and FBOP announced they had executed a definitive
merger agreement dated December 8, 2000, providing for the acquisition of all of
PBOC's shares at $10.00 per share. The closing price per share for the PBOC
common stock as reported on the Nasdaq Stock Market on November 15, 2000, the
last full trading day prior to the public announcement of FBOP's agreement to
acquire the shares of PBOC common stock owned by PBOC's largest shareholder, and
on December 8, 2000, the last full trading day prior to the public announcement
of the proposed merger, was $7.00 and $9.1875, respectively.
LITIGATION
Following the public announcement of the proposed merger, three purported
class action lawsuits were filed by stockholders of PBOC against PBOC, People's
Bank of California, FBOP and certain present and former directors of PBOC in the
Court of Chancery of the State of Delaware. The three lawsuits have been
consolidated under the caption IN RE PBOC HOLDINGS, INC. SHAREHOLDERS
LITIGATION, Cons. C.A. No. 18543 (the "Consolidated Action"). The complaint in
the Consolidated Action generally alleges that the directors of PBOC, aided and
abetted by FBOP, breached their fiduciary duties in connection with their
approval of the proposed merger. Plaintiffs purport to seek, among other things,
(i) an order enjoining the proposed merger; (ii) rescission of the merger in the
event that it is consummated; and/or (iii) damages. The defendants in the
Consolidated Action intend to defend the action vigorously.
REASONS FOR THE MERGER AND RECOMMENDATION OF THE BOARD OF DIRECTORS
At a special board meeting on December 8, 2000, the PBOC Board of Directors
determined that the merger is fair to and in the best interests of PBOC and its
shareholders and, by the unanimous vote of all the directors, approved and
adopted the merger agreement and the transactions contemplated by the merger
agreement. ACCORDINGLY, THE PBOC BOARD OF DIRECTORS
21
UNANIMOUSLY RECOMMENDS THAT PBOC SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER
AGREEMENT AT THE SPECIAL MEETING.
The Board of Directors believes that the terms of the merger agreement,
which are the product of arm's length negotiations between representatives of
FBOP and PBOC, are fair and in the best interests of PBOC and its shareholders.
In the course of reaching its determination, the Board of Directors consulted
with its legal counsel with respect to its legal duties, the terms of the merger
agreement and related issues; with its financial advisors KBW and Sandler
O'Neill with respect to the financial aspects and with KBW with respect to the
fairness of the transaction; and with senior management regarding, among other
things, operational matters.
The financial services industry has changed significantly in recent years.
Such changes include:
- consolidation of the banking industry through mergers;
- deregulation of competition among banking, securities and insurance
services providers; and
- a trend towards banks and others offering a broad range of different
financial services and products to customers.
In the future, many expect the extensive use of technology to continue to
transform the delivery of banking services. For these reasons, the Board of
Directors developed concerns about PBOC's size and limited resources and its
ability to meet the challenges facing it. The Board of Directors was also
concerned about PBOC's ability to meet its shareholders' expectations.
Increasing shareholder value in future years would require increases in
profitability and growth, which would be difficult for PBOC to achieve given its
size, current market conditions and increasing consumer demand for sophisticated
financial services. The Board of Directors believes that the merger at this time
is in the best interests of the shareholders. KBW has advised PBOC that FBOP's
offer of $10.00 per share for PBOC's outstanding common stock is fair from a
financial point of view to PBOC's shareholders.
In reaching its determination to approve the merger agreement, the Board of
Directors considered all factors it deemed material. The Board of Directors
analyzed information with respect to the financial condition, results of
operations, businesses and prospects of PBOC. In this regard, the Board of
Directors considered the performance trends of PBOC over the past several years.
The Board of Directors compared PBOC's current and anticipated future operating
results to publicly available financial and other information for other
similarly sized banking institutions in California. The Board of Directors noted
that the financial and operating performance of PBOC over recent periods did not
compare favorably with PBOC's peer group (see "THE PROPOSED MERGER--OPINION OF
THE FINANCIAL ADVISOR--SELECTED PEER GROUP ANALYSIS.") In addition, the Board of
Directors also considered the effect of the Supervisory Agreement entered into
with the Office of Thrift Supervision on June 16, 2000 on PBOC's operations
going forward as well as its effect on the market for PBOC's stock. The Board of
Directors used this information in analyzing the options available to PBOC.
The Board of Directors concluded that the merger represents an opportunity
for PBOC's shareholders to realize a premium over recent market prices for their
common stock. The shareholders of PBOC will receive approximately a 42.9%
premium over the $7.00 closing price of PBOC's common stock on November 15,
2000, the last full trading day prior to the public announcement of FBOP's
agreement to acquire the shares of PBOC common stock owned by PBOC's largest
shareholder.
The Board of Directors considered the opinion of KBW as of December 8, 2000,
and updated through the date of this proxy statement, that the purchase price to
be received by holders of PBOC's common stock pursuant to the merger agreement
was fair to PBOC's shareholders from a financial point of view. See "THE
PROPOSED MERGER--OPINION OF THE FINANCIAL ADVISOR." The Board of Directors
reviewed the assumptions and results of the various valuation methodologies
employed by KBW in arriving at its opinion and found those assumptions and
results to be reasonable and complete.
22
The Board of Directors considered the current operating environment,
including but not limited to the continued consolidation and increasing
competition in the banking and financial services industries, the prospects for
further changes in these industries, and the importance of being able to
capitalize on developing opportunities in these industries. The Board of
Directors also considered the current and prospective economic and competitive
conditions facing PBOC in its market areas.
The Board of Directors considered the likelihood of the merger being
approved by the appropriate regulatory authorities. See "THE PROPOSED
MERGER--REGULATORY APPROVALS."
The Board of Directors considered the specific terms of the merger
agreement, including the taxable nature of the purchase price. The Board of
Directors also considered the ability of FBOP to pay the aggregate purchase
price, and accordingly reviewed FBOP's financial condition, results of
operations, liquidity and capital position.
The Board of Directors also considered the fact that the merger
consideration is all cash, which provides certainty of value to PBOC's
shareholders as compared to a stock transaction.
The above discussion of the factors considered by the Board of Directors is
not intended to be exhaustive. In determining whether to approve and recommend
the merger agreement, the Board of Directors did not assign any relative or
specific weights to any of the foregoing factors, and individual directors may
have weighed factors differently. After deliberating with respect to the merger
and the merger agreement, considering, among other things, the reasons discussed
above and the opinion of KBW referred to above, the Board of Directors
unanimously approved and adopted the merger agreement and the merger as being in
the best interests of PBOC and its shareholders.
For the reasons set forth above, the Board of Directors has unanimously
approved the merger agreement and the merger as advisable and in the best
interests of PBOC and its shareholders and recommends that the shareholders of
PBOC vote "FOR" the approval and adoption of the merger agreement and the
merger.
This description of the information and factors considered by the PBOC Board
of Directors above is not meant to be exhaustive, but is believed to include all
material factors considered by the PBOC Board of Directors. The PBOC Board of
Directors did not quantify or attach any particular weight to the various
factors that it considered in reaching its determination that the merger
agreement is advisable for, and in the best interests of, the shareholders of
PBOC. Rather the PBOC Board of Directors made its determination based on the
total mix of information available to it.
OPINION OF THE FINANCIAL ADVISOR
On November 29, 2000, PBOC entered into a new agreement with KBW, pursuant
to which PBOC retained KBW to advise PBOC in connection with the merger and to
render an opinion to PBOC's Board of Directors as to the fairness of the cash
consideration to be received by PBOC's shareholders from a financial point of
view. As part of its investment banking business, KBW is continually engaged in
the valuation of financial businesses and their securities in connection with
mergers and acquisitions.
On December 1, 2000, the PBOC Board of Directors held a meeting to evaluate
strategic alternatives, including a potential acquisition by FBOP. At this
meeting, KBW reviewed the financial aspects of such alternatives and rendered a
verbal opinion that, as of that date and subject to the finalization of a merger
agreement with FBOP, a $10.00 per share purchase price was fair to PBOC
shareholders from a financial point of view. On December 8, 2000, the PBOC Board
of Directors held a meeting to review and approve the merger agreement with
FBOP. At this meeting, KBW confirmed its oral opinion that, as of that date and
based upon and subject to the factors and assumptions set forth in its written
opinion, the $10.00 per share purchase price was fair, from a financial point of
view, to the PBOC shareholders. That opinion was reconfirmed in writing as of
such date and was further reconfirmed in writing as of the date of this proxy
statement.
The full text of KBW's updated written opinion is attached as APPENDIX B to
this proxy statement and is incorporated herein by reference. PBOC's
shareholders are urged to read the opinion
23
in its entirety for a description of the procedures followed, assumptions made,
matters considered, and qualifications and limitations on the review undertaken
by KBW.
KBW'S OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF PBOC AND ADDRESSES
ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CASH CONSIDERATION TO
BE PAID TO PBOC SHAREHOLDERS. IT DOES NOT ADDRESS THE UNDERLYING BUSINESS
DECISION TO PROCEED WITH THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY PBOC SHAREHOLDER AS TO HOW THE SHAREHOLDER SHOULD VOTE AT THE SPECIAL
MEETING ON THE MERGER OR ANY RELATED MATTER.
In rendering its opinion, KBW:
- reviewed, among other things,
- the merger agreement,
- Annual Reports to shareholders and Annual Reports on Form 10-K of PBOC,
and
- Quarterly Reports on Form 10-Q of PBOC;
- held discussions with members of senior management of PBOC regarding
- past and current business operations,
- regulatory relationships,
- financial condition, and
- future prospects of PBOC;
- held discussions with members of senior management of FBOP regarding
- regulatory relationships, and
- ability to fund and capitalize the proposed acquisition of PBOC;
- reviewed the market prices, valuation multiples, publicly reported
financial conditions and results of operations for PBOC and compared them
with those of certain publicly traded companies that KBW deemed to be
relevant;
- compared the proposed financial terms of the merger with the financial
terms of certain other transactions that KBW deemed to be relevant; and
- performed other studies and analyses that it considered appropriate.
In conducting its review and arriving at its opinion, KBW relied upon and
assumed the accuracy and completeness of all of the financial and other
information provided to or otherwise made available to KBW or that was discussed
with, or reviewed by or for KBW, or that was publicly available. KBW did not
attempt or assume any responsibility to verify such information independently.
KBW relied upon the management of PBOC as to the reasonableness and
achievability of the financial and operating forecasts and projections (and
assumptions and bases therefor) provided to KBW. KBW assumed, without
independent verification, that the aggregate allowances for loan and lease
losses for FBOP and PBOC are adequate to cover those losses. KBW did not make or
obtain any evaluations or appraisals of any assets or liabilities of FBOP or
PBOC, and KBW did not examine any books and records or review individual credit
files.
The projections furnished to KBW and used by it in certain of its analyses
were prepared by PBOC's senior management. PBOC does not publicly disclose
internal management projections of the type provided to KBW in connection with
its review of the merger. As a result, such projections were not prepared with a
view toward public disclosure. The projections were based on numerous variables
and assumptions which are inherently uncertain, including factors related to
general economic and competitive conditions. Accordingly, actual results could
vary significantly from those set forth in the projections.
For purposes of rendering its opinion, KBW assumed that, in all respects
material to its analyses:
- the merger will be completed substantially in accordance with the terms
set forth in the merger agreement;
24
- the representations and warranties of each party in the merger agreement
and in all related documents and instruments referred to in the merger
agreement are true and correct;
- each party to the merger agreement and all related documents will perform
all of the covenants and agreements required to be performed by such party
under such documents;
- all conditions to the completion of the merger will be satisfied without
any waivers; and
- in the course of obtaining the necessary regulatory, contractual, or other
consents or approvals for the merger, no restrictions, including any
divestiture requirements, termination or other payments or amendments or
modifications, will be imposed that will have a material adverse effect on
the future results of operations or financial condition of the combined
entity or the contemplated benefits of the merger, including the cost
savings, revenue enhancements and related expenses expected to result from
the merger.
KBW further assumed that the merger will be accounted for as a purchase
under generally accepted accounting principles.
In performing its analyses, KBW made numerous assumptions with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of KBW, PBOC
and FBOP. Any estimates contained in the analyses performed by KBW are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by these analyses.
Additionally, estimates of the value of businesses or securities do not purport
to be appraisals or to reflect the prices at which such businesses or securities
might actually be sold. Accordingly, these analyses and estimates are inherently
subject to substantial uncertainty. In addition, the KBW opinion was among
several factors taken into consideration by the PBOC Board of Directors in
making its determination to approve the merger agreement and the merger.
Consequently, the analyses described below and the delivery of the opinion
should not be viewed as the sole factors in the decision of the PBOC Board of
Directors or management of PBOC with respect to the fairness of the cash
consideration.
The following is a summary of the material analyses presented by KBW to the
PBOC Board of Directors on December 1, 2000 and December 8, 2000 in connection
with its opinion. The summary is not a complete description of the analyses
underlying the KBW opinion or the presentation made by KBW to the PBOC Board of
Directors, but summarizes the material analyses performed and presented in
connection with such opinion. The preparation of a fairness opinion is a complex
analytic process involving various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances. Therefore, a fairness opinion is not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, KBW did not attribute any particular weight to any analysis or factor
that it considered, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. The financial analyses summarized
below include information presented in tabular format. Accordingly, KBW believes
that its analyses and the summary of its analyses must be considered as a whole
and that selecting portions of its analyses and factors or focusing on the
information presented below in tabular format, without considering all analyses
and factors or the full narrative description of the financial analyses,
including the methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of the process underlying its analyses
and opinion. The tables alone do not constitute a complete description of the
financial analyses.
25
IMPLIED PRICING MULTIPLES. Based on the per share consideration of $10.00
in cash, KBW analyzed the transaction value as a multiple of PBOC's book value
per share, tangible book value per share, last twelve months diluted operating
fully-taxed earnings per share, and estimated earnings per share for 2000 and
2001.
The analyses performed indicated that the per share transaction value as a
multiple of PBOC's book value per share would be 0.93x and further indicated
that the per share transaction value as a multiple of PBOC's tangible book value
per share would be 1.08x, in each case based on financial data for the period
ending September 30, 2000. KBW's analyses also indicated that the per share
transaction value as a multiple of the last twelve months diluted operating
fully-taxed earnings per share would be 13.2x, based upon KBW's estimate of
$0.76 per share for PBOC's diluted operating fully-taxed earnings per share for
the last twelve months ended September 30, 2000. The analyses also indicated
that the transaction value as a multiple of PBOC's estimated earnings per share
in 2001 would be 15.2x, based on consensus IBES earnings estimates as of
November 29, 2000. IBES is a recognized data service that monitors and publishes
compilations of earnings estimates.
KBW also analyzed the per share transaction value as a premium to the
closing price of PBOC common stock prior to the announcement of the merger. The
analyses performed indicated the per share transaction value as a premium to the
closing price of PBOC common stock on November 6, 2000 was 63.3% and on
December 6, 2000 was 6.7%.
SELECTED TRANSACTION ANALYSIS. KBW reviewed certain financial data related
to a set of ten comparable nationwide thrift transactions with announced value
of over $100 million since December 31, 1999.
KBW compared multiples of price to various factors for the FBOP-PBOC merger
to the same multiples for the comparable group's mergers at the time those
mergers were announced. In addition, KBW repeated this analysis using current
acquiror stock prices. The results were as follows:
MULTIPLE OF PRICE TO FACTOR
-----------------------------------------
COMPARABLE GROUP
RATIO OF PRICE PER SHARE TO: ANNOUNCED MEDIAN FBOP-PBOC MERGER
- ---------------------------- ---------------------- ----------------
Estimated Forward Earnings per
Share.............................. 11.9x 15.2x*
Trailing 12 Months Earnings per
Share.............................. 16.0x 13.2x**
Book Value per Share................. 1.63x 0.93x
Tangible Book Value per Share........ 1.63x 1.08x
- ------------------------
* Based on IBES 2001 estimates.
** Based on twelve months ended September 30, 2000 diluted operating fully
taxed earnings.
No company or transaction used as a comparison in the above analysis is
identical to FBOP, PBOC or the merger. Accordingly, an analysis of these results
is not mathematical. Rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies and other factors that could affect the public trading value of the
companies to which they are being compared.
DISCOUNTED DIVIDEND ANALYSIS--PBOC STAND-ALONE. KBW performed a discounted
dividend analysis to estimate a range of present values per share of PBOC common
stock, assuming PBOC continued to operate as a stand-alone entity. This range
was determined by adding (i) the present value of the estimated future dividend
stream that PBOC could generate, and (ii) the present value of the "terminal
value" of PBOC common stock at December 31, 2005.
In calculating a terminal value of PBOC common stock at December 31, 2005,
KBW applied a forward earnings multiple of 7.0x to 10.0x to year 2006 projected
GAAP earnings. The dividend stream and terminal value were then discounted back
to December 31, 2000 using discount rates ranging from
26
10.0% to 14.0%, which rates KBW viewed as the appropriate range of discount
rates for a company of PBOC's risk characteristics.
In performing this analysis, KBW used PBOC's internal budgeted earnings
estimates for 2001 of $0.74 per share. For periods after 2001, earnings per
share was assumed to increase at annual long-term earnings growth rates of 9.0%
to 11.0%. KBW assumed that no dividends would be paid out to PBOC shareholders
during this period. Based on the above assumptions, the stand-alone present
value of the PBOC common stock ranged from $5.38 to $8.27 per share.
KBW advised the PBOC Board of Directors that the discounted cash flow
present value analysis is a widely used valuation methodology but noted that it
relies on numerous assumptions, including asset and earnings growth rates,
terminal values and discount rates. The analysis did not purport to be
indicative of the actual values or expected values of PBOC common stock.
SELECTED PEER GROUP ANALYSIS. KBW compared the financial performance and
market performance of PBOC to those of a group of eleven comparable holding
companies. The comparisons were based on:
- various financial measures:
- earnings performance
- operating efficiency
- capital
- asset quality
- various measures of market performance:
- price/book value
- price to earnings
- dividend yields
To perform this analysis, KBW used the financial information as of and for
the quarter ended September 30, 2000 and market price information as of
November 29, 2000. The companies in the peer group were California thrift
institutions with total market capitalizations ranging from $63 million to
$9.0 billion.
KBW's analysis showed the following concerning PBOC's financial performance:
PERFORMANCE MEASURE: PBOC PEER GROUP MEDIAN
- -------------------- -------- -----------------
Return on Equity (operating),
annualized........................................ 3.36% 15.64%
Return on Assets (operating),
annualized........................................ 0.19% 0.94%
Net Interest Margin, annualized..................... 1.95% 2.66%
Efficiency Ratio, annualized
(non-interest expense to net
operating revenue)................................ 63.25% 46.87%
Tangible Common Equity/
Tangible Assets................................... 5.94% 6.66%
Non-Performing Assets to Total
Loans and Other Real Estate
Owned............................................. 0.73% 0.44%
Loan Loss Reserve to Total
Gross Loans....................................... 1.00% 1.24%
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KBW's analysis showed the following concerning PBOC's market performance:
PERFORMANCE MEASURE PBOC PEER GROUP MEDIAN
- ------------------- -------- -----------------
Price to Earnings per Share,
based on 2000 GAAP estimated
earnings per share................................. 15.7x 10.4x
Price to Earnings per Share,
based on 2001 GAAP estimated
earnings........................................... 17.2x 8.2x
Price to Book Value per Share........................ 0.83x 1.04x
Price to Tangible Book Value per Share............... 0.92x 1.14x
Dividend Yield....................................... 0.00% 0.00%
For purposes of the above calculations, all earnings estimates are based upon
the KBW estimates for PBOC, and the price per share for the PBOC common stock
used was the closing price of $8.93750 per share as of November 29, 2000.
OTHER ANALYSES. KBW reviewed the relative financial and market performance
of PBOC and the financial performance of FBOP to a variety of relevant industry
peer groups and indices. KBW also noted the premium to market provided by the
$10.00 cash consideration compared to the prices PBOC was trading at on
December 8, 2000, the last full trading day prior to the public announcement of
the proposed merger ($9.1875), on November 15, 2000, the last full trading day
prior to the public announcement of FBOP's agreement to acquire the shares of
PBOC common stock owned by PBOC's largest shareholder ($7.00), and on
October 31, 2000, the last full trading day prior to FBOP entering into a stock
purchase agreement with PBOC's largest shareholder ($5.9375). These premiums
were 8.8%, 42.9% and 68.4% respectively.
In connection with its opinion dated as of the date of this proxy statement,
KBW performed procedures to update, as necessary, certain of the analyses
described above. KBW reviewed the assumptions on which the analyses described
above were based and the factors considered in connection therewith. KBW did not
perform any analyses in addition to those described above in updating its
December 1, 2000 opinion.
The PBOC Board of Directors retained KBW as an independent contractor to act
as a financial advisor to PBOC regarding the merger. As part of its investment
banking business, KBW is continually engaged in the valuation of banking
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. As specialists in the securities of banking
companies, KBW has experience in, and knowledge of, the valuation of banking
enterprises. In the ordinary course of its business as a broker-dealer, KBW may,
from time to time, purchase securities from, and sell securities to, PBOC. In
addition, KBW may from time to time have a long or short position in, and buy or
sell, debt or equity securities of PBOC for its own account and for the accounts
of its customers.
PBOC and KBW have entered into an agreement relating to the services to be
provided by KBW in connection with the merger and PBOC has entered into a
separate agreement with Sandler O'Neill relating to the services to be provided
by Sandler O'Neill in connection with the merger. PBOC has agreed to pay each of
KBW and Sandler O'Neill a cash fee ("Contingent Fee") equal to 0.75% (1.50% in
the aggregate) of the market value of the aggregate consideration offered in
exchange for the outstanding shares of common stock of PBOC in the merger, the
majority of which is to be paid upon the completion of the merger. In addition,
PBOC paid KBW a cash fee of $250,000 upon delivering its fairness opinion to
PBOC's Board of Directors in connection with the merger. Pursuant to such
engagement agreements, PBOC also agreed to reimburse KBW and Sandler O'Neill for
their reasonable out-of-pocket expenses and disbursements incurred by them in
connection with their
28
retention and to indemnify KBW and Sandler O'Neill against certain liabilities,
including liabilities under the federal securities laws.
MERGER CONSIDERATION
The merger agreement provides that the aggregate purchase price to be paid
by FBOP for PBOC's common stock issued and outstanding immediately prior to the
effective time and for all existing options to acquire shares of PBOC's common
stock outstanding will be an amount equal to $198,762,050, plus the cash payment
for the options to PBOC and/or People's Bank of California directors and
employees. On a per share, per option basis, the purchase price is equivalent
to: $10.00 in cash for each share of PBOC common stock outstanding, and $10.00
less the per-share exercise price in cash for each option to acquire a share of
PBOC common stock which is outstanding and unexercised immediately prior to the
effective time of the merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
BENEFICIAL OWNERSHIP. As of the record date, the executive officers and
directors of PBOC and its subsidiaries, together with their respective
affiliates, excluding options exercisable within 60 days of the record date,
collectively owned or had power to vote approximately 540,389 shares of PBOC
common stock, or approximately 2.7% of the outstanding shares. In addition, as
of the record date, the executive officers and directors of PBOC and its
subsidiaries collectively held options to acquire 918,916 shares which are
exercisable within 60 days of the record date (the directors and officers of
PBOC and its subsidiaries also hold options to acquire an additional 395,832
shares which are exercisable after 60 days of the record date). The directors
and executive officers will receive the same consideration for their shares as
the other shareholders and option holders of PBOC. See "BENEFICIAL OWNERSHIP OF
COMMON STOCK BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
INSURANCE; DIRECTORS' AND OFFICERS' INDEMNIFICATION. At the present time,
PBOC maintains a directors' and officers' liability insurance policy. Prior to
the effective date, PBOC may obtain an extended reporting period (otherwise
known as "tail coverage") under this policy for a period of up to four years
from the effective time. In addition, for a period of four years after the
effective time, FBOP shall indemnify, defend and hold harmless the officers,
directors and employees of PBOC and its subsidiaries against all costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages or liabilities incurred in connection with any claim, action,
suit, proceeding or investigation arising out of matters existing or occurring
at or prior to the effective time to the full extent permitted under applicable
law and by PBOC's and People's Bank of California's respective bylaws as in
effect on the date of the merger agreement.
EMPLOYMENT AGREEMENTS. PBOC and People's Bank of California (the
"Employers") entered into employment agreements with Messrs. Guenzel, Holmes and
Flader (individually, the "Executive" and collectively, the "Executives") in
1998, which employment agreements were amended in May 2000. The Employers agreed
to employ the executives for a term of three years, in each case in their
current respective positions. The employment agreements are to be reviewed
annually and, prior to the second annual anniversary of such agreements and each
annual anniversary thereafter, the Board of the Directors of the Employers will
determine whether to extend the term of such agreements. Under the agreements,
the term of the Executives' employment agreements may be extended after the
second anniversary of the agreement, for additional one-year periods upon the
approval of the Employers' Boards of Directors, unless either party elects, not
less than 30 days prior to the annual anniversary date, not to extend the
employment term.
Each of the employment agreements is terminable with or without cause by the
Employers. The Executives have no right to compensation or other benefits
pursuant to the employment agreements for any period after voluntary termination
or termination by the Employers for cause, disability or retirement. The
agreements provide for certain benefits in the event of the Executive's death.
In the event that (i) the Executive terminates his or her employment because of
failure to comply with any
29
material provision of the employment agreement or the Employers change the
executive's title or duties or (ii) the employment agreement is terminated by
the Employers other than for cause, disability, retirement or death or by the
Executive as a result of certain adverse actions which are taken with respect to
the Executive's employment following a change in control of the Company, as
defined, the Executive will be entitled to a cash severance amount equal to two
times the Executive's average annual compensation for the prior five years.
The employment agreements with the Executives provide that, in the event
that any of the payments to be made thereunder or otherwise upon termination of
employment are deemed to constitute "excess parachute payments" within the
meaning of Section 280G of the Internal Revenue Code, then such payments and
benefits received thereunder shall be reduced by the amount which is the minimum
necessary to result in the payments not exceeding three times the recipient's
average annual compensation from the Employers which was includable in the
recipient's gross income during the most recent five taxable years. Recipients
of excess parachute payments are subject to a 20% excise tax on the amount by
which such payments exceed the base amount, in addition to regular income taxes,
and payments in excess of the base amount are not deductible by the employer as
compensation expense for federal income tax purposes.
A change in control is generally defined in the employment agreements to
include any change in control of the Company required to be reported under the
federal securities laws, as well as (i) the acquisition by any person of 25% or
more of the Company's outstanding voting securities and (ii) a change in a
majority of the directors of the Company during any three-year period without
the approval of at least two-thirds of the persons who were directors of the
Company at the beginning of such period.
The merger shall be deemed a change in control for purposes of the
employment agreements and it is anticipated that in connection with the merger,
the employment of Messrs. Guenzel, Holmes and Flader will be terminated.
Accordingly, upon consummation of the merger, Messrs. Guenzel, Holmes and Flader
will be entitled pursuant to the employment agreements to severance amounting to
approximately $1.1 million, $703,000 and $578,000 respectively.
REGULATORY APPROVALS
In order for the merger to occur, the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") must approve the acquisition of
PBOC by FBOP because as a result of the merger, FBOP, a registered bank holding
company, will acquire control of PBOC, a thrift holding company, as well as
People's Bank of California, a federal savings institution. Further, the Office
of the Comptroller of the Currency ("OCC") must approve the consummation of the
merger of People's Bank of California with and into California National Bank.
FBOP and California National Bank have filed applications for such approvals.
The merger may not be consummated unless FBOP and California National Bank
obtain these approvals. In addition, there is a 30-day waiting period after the
Federal Reserve Board approves the transaction (which the Federal Reserve Board
may, in its discretion, shorten to 15 days) before the merger can become
effective. The Office of Thrift Supervision ("OTS"), which regulates PBOC and
People's Bank of California, has also been notified of the proposed merger as
required under applicable law.
The OCC will consider several factors when reviewing the merger of People's
Bank of California into California National Bank, including the competitive
effects of the transaction, the managerial and financial resources and future
prospects of the existing and resulting institutions, and the effect of the
transaction on the convenience and needs of the communities to be served. The
Community Reinvestment Act of 1977 ("CRA") also requires that the OCC, in
deciding whether to approve the merger of the two banks, assess their records of
performance in meeting the credit needs of the communities they serve, including
low and moderate income neighborhoods. People's Bank of California currently has
a satisfactory CRA rating from the OTS and California National Bank currently
has a satisfactory CRA rating from the OCC. Applicable regulations provide for
publication
30
of notice and an opportunity for public comment on the application for the
merger of People's Bank of California and California National Bank.
Regulatory approval of an application means that it has satisfied the
statutory and regulatory standards required for such approval. It does not mean,
and should not be understood to imply, that the merger or the merger
consideration that will be paid to PBOC shareholders in the merger is fair to
them from a financial standpoint.
It is a condition to FBOP's and PBOC's obligations to consummate the
transactions contemplated by the merger agreement that all requisite regulatory
approvals are obtained and all such approvals (i) not contain conditions that
could lead to a material adverse effect on FBOP, California National Bank or
Acquisition or (ii) not contain conditions that materially reduce the economic
or business benefits of the transactions contemplated by the merger agreement to
FBOP such that had such conditions or requirements been known, FBOP, in its
reasonable judgment, would not have entered into the merger agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following is a summary of the material United States federal
income tax consequences of the merger to PBOC shareholders. This summary is
based upon the provisions of the Internal Revenue Code, applicable current and
proposed United States Treasury Regulations, judicial authority, and
administrative rulings and practice. Legislative, judicial or administrative
rules and interpretations are subject to change, possibly on a retroactive
basis, at any time, and, therefore, the following statements and conclusions
could be altered or modified. This summary applies only to the shares of PBOC
common stock that are held as capital assets by a United States person (i.e., a
citizen or resident of the United States or a domestic corporation partnership
or other business entity, a domestic trust, or domestic estate). This discussion
does not address all aspects of United States federal income taxation that may
be relevant to a particular PBOC shareholder in light of that shareholder's
personal investment circumstances, or those PBOC shareholders subject to special
treatment under the United States federal income tax laws (for example, life
insurance companies, tax-exempt organizations, financial institutions, and
United States expatriates), PBOC shareholders who hold shares of PBOC common
stock as part of a hedging, "straddle," conversion or other integrated
transaction, or PBOC shareholders who acquired their shares of PBOC common stock
through the exercise of employee stock options or other compensation
arrangements. In addition, the discussion does not address any aspect of
foreign, state or local taxation or estate and gift taxation that may be
applicable to a PBOC shareholder.
TAX CONSEQUENCES OF THE MERGER TO PBOC SHAREHOLDERS. The receipt of cash
for PBOC's common stock pursuant to the merger will be a taxable transaction to
the PBOC shareholders for United States federal income tax purposes. In general,
a holder of PBOC's common stock will recognize gain or loss measured by the
difference between such shareholder's adjusted tax basis for PBOC's common stock
owned by him or her at the effective time and the amount of cash received for
the stock. Gain or loss will be calculated separately for each block of shares
(i.e., shares acquired at the same cost in a single transaction)converted in the
merger. The gain or loss will be capital gain or loss. If the shares have been
held for one year or less at the effective time of the merger, the gain or loss
will be a short-term capital gain or loss. If the shares have been held for more
than one year, the gain or loss will be long-term capital gain or loss.
Shareholders who are individuals are subject to tax on net long-term capital
gains at a maximum United States federal income tax rate of 20%. However, the
maximum tax rate on ordinary income and short-term capital gains is 39.6%.
Capital losses are subject to limitations.
BACKUP TAX WITHHOLDING. Under the United States federal income tax backup
withholding rules, the cash payments due the PBOC shareholders upon the exchange
of their common stock pursuant to the merger will be subject to "backup
withholding" (unless certain exemptions apply) for federal income tax purposes
unless certain requirements are met under federal law. Registrar and Transfer
31
Company as paying agent is required to and will withhold 31% of all payments to
which a PBOC shareholder or other payee is entitled in the merger, unless the
PBOC shareholder or other payee provides a tax identification number (social
security number, in the case of an individual, or employer identification
number, in the case of other shareholders), and certifies under penalties of
perjury that that number is correct. Each PBOC shareholder and, if applicable,
each other payee, should complete and sign the substitute Form W-9 that will be
part of the letter of transmittal to be returned to the exchange agent (or other
agent) in order to provide the information and certification necessary to avoid
backup withholding, unless an applicable exemption exists and is otherwise
proved in a manner satisfactory to the exchange agent (or other agent). The
exemptions provide that certain PBOC shareholders (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding requirements. Any amounts withheld will be allowed as a credit
against the shareholder's United States federal income tax liability for that
year.
No ruling has been or will be requested from the Internal Revenue Service as
to any of the tax effects to the PBOC shareholders of the transactions discussed
in this proxy statement, and no opinion of counsel has been or will be rendered
to the PBOC shareholders with respect to any of the tax effects of the merger to
shareholders.
THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE PARTICULAR
CIRCUMSTANCES OF EACH SHAREHOLDER. THEREFORE, EACH SHAREHOLDER IS URGED TO
CONSULT HIS OR HER TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF
THE MERGER TO SUCH SHAREHOLDER, INCLUDING THOSE RELATING TO FOREIGN STATE, LOCAL
AND OTHER TAXES.
ACCOUNTING TREATMENT
It is anticipated the merger will be accounted for as a "purchase"
transaction under generally accepted accounting principles. Under such method of
accounting, the assets and liabilities of PBOC will be revalued on FBOP's
consolidated balance sheet at their fair values as of the date the transaction
is consummated. The excess purchase price, if any, paid over the fair value of
the net assets acquired (including values assigned to core deposits and other
such intangible assets) will be reported as goodwill in FBOP's consolidated
balance sheet. The results of operations of PBOC will be reported in FBOP's
consolidated statement of operations only after the effective time of the
merger.
DISSENTERS' RIGHTS
Under Delaware law, if you do not wish to accept the cash payment provided
for in the merger agreement, you have the right to dissent from the merger and
to have an appraisal of the fair value of your shares conducted by the Delaware
Court of Chancery. Stockholders electing to exercise dissenters' rights must
strictly comply with the provisions of Section 262 of the Delaware General
Corporation Law to perfect their rights. A copy of Section 262 is attached as
APPENDIX C.
The following is intended as a brief summary of the material provisions of
the Delaware statutory procedures required to dissent from the merger and
perfect a stockholder's dissenters' rights. This summary, however, is not a
complete statement of all applicable requirements and is qualified in its
entirety by reference to Section 262 of the Delaware General Corporation Law.
Section 262 requires that stockholders be notified not less than 20 days
before the special meeting to vote on the merger that dissenters' appraisal
rights will be available. A copy of Section 262 must be included with such
notice. This proxy statement constitutes our notice to you of the availability
of dissenters' rights in connection with the merger. If you wish to consider
exercising your dissenters' rights you should carefully review the text of
Section 262 contained in APPENDIX C because failure to timely and properly
comply with the requirements of Section 262 will result in the loss of your
dissenters' rights under Delaware law.
32
If you elect to demand appraisal of your shares, you must satisfy ALL of the
following conditions:
- You must deliver to us a written demand for appraisal of your shares
before the vote with respect to the merger is taken. This written demand
for appraisal must be in addition to and separate from any proxy or vote
abstaining from or against the merger. Voting against or failing to vote
for the merger by itself does not constitute a demand for appraisal within
the meaning of Section 262.
- You must not vote in favor of the merger. An abstention or failure to vote
will satisfy this requirement, but a vote in favor of the merger, by proxy
or in person, will constitute a waiver of your dissenters' rights in
respect of the shares so voted and will nullify any previously filed
written demands for appraisal.
- You must continuously hold your shares of PBOC common stock through the
effective time of the merger.
If you fail to comply with these conditions and the merger is completed, you
will be entitled to receive the cash payment for any shares of PBOC common stock
you hold as of the effective time of the merger as provided for in the merger
agreement but will have no dissenters' rights of appraisal for your shares of
PBOC common stock.
All demands for appraisal should be delivered to the Corporate Secretary,
PBOC Holdings, Inc., 5900 Wilshire Boulevard, Los Angeles, California 90036,
before the vote on the merger is taken at the special meeting, and should be
executed by, or on behalf of, the record holder of the shares of PBOC common
stock. The demand must reasonably inform PBOC of the identity of the stockholder
and the intention of the stockholder to demand appraisal of his or her shares.
To be effective, a demand for appraisal by a holder of PBOC common stock
must be made by or in the name of the record holder of the shares, fully and
correctly, as the stockholder's name appears on his or her stock certificate(s)
and cannot be made by the beneficial owner if he or she does not also hold the
shares of record. The beneficial holder must, in such cases, have the registered
owner submit the required demand in respect of such shares.
If shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of a demand for appraisal should be made in
such capacity. If the shares are owned of record by more than one person, as in
a joint tenancy or tenancy in common, the demand should be executed by or for
all joint owners. An authorized agent, including one of two or more joint
owners, may execute the demand for appraisal for a stockholder of record.
However, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, he or she is acting as agent
for the record owner. A record owner, such as a broker, who holds shares as a
nominee for others, may exercise his or her right of appraisal with respect to
the shares held for one or more beneficial owners, while not exercising this
right for other beneficial owners. In such case, the written demand should state
the number of shares as to which appraisal is sought. Where no number of shares
is expressly mentioned, the demand will be presumed to cover all shares held in
the name of such record owner.
If you hold your shares of PBOC common stock in a brokerage account or in
other nominee form and you wish to exercise appraisal rights, you should consult
with your broker or such other nominee to determine the appropriate procedures
for the making of a demand for appraisal by such nominee.
Within ten days after the effective date of the merger, PBOC must give
written notice that the merger has become effective to each PBOC stockholder who
has properly filed a written demand for appraisal and who did not vote in favor
of the merger. Within 120 days after the effective date, either PBOC or any
stockholder who has complied with the requirements of Section 262 may file a
petition in the Delaware Court of Chancery demanding a determination of the fair
value of the shares held by all
33
stockholders entitled to appraisal. A dissenting stockholder may request from
FBOP during this 120 day period a statement setting forth (a) the aggregate
number of shares not voted in favor of the merger and with respect to which
demands for appraisal have been received, and (b) the aggregate number of
holders of such shares. PBOC does not presently intend to file such a petition
in the event there are dissenting stockholders and has no obligation to do so.
Accordingly, your failure to timely file a petition could nullify your demand
for appraisal.
At any time within 60 days after the effective date of the merger, any
stockholder who has demanded an appraisal has the right to withdraw the demand
and to accept the cash payment specified by the merger agreement for his or her
shares of PBOC common stock. If a petition for appraisal is duly filed by a
stockholder and a copy of the petition is delivered to PBOC, PBOC will then be
obligated within 20 days after receiving service of a copy of the petition to
provide the Chancery Court with a duly verified list containing the names and
addresses of all stockholders who have demanded an appraisal of their shares.
After notice to dissenting stockholders, the Chancery Court is empowered to
conduct a hearing upon the petition, to determine those stockholders who have
complied with Section 262 and who have become entitled to the appraisal rights
provided thereby. The Chancery Court may require the stockholders who have
demanded payment for their shares to submit their stock certificates to the
Register in Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such direction, the
court may dismiss the proceedings as to such stockholder.
After determination of the stockholders entitled to appraisal of their
shares of PBOC common stock, the Chancery Court will appraise the shares,
determining their fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if any. When the value is determined, the court will direct the
payment of such value, with interest thereon accrued during the pendency of the
proceeding if the Chancery Court so determines, to the stockholders entitled to
receive the same, upon surrender by such holders of the certificates
representing such shares.
In determining fair value, the Chancery Court is required to take into
account all relevant factors. You should be aware that the fair value of the
shares as determined under Section 262 could be more, the same, or less than the
value that you are entitled to receive pursuant to the merger agreement.
Costs of the appraisal proceeding may be imposed upon PBOC and the
stockholders participating in the appraisal proceeding by the Chancery Court as
the court deems equitable in the circumstances. Upon the application of a
stockholder, the Chancery Court may order all or a portion of the expenses
incurred by any stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys' fees and the fees and
expenses of experts, to be charged pro rata against the value of all shares
entitled to appraisal.
Any stockholder who demands appraisal rights will not, after the effective
date, be entitled to vote shares subject to such demand for any purpose or to
receive payments of dividends or any other distribution with respect to such
shares, other than with respect to payment as of a record date prior to the
effective date; however, if no petition for appraisal is filed within 120 days
after the effective date, or if such stockholder delivers a written withdrawal
of his or her demand for appraisal and an acceptance of the merger within
60 days after the effective date, then the right of such stockholder to
appraisal will cease and such stockholder will be entitled to receive the cash
payment for shares of his or her PBOC common stock pursuant to the merger
agreement. Any withdrawal of a demand for appraisal made more than 60 days after
the effective date of the merger may only be made with the written approval of
PBOC.
Failure to comply with these procedures will cause the shareholder to lose
his or her dissenters' rights. Consequently, any shareholder who desires to
exercise his or her dissenters' rights is urged to consult a legal advisor
before attempting to exercise such rights.
34
THE MERGER AGREEMENT
The following is a summary of the material terms of the merger agreement.
The summary is qualified in its entirety by reference to the merger agreement, a
copy of which is attached to this proxy statement as APPENDIX A.
EFFECTIVE TIME
The merger agreement provides that the closing of the merger will take place
as soon as reasonably practicable after all regulatory, corporate and other
approvals have been obtained and required waiting periods have passed. At such
time, a certificate of merger will be prepared, executed by representatives of
PBOC and Acquisition, and filed with the Secretary of State of the State of
Delaware. The merger will then become effective upon the filing of the
certificate of merger by the Secretary of State, or such later date as is set
forth in the certificate of merger. The date on which the certificate of merger
is issued and the merger is effective is referred to herein as the "effective
time." The merger agreement provides that the closing date shall occur as soon
as practicable, but in no event later than June 30, 2001, provided, that if all
required governmental approvals have not been received but all other conditions
have been substantially satisfied, the effective time shall automatically be
extended for up to an additional period of 90 days.
CONVERSION OF SHARES OF PBOC'S COMMON STOCK
No later than three business days after the effective time, FBOP shall
furnish or cause to be furnished to PBOC's former shareholders a letter of
transmittal and instructions for use in effecting the surrender of the PBOC
common stock held by PBOC's shareholders in exchange for the merger
consideration. The letter of transmittal and instructions will specify that
delivery of certificates representing ownership of PBOC common stock shall be
effected only upon delivery, on or after the effective time of the merger, of
the certificates to Registrar and Transfer Company, the paying agent for the
merger, and that, until the certificates are delivered by the shareholder in
accordance with the letter of transmittal and instructions, the risk of loss of
the certificates will remain with the shareholder. The instructions will request
shareholders to deliver their certificates, along with a properly completed and
duly executed letter of transmittal and any other documentation that the
instructions may require, to Registrar and Transfer Company.
FBOP and Acquisition will instruct the paying agent that, on and after the
effective time, upon the delivery to the paying agent of the properly completed
letter of transmittal and other required documentation, the paying agent will
pay the shareholder the amount of cash that the holder is entitled to receive in
accordance with the terms of the merger agreement, minus any withholding taxes
required by law, payable by check, and the surrendered certificates will be
canceled. No payment will be made for share certificates prior to the effective
time of the merger. No interest will be payable with respect to the payment of
the merger consideration made to PBOC shareholders and option holders under the
merger agreement.
TREATMENT OF PBOC STOCK OPTIONS
The merger agreement provides that, at the effective time, all holders of
PBOC options shall cease to have any rights with respect to their options,
except the right to receive a cash payment computed in the manner provided in
the merger agreement, without interest. Each holder of PBOC options shall,
concurrently with the receipt of such cash payment, deliver evidence to FBOP of
the cancellation of such options.
35
REPRESENTATIONS AND WARRANTIES
REPRESENTATIONS AND WARRANTIES OF PBOC. The merger agreement contains
representations and warranties of PBOC, the material ones of which relate to:
-- PBOC's proper organization, qualification, good standing, authority and
other corporate organizational matters;
-- PBOC's capital structure and the number of its authorized and
outstanding shares of its common stock and designated preferred stock;
-- People's Bank of California's capital structure and the number of its
authorized and outstanding shares of its common stock;
-- PBOC's compliance with applicable laws and its possession of all
requisite corporate power and authority to enter into the merger
agreement;
-- the consistency of the merger agreement with PBOC's charter documents
and its agreements;
-- the absence of any default by PBOC or People's Bank of California or any
other subsidiary under any agreement, indenture, or other instrument to
which any is a party, is bound or to which its assets are subject, except
where such default would not have a material adverse effect on PBOC and
its subsidiaries, taken as a whole;
-- compliance of PBOC's consolidated financial statements with generally
accepted accounting principles;
-- the absence of undisclosed liabilities, except as provided in PBOC's
consolidated financial statements and as incurred in the ordinary course
of business;
-- PBOC's, People's Bank of California's and each other subsidiary's
compliance in all material respects with all filing requirements with
governmental regulatory agencies;
-- PBOC's and each subsidiary's material compliance with applicable
environmental laws;
-- the absence of claims of any kind against PBOC or any subsidiary which
could be reasonably expected to have a material adverse effect on PBOC
and its subsidiaries taken as a whole;
-- the filing by PBOC and each subsidiary of all required tax returns, and
the absence of material tax liens on the property of PBOC and each
subsidiary, except for statutory liens for taxes not yet delinquent;
-- the absence of any undisclosed professional services agreements,
collective bargaining agreements, stock option or employee benefit plans;
-- the absence of any material prohibited transactions, breaches of
fiduciary duty or violations of law related to the employee benefit plans
of PBOC or any subsidiary;
-- the validity and enforceability of the material contracts, employee
benefit plans and insurance policies;
-- the absence, since September 30, 2000, of any material adverse change to
the financial condition, results of operations, assets, properties or
business of PBOC and its subsidiaries taken as whole;
-- PBOC's and each subsidiary's good title, free of encumbrances, to all of
the personal and real property reflected in PBOC's consolidated financial
statements, except as disclosed in PBOC's consolidated financial
statements, except for property disposed of in the ordinary course of
business, and except for encumbrances and title imperfections that do not
have a material adverse effect on PBOC and its subsidiaries taken as a
whole;
36
-- loans and loan commitments made in accordance with applicable regulatory
requirements in the ordinary course of business;
-- deposits insured to the fullest extent permitted by law and regulation;
-- loan loss reserves which have been computed in accordance with generally
accepted methods and principles and which are adequate;
-- specified amounts of bonuses, accrued vacations, expenses associated
with the merger contemplated by the merger agreement and change in
control payments under existing employment agreements; and
-- the absence of any untrue statements of a material fact or any omission
of a material fact relating to the representations and warranties of PBOC
or any subsidiary in the merger agreement.
REPRESENTATIONS AND WARRANTIES OF FBOP. The merger agreement contains
representations and warranties of FBOP, the material ones of which relate to:
-- its proper organization, qualification, good standing and other
corporate organizational matters;
-- the execution, delivery, performance and enforceability of the merger
agreement;
-- consistency of the merger agreement with FBOP's charter documents and
agreements and any laws applicable to FBOP;
-- the lack of consents and approvals of any public body or authority in
connection with the transaction except for the governmental approvals
described under "THE PROPOSED MERGER--REGULATORY APPROVALS" and
-- the availability of sufficient funds for FBOP to perform all of their
obligations under the merger agreement.
COVENANTS OF PBOC, FBOP AND ACQUISITION; CONDUCT OF BUSINESS PRIOR TO THE MERGER
The merger agreement provides that PBOC will (and will cause People's Bank
of California and PBOC's other subsidiaries to), among other things:
-- not engage in any transaction except in the ordinary course of business
and shall conduct its business consistent with past practices;
-- maintain its branches in a condition substantially the same as of the
date of the merger agreement, reasonable wear and tear excepted;
-- maintain its books of accounts and records in the usual, regular and
ordinary manner; and
-- duly maintain compliance in all material respects with all laws,
regulatory requirements and agreements to which it is subject or by which
it is bound.
37
The merger agreement further provides that prior to the effective time
neither PBOC nor People's Bank of California nor any other subsidiaries of PBOC
will, without the prior written consent of FBOP:
-- fail to maintain its tangible property and assets in their present state
of repair, order and condition, reasonable wear and tear and damage by
fire or other casualty excepted;
-- fail to maintain its books, accounts and records in accordance with
generally accepted accounting principles consistently applied;
-- fail to comply in all material respects with all applicable laws and
regulations;
-- make, renew or modify the terms of any loan, letter of credit or other
extension of credit, or commitment, in excess of $2,000,000, provided,
however, that loans which are originated pursuant to binding commitments
entered into prior to the date of the merger agreement and loans that are
secured by secondary market qualified mortgages on single-family
dwellings shall be permitted;
-- except for the terminations of certain benefit agreements set forth in
the merger agreement, enter into, adopt, amend or terminate any bonus,
profit sharing, compensation, termination, stock option, stock
appreciation right, restricted stock, performance unit, pension,
retirement, deferred compensation, employment, severance or other
employee benefit agreements, trusts, plans, funds or other arrangements
for the benefit or welfare of any director, officer or employee;
-- authorize or enter into any employee contract or employment agreement,
grant any pay raise or increase in any manner the compensation or fringe
benefits of any director, officer or employee or pay any benefit not
required by an existing plan or arrangement or authorize or enter into
any contract, agreement, commitment or arrangement to do any of the
foregoing; provided however, that bonuses described in the merger
agreement and pay raises to employees pursuant to regularly scheduled
reviews in the ordinary course of business not to exceed 6% of such
employee's current salary shall not be prohibited; and provided further
that nothing contained in the merger agreement shall restrict the hiring
of non-officer, clerical or teller employees whose compensation does not
exceed $50,000 per year;
-- authorize or enter into, or amend, modify or supplement any contract or
commitment (excluding all loans and loan commitments and except as
otherwise set forth in the merger agreement) which provides for the
receipt or payment of amounts, in the aggregate, in excess of $100,000;
-- sell, transfer, convey, assign or otherwise dispose of any of its assets
or properties (other than assets which are being sold pursuant to binding
commitments entered into prior to the date hereof and immaterial assets
or properties sold, transferred, conveyed, assigned or otherwise disposed
of in the ordinary course of business consistent with past practices and
policies), or authorize any of the foregoing, or sell loans in bulk other
than (i) up to $5,000,000 per month of residential mortgage loans sold in
the ordinary course of business pursuant to existing and on-going
commitments, and (ii) other loans which are sold in the ordinary course
of business pursuant to existing written commitments, which commitments
will not be amended, modified or supplemented except in accordance with
the terms of the merger agreement;
-- authorize or make any expenditures for assets in excess of $100,000 for
any item, or lease or encumber any assets outside the ordinary course of
business;
-- authorize or make any amendment to its charter or bylaws;
-- fail to keep in force all insurance policies presently in effect,
including insurance of deposit accounts with the Federal Deposit
Insurance Corporation;
38
-- do any act which, or omit to do any act the omission of which, will
cause a material breach of any material contract, commitment or
obligation;
-- make any borrowing, incur any debt (other than (i) deposits in the
ordinary course of business and consistent with past practice and
(ii) overnight borrowings from the Federal Home Loan Bank and federal
funds purchased or securities sold under agreements to repurchase, in
each case in the ordinary course of business and for less than one year
in duration and consistent with past practices), or assume, guarantee,
endorse or otherwise become liable with respect to any such obligations;
-- fail to maintain deposit rates substantially in accord with the average
of the prevailing rates of competing financial institutions in the local
Los Angeles area market, provided that in no event will People's Bank of
California accept any deposits for which the interest rate payable
thereon exceeds by more than 1.00 percent the average interest rate being
paid on similar deposits by savings banks and savings and loan
associations in the local Los Angeles area market;
-- waive, release or cancel any claims in excess of $100,000 against third
parties or debts in excess of $100,000 owing to it, or any rights which
have any value in excess of $100,000;
-- make any changes in its accounting systems, policies, principles or
practices, except as required by changes in laws or regulations or
generally accepted accounting principles;
-- enter into, authorize, or permit any transaction, except as now existing
and disclosed to FBOP, with any affiliate of PBOC (other than
transactions between PBOC and People's Bank of California on the one
hand, and Peoples Preferred Capital Corporation on the other hand, in the
ordinary course of business and consistent with past practices);
-- make any capital contribution to any person or purchase or invest in any
securities issued by any person other than securities which are issued or
guaranteed by the United States government or an agency thereof having a
maturity of more than twelve months from the date of purchase;
-- sell any investment securities except in the ordinary course of business
consistent with past practices;
-- enter into, amend or renew any data processing service contract;
-- materially change or amend its schedules and policies relating to
service charges or service fees;
-- fail to use its best efforts to (i) preserve the present business
organizations intact, (ii) keep available the services of its present
officers and employees or (iii) preserve its present relationships with
persons having business dealings with it;
-- fail to maintain, consistent with its past practices, a reserve for
possible loan and lease losses which is adequate under the requirements
of generally accepted accounting principles to provide for possible
losses, net of recoveries relating to loans previously charged off, on
loans outstanding (including, without limitation, accrued interest
receivable);
-- make any material change in any lease of real property;
-- fail to file in a timely manner all required filings with all proper
regulatory authorities and fail to cause such filings to be true and
correct in all material respects;
-- foreclose upon or take deed or title to any commercial real estate
without first conducting a Phase I environmental assessment of the
property; or foreclose upon such commercial real estate if such
environmental assessment indicates the presence of hazardous material in
39
amounts that, if such foreclosure were to occur, would be reasonably
likely to result in a material adverse effect on People's Bank of
California;
-- amend or modify any of its promotional, deposit account or account loan
practices, other than amendments or modifications in the ordinary course
of business; or
-- (i) make any change in its authorized capital stock, (ii) issue any
stock options, or issue any warrants, or other rights calling for the
issue, transfer, sale or delivery of its capital stock or other
securities, (iii) pay any stock dividend or make any reclassification in
respect of its outstanding shares of capital stock, (iv) except for the
issuance of common stock upon exercise of any options, issue, sell,
exchange or deliver any shares of its capital stock (or securities
convertible into or exchangeable, with or without additional
consideration, for such capital stock), (v) purchase or otherwise acquire
for consideration any outstanding shares of its capital stock, or
(vi) declare, pay or set apart in respect of its capital stock any
dividends or other distributions or payments.
The merger agreement contains additional covenants of PBOC concerning, among
other things:
-- taking all steps necessary to hold a meeting of its stockholders and
using its best efforts to obtain stockholder approval of the merger and
the merger agreement;
-- the preparation and filing of all required regulatory applications,
waivers or consents;
-- the delivery to FBOP of all reports filed by PBOC with the Securities
and Exchange Commission and all regulatory reports filed by PBOC with the
applicable regulatory authorities; and
-- keeping FBOP advised of material corporate developments or events.
The merger agreement also contains covenants of FBOP concerning, among other
things:
-- the preparation and filing of all required regulatory applications,
waivers or consents;
-- the assumption of the rights and obligations of PBOC and People's Bank
of California under the Shareholders Rights Agreement dated as of
April 20, 1998 by and among PBOC, People's Bank of California, the
Trustees of the Estate of Bernice Pauahi Bishop, BIL Securities
(Offshore) Limited and Arbur, Inc.;
-- taking all reasonable action so that retained employees of PBOC and
People's Bank of California shall be entitled to participate in employee
benefit plans of FBOP and California National Bank of general
applicability;
-- the indemnification (for a period of four years from the effective time
of the merger) of the directors, officers and employees of PBOC and
People's Bank of California to the fullest extent permitted by law and
PBOC's and People's Bank of California's respective bylaws and the
maintenance (for a period of four years from the effective time of the
merger) of directors officers liability coverage.
CONDITIONS TO CONSUMMATION OF THE MERGER
The closing of the merger will occur only if, among other things:
-- the merger shall have been approved and adopted by the required vote of
the shareholders of PBOC;
-- the merger and the other transactions described herein shall have
received all necessary regulatory approvals, and such approvals shall not
contain conditions that, individually or in the aggregate, could likely
have or lead to a material adverse effect on FBOP, California
40
National Bank or Acquisition or shall not, individually or in the
aggregate, so materially reduce the economic or business benefits of the
transactions to FBOP that had such condition or requirement been known,
FBOP, in its reasonable judgment, would not have entered into the merger
agreement;
-- The consummation of the merger shall not have been restrained, enjoined
or prohibited by any court or governmental authority of competent
jurisdiction. No material litigation or administrative proceeding shall
be pending or threatened as of the effective time seeking to restrain,
enjoin or prohibit the consummation of the merger or the merger
agreement.
The obligation of FBOP and Acquisition to consummate the merger is subject
to, among other things, the following conditions:
-- the representations and warranties of PBOC in the merger agreement must
be true and correct in all material respects as of the closing date of
the merger;
-- PBOC must have performed in all material respects its obligations under
the merger agreement;
-- PBOC must have delivered to FBOP an opinion of legal counsel;
-- there must not have been, since September 30, 2000, a material adverse
effect on the financial condition, results of operations or business of
PBOC and People's Bank of California, taken as a whole;
-- PBOC shall have obtained all consents, approvals, authorizations or
orders required in connection with the transaction;
-- the number of dissenting shares of the outstanding PBOC common stock
must not exceed 10% of the issued and outstanding PBOC common stock;
-- each of the directors of PBOC, Peoples' Bank of California and each
other subsidiary shall have tendered their resignations, effective as of
the closing date of the merger;
-- each holder of options to purchase PBOC common stock shall have provided
evidence satisfactory to Acquisition that, upon payment of the
consideration set forth in the merger agreement for their options, each
option shall have been cancelled;
The obligation of PBOC to consummate the merger is subject to, among other
things, the following conditions:
-- the representations and warranties of FBOP in the merger agreement shall
be true and correct in all material respects as of the closing date of
the merger;
-- FBOP and Acquisition shall have performed in all material respects their
obligations under the merger agreement;
-- PBOC shall have obtained the opinion of KBW that the consideration to be
paid to PBOC's shareholders pursuant to terms the merger agreement are
fair from a financial point of view to the shareholders of PBOC;
-- FBOP shall have delivered to PBOC an opinion of legal counsel; and
-- FBOP or Acquisition shall have made available to the paying agent funds
sufficient to pay the consideration required by the merger agreement to
shareholders of PBOC and to holders of the options to acquire PBOC common
stock.
41
NO NEGOTIATIONS WITH OTHERS
Except as may be required by any regulatory authority, or except to the
extent required by fiduciary obligations under applicable law in reliance upon
the opinion of outside counsel, neither PBOC, Peoples Bank of California, nor
any other subsidiary or any of their respective directors, officers, employees,
representatives, investment bankers, agents or affiliates shall, directly or
indirectly solicit, initiate, encourage or respond favorably to inquiries or
proposals from, or provide any confidential information or access to People's
Bank of California's or PBOC's premises to, or participate in any discussions or
negotiations with, any person (other than Acquisition and FBOP and their
directors, officers, employees, representatives and agents) concerning:
-- any merger, sale of assets not in the ordinary course of business,
acquisition, business combination, changes of control or other similar
transaction involving PBOC or People's Bank of California, or
-- any purchase or other acquisition by any person of any shares of capital
stock of PBOC or People's Bank of California, or
-- any issuance by PBOC or People's Bank of California of any shares of its
capital stock.
PBOC is required by the merger agreement to promptly advise FBOP or
Acquisition of, and communicate to FBOP or Acquisition the terms and conditions
of (and the identity of the person making), any such inquiry or proposal
received, and to promptly furnish FBOP or Acquisition with copies of any
documents received and summaries of any other communications concerning these
matters. In addition, PBOC is required by the merger agreement to cease any such
existing activities, discussions or negotiations with any person conducted with
respect to any of such matters.
TERMINATION
The merger agreement provides that it may be terminated at any time prior to
the effective time:
-- by mutual written consent of the boards of directors of Acquisition and
PBOC;
-- by either Acquisition or by PBOC if any condition precedent to the
terminating party's obligation to effect the merger has not been
satisfied as of the time such condition is required to be fulfilled; or
-- by FBOP at any time on or prior to December 21, 2000 (which has expired
without FBOP exercising its right to terminate the merger agreement) if
the results of FBOP's investigation of the business, operations, assets,
liabilities, capital, prospects, investments, affairs, condition
(financial or otherwise) of PBOC and its subsidiaries are not
satisfactory to FBOP or Acquisition.
TERMINATION FEE
If PBOC and Acquisition fail to consummate the merger and (i) PBOC or
People's Bank of California enters into a letter of intent, commitment letter or
other written agreement with a third party regarding a merger, consolidation,
sale of assets or other similar transaction involving PBOC or People's Bank of
California within twelve months following the termination of the merger, and
(ii) PBOC shall not have terminated the merger agreement by reason of
Article XI (a)(iii) or (a)(iv) of the merger agreement, and (iii) Acquisition
shall not have terminated the merger agreement by reason of Article XI
(a)(i) or (a)(v) of the merger agreement, PBOC shall, upon execution of any such
letter or agreement, promptly pay $10,000,000 to FBOP, and PBOC shall have no
further liability or obligation to FBOP or Acquisition with respect to the
merger agreement.
42
AMENDMENT
The merger agreement may be amended by the boards of directors of PBOC, FBOP
and Acquisition at any time prior to the closing date of the merger, by an
instrument in writing signed on behalf of each of the parties.
ADJOURNMENT OF THE SPECIAL MEETING
Each proxy solicited requests authority to vote for an adjournment of the
special meeting, if an adjournment is deemed to be necessary. PBOC may seek an
adjournment of the special meeting for not more than 30 days so that we can
solicit additional votes in favor of the merger agreement if the merger proposal
has not received the requisite vote of stockholders at the special meeting. If
PBOC desires to adjourn the meeting, it will request a motion that the meeting
be adjourned for up to 29 days with respect to the merger proposal (and solely
with respect to the merger proposal, provided that a quorum is present at the
special meeting), and no vote will be taken on the merger proposal at the
originally scheduled special meeting. Each proxy solicited, if properly signed
and returned to PBOC and not revoked prior to its use, will be voted on any
motion for adjournment in accordance with the instructions contained therein. If
no contrary instructions are given, each proxy received will be voted in favor
of any motion to adjourn the meeting. Unless revoked prior to its use, any proxy
solicited for the special meeting will continue to be valid for any adjourned
meeting, and will be voted in accordance with instructions contained therein,
and if no contrary instructions are given, for the proposal in question.
Any adjournment will permit PBOC to solicit additional proxies and will
permit a greater expression of the stockholders' views with respect to the
merger proposal. The adjournment would be disadvantageous to stockholders who
are against the merger agreement because an adjournment will give PBOC
additional time to solicit favorable votes and thus increase the chances of
passing the merger proposal.
If a quorum is not present at the special meeting, no proposal will be acted
upon and the PBOC Board of Directors will adjourn the special meeting to a later
date to solicit additional proxies on each of the proposals being submitted to
stockholders.
An adjournment for up to 29 days will not require either the setting of a
new record date or notice of the adjourned meeting as in the case of an original
meeting.
Because the Board of Directors recommends that stockholders vote "FOR" the
proposed merger agreement, the Board of Directors also recommends that
stockholders vote "FOR" the possible adjournment of the special meeting on the
merger proposal. Approval of the proposal to adjourn the special meeting on the
merger proposal requires the approval of a majority of the shares of PBOC common
stock present in person or by proxy and voting on the adjournment proposal.
MARKET PRICES AND DIVIDENDS
PBOC's common stock has been traded on the Nasdaq National Market under the
symbol "PBOC" since the Company's initial public offering in May 1998. The
following table sets forth for the
43
quarters indicated the range of high and low bid information per share of common
stock as reported by the Nasdaq National Market. No dividends have been paid on
the common stock.
2001 HIGH LOW
- ---- -------- --------
First Quarter (through , 2001).................. $ $
2000 HIGH LOW
- ---- -------- --------
First Quarter............................................... $9.87 $8.25
Second Quarter.............................................. 9.81 8.50
Third Quarter............................................... 9.06 7.56
Fourth Quarter.............................................. 9.59 5.93
1999 HIGH LOW
- ---- -------- --------
First Quarter............................................... $10.53 $8.75
Second Quarter.............................................. 10.00 8.37
Third Quarter............................................... 10.87 7.90
Fourth Quarter.............................................. 9.87 7.66
The closing price per share for the common stock as reported on the Nasdaq
National Market on November 15, 2000, the last full trading day prior to the
public announcement of FBOP's agreement to acquire the shares of PBOC common
stock owned by PBOC's largest shareholder, was $7.00. The closing price per
share on December 8, 2000, the last full trading day prior to the public
announcement of the proposed merger, was $9.1875. As of the record date,
, 2001, there were approximately holders of record of the
common stock.
WHERE YOU CAN FIND MORE INFORMATION
PBOC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and in accordance therewith files reports, proxy
statements, and other information with the Securities and Exchange Commission.
You may read and copy these reports, proxy statements and other information at
the public reference facilities of the Securities and Exchange Commission
located at 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC 20549, and
the Securities Exchange Commission's Regional offices located at Seven World
Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of this material can also be obtained at prescribed rates by writing to
the Public Reference Section of the Securities Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C., 20549 or by calling the Securities Exchange
Commission at 1-800-SEC-0330. In addition, the Securities and Exchange
Commission maintains a World Wide Web site at http://www.sec.gov, which contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities Exchange Commission.
PBOC has incorporated by reference into this proxy statement the information
it has filed with the Securities and Exchange Commission, which means that PBOC
can disclose important information to you by referring you to those documents.
The information incorporated by reference is an important part of this proxy
statement and information that PBOC files subsequently with the Securities and
Exchange Commission will automatically update this proxy statement. PBOC
incorporates by reference the documents listed below and any filings it makes
with the Securities and Exchange Commission under Sections 13(a), 13(c), 14, or
15(d) of the Securities Exchange Act of 1934 after the date of this proxy
statement:
- Annual Report on Form 10-K for the year ended December 31, 1999;
44
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000,
June 30, 2000 and September 30, 2000; and
- Current Reports on Form 8-K dated as of the November 1, 2000 and
December 8, 2000.
You may request a copy of these filings (other than an exhibit to a filing
unless that exhibit is specifically incorporated by reference into that filing)
at no cost, by writing to or telephoning us at the following address: 5900
Wilshire Boulevard, Los Angeles, California 90036, Attention: Corporate
Secretary, telephone (323) 954-6651.
FUTURE SHAREHOLDER PROPOSALS
PBOC intends to hold an annual meeting in 2001 only if the merger is not
completed. Any PBOC shareholder intending to submit a proposal for inclusion in
the proxy statement and form of proxy for our 2001 annual meeting of
shareholders, in the event that it is held, was required to submit the proposal
to the attention of our Corporate Secretary at our principal executive office by
not later than November 23, 2000, and such proposal must comply with the
requirements of Rule 14a-8 of the Securities Exchange Act of 1934.
OTHER BUSINESS
No other business may be presented for consideration at the special meeting
other than as stated in the accompanying Notice of Special Meeting of
Shareholders.
FORWARD-LOOKING STATEMENTS--CAUTIONARY STATEMENTS
This proxy statement and the materials incorporated by reference herein
contain certain forward-looking statements and information relating to PBOC and
its subsidiaries that are based on the beliefs of PBOC's management as well as
assumptions made by and information currently available to PBOC's management.
When used in this proxy statement and the materials incorporated by reference
herein, the words "anticipate," "believe," "estimate," "expect" and "intend" and
words or phrases of similar import, as they relate to PBOC or its subsidiaries
or PBOC management, are intended to identify forward-looking statements. Such
statements reflect the current view of PBOC with respect to future events and
are subject to certain risks, uncertainties and assumptions related to certain
factors including, without limitation, competitive factors, general economic
conditions, customer relations, the interest rate environment, governmental
regulation and supervision, nonperforming asset levels, loan concentrations,
changes in industry practices, one time events and other factors described
herein. Based upon changing conditions, should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described herein or is the
material incorporated by reference herein as anticipated, believed, estimated,
expected or intended. PBOC does not intend to update these forward-looking
statements.
WE HAVE AUTHORIZED NO ONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY
REPRESENTATION ABOUT THE MERGER, PBOC OR PEOPLE'S BANK OF CALIFORNIA, THAT
DIFFERS FROM OR ADDS TO THE INFORMATION CONTAINED IN THIS PROXY STATEMENT OR IN
THE DOCUMENTS WE HAVE PUBLICLY FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. THEREFORE, IF ANYONE SHOULD GIVE YOU ANY DIFFERENT OR ADDITIONAL
INFORMATION, YOU SHOULD NOT RELY ON IT.
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT AND INCORPORATED BY
REFERENCE HEREIN SPEAKS ONLY AS OF THE DATE INDICATED ON THE COVER OF THIS PROXY
STATEMENT UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE
APPLIES.
45
APPENDIX A
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
PBOC HOLDINGS, INC.
FBOP CORPORATION
AND
FBOP ACQUISITION COMPANY
As of December 8, 2000
----------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
--------
ARTICLE I................................................................. 1
MERGER........................................................... 1
(a) Merger...................................................... 1
(b) Effective Time.............................................. 2
(c) Effects of the Merger....................................... 2
(d) Prior Approvals............................................. 2
(e) Certificate of Incorporation................................ 2
(f) Bylaws...................................................... 2
(g) Directors and Officers...................................... 2
(h) Additional Actions.......................................... 2
(i) Conversion of Shares........................................ 3
(j) Total Merger Consideration.................................. 3
(k) Surrender of Shares......................................... 3
(l) Designation of Paying Agent; Investment of Funds............ 4
(m) Transmittal Materials....................................... 4
(n) Dissenting Shares........................................... 4
(o) Termination of Paying Agent's Duties........................ 4
(p) Closing of Holding Company's Transfer Books................. 5
(q) Employee Stock Options; Restricted Stock.................... 5
ARTICLE II................................................................ 5
REPRESENTATIONS AND WARRANTIES OF HOLDING COMPANY................ 5
(a) Organization and Standing of Holding Company................ 5
(b) Organization and Standing of Savings Institution............ 5
(c) Holding Company Subsidiaries................................ 6
(d) Capitalization.............................................. 6
(e) Authorization............................................... 6
(f) Certificates of Incorporation and Bylaws.................... 7
(g) Consents and Approvals...................................... 7
(h) Defaults and Conflicts...................................... 7
(i) SEC Reports; Financial Statements........................... 7
(j) Regulatory Reports and Filings.............................. 8
(k) Changes Since September 30, 2000............................ 8
(l) Properties.................................................. 9
(i) Real Estate and Mortgages............................... 9
(ii) Investments............................................ 9
(iii) Title to Property; Zoning............................. 9
(m) Environmental Laws.......................................... 9
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PAGE
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(n) Proprietary Rights.......................................... 10
(o) Agreements.................................................. 10
(p) Litigation; Claims.......................................... 11
(q) Compliance with Laws........................................ 11
(r) Taxes....................................................... 11
(s) Related Party Transactions.................................. 12
(t) Employee Benefit Plans...................................... 12
(u) Insurance................................................... 13
(v) Intentionally Omitted....................................... 13
(w) Deposits.................................................... 13
(x) Loans....................................................... 14
(y) Reserves.................................................... 14
(z) Agreements with Regulatory Agencies......................... 14
(aa) Information for Regulatory Approvals........................ 14
(ab) Governmental Notices........................................ 14
(ac) SEC Filings................................................. 15
(ad) Finders and Investment Bankers.............................. 15
(ae) Third Party Discussions..................................... 15
(af) Disclosure.................................................. 15
(ag) Bonuses; Accrued Vacation................................... 15
(ah) Expenses.................................................... 15
(ai) Change in Control Payments.................................. 15
ARTICLE III............................................................... 16
REPRESENTATIONS AND WARRANTIES OF ACQUISITION AND FBOP............ 16
(a) Organization of Acquisition and FBOP........................ 16
(b) Authorization............................................... 16
(c) Consents and Approvals...................................... 16
(d) Defaults and Conflicts...................................... 16
(e) SEC Filings................................................. 16
(f) Funds Available............................................. 16
(g) Finders and Investment Bankers.............................. 16
(h) Governmental Notices........................................ 16
(i) Articles; Bylaws............................................ 17
(j) Access to Certain Information............................... 17
ARTICLE IV................................................................ 17
RIGHT TO INVESTIGATE............................................. 17
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ARTICLE V................................................................. 17
COVENANTS OF HOLDING COMPANY..................................... 17
(a) Operation in Ordinary Course................................ 17
(b) Exclusivity................................................. 20
(c) Stockholder Meeting......................................... 20
(d) Consents.................................................... 21
(e) Reports..................................................... 21
(f) Notice...................................................... 21
(g) Regulatory Matters.......................................... 21
(h) Schedules................................................... 21
(i) Supplemental Information; Disclosure Supplements............ 21
(j) Cooperation................................................. 21
(k) Conditions Precedent........................................ 21
(l) Best Efforts................................................ 22
(m) Proxies..................................................... 22
ARTICLE VI................................................................ 22
COVENANTS OF ACQUISITION AND FBOP................................ 22
(a) Consents.................................................... 22
(b) Cooperation................................................. 22
(c) Conditions Precedent........................................ 22
(d) Best Efforts................................................ 22
(e) Shareholder Rights Agreement................................ 22
(f) Benefit Plans and Arrangements.............................. 22
(g) Indemnification; Insurance.................................. 22
(h) Standstill.................................................. 23
ARTICLE VII............................................................... 24
CONDITIONS TO THE OBLIGATIONS OF ACQUISITION..................... 24
(a) Validity of Representation and Warranties................... 24
(b) Consents.................................................... 24
(c) Compliance with Covenants; Schedules........................ 24
(d) Opinion of Counsel.......................................... 24
(e) Approval of Holding Company Stockholders.................... 24
(f) Dissenting Holding Company Shares........................... 24
(g) Resignations................................................ 24
(h) Adverse Changes............................................. 24
(i) Effective Time.............................................. 24
(j) Stock Option Plans and Incentive Plans; Options............. 24
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PAGE
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ARTICLE VIII.............................................................. 25
CONDITIONS TO THE OBLIGATIONS OF HOLDING COMPANY................. 25
(a) Validity of Representations and Warranties.................. 25
(b) Consents.................................................... 25
(c) Compliance with Covenants................................... 25
(d) Opinion of Counsel.......................................... 25
(e) Fairness Opinion............................................ 25
(f) Effective Time.............................................. 25
(g) Funds to Paying Agent....................................... 25
ARTICLE IX................................................................ 25
CONDITIONS APPLICABLE TO ACQUISITION, FBOP AND HOLDING COMPANY....
25
(a) Governmental Approvals...................................... 25
(b) Injunction.................................................. 26
ARTICLE X................................................................. 26
CLOSING AND CLOSING DOCUMENTS.................................... 26
(a) Closing..................................................... 26
(b) Holding Company Closing Documents........................... 26
(c) Acquisition Closing Documents............................... 26
ARTICLE XI................................................................ 27
TERMINATION AND TERMINATION FEE.................................. 27
(a) Termination................................................. 27
(b) Termination Fee............................................. 27
(c) Survival of Rights.......................................... 27
ARTICLE XII............................................................... 27
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS............ 27
ARTICLE XIII.............................................................. 27
MISCELLANEOUS.................................................... 27
(a) Payment of Expenses......................................... 27
(b) Entire Agreement............................................ 27
(c) Modifications, Amendments and Waivers....................... 28
(d) Assignment; Governing Law................................... 28
(e) Schedules................................................... 28
(f) Press Releases.............................................. 28
(g) Notices..................................................... 28
(h) Attorneys' Fees............................................. 29
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into as of
the 8th day of December, 2000, by and among PBOC Holdings, Inc., a savings
institution holding company organized under the laws of the State of Delaware
(the "Holding Company"), FBOP Corporation, a bank and savings institution
holding company organized under the laws of the State of Illinois ("FBOP") and
FBOP Acquisition Company, a corporation organized under the laws of the State of
Delaware ("Acquisition"). Holding Company and Acquisition are sometimes referred
to herein as the "Constituent Corporations."
W I T N E S S E T H:
WHEREAS, Acquisition is a wholly-owned subsidiary of FBOP; and
WHEREAS, the parties desire that Holding Company be acquired by Acquisition
through the merger of Acquisition with and into Holding Company upon the terms
and conditions contained herein and in accordance with applicable laws (the
"Merger"); and
WHEREAS, the Board of Directors of Holding Company deems the Merger to be
advisable and in the best interests of Holding Company and its stockholders and
has adopted resolutions approving this Agreement and directing that this
Agreement be submitted for consideration at a meeting of its stockholders; and
WHEREAS, the Boards of Directors of FBOP and Acquisition deem the Merger to
be advisable and in the best interests of their respective stockholders and each
has adopted resolutions approving this Agreement; and
WHEREAS, following the execution and delivery of this Agreement, Peoples
Bank of California, a federally-chartered stock savings institution and
wholly-owned subsidiary of Holding Company (the "Savings Institution"), and
California National Bank, a national banking institution and wholly-owned
subsidiary of FBOP ("CNB," and sometimes referred to herein as the "Surviving
Bank"), may enter into a Bank Agreement and Plan of Merger (the "Bank Merger
Agreement") providing for the merger (the "Bank Merger"), of Savings Institution
with and into CNB, with the Bank Merger to be consummated following the
consummation of the Merger (the Merger and the Bank Merger and the transactions
contemplated thereby are referred to herein as the "Transaction");
NOW, THEREFORE, for and in consideration of the premises and the mutual
agreements, representations, warranties and covenants herein contained and in
the Proxies, for the purpose of prescribing the terms and conditions of the
Merger, the manner of converting the common stock, $0.01 par value per share, of
Holding Company (the "Common Stock") into cash, and such other details and
provisions as are deemed desirable in connection with the Merger, the parties,
intending to be bound, hereby agree as follows:
ARTICLE I
MERGER
(a) MERGER. In accordance with the provisions of this Agreement and the
Delaware General Corporation Law ("DGCL"), at the Effective Time (as herein
defined), Acquisition shall be merged with and into Holding Company and the
separate existence of Acquisition thereupon shall cease. Following the Merger,
Holding Company shall continue as the surviving corporation ("Surviving
Corporation"). At Acquisition's option, subject to the filing of all necessary
applications and the receipt of all required regulatory approvals, the Merger
may be structured so that Holding Company merges into another direct or indirect
wholly-owned subsidiary of FBOP (such entity, if any, to be included in the
definition of "Acquisition"); provided, however, that (i) Acquisition shall
assign to such entity, and
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such entity shall assume, all rights and obligations of Acquisition under this
Agreement, (ii) the consideration to be paid to the holders of Holding Company
Common Stock is not thereby changed in kind or reduced in amount as a result of
such modification or the taxation of any amounts to be received by the holders
of Holding Company Common Stock is not altered and (iii) such modification will
not materially delay or jeopardize receipt of any required regulatory approvals
or any other condition to the obligations of FBOP and Acquisition set forth
herein.
(b) EFFECTIVE TIME. As soon as practicable after the satisfaction or
waiver of the conditions set forth in Article X, the parties hereto will file a
certificate of merger (the "Certificate of Merger") with the Secretary of State
of Delaware and make all other filings or recordings required by the DGCL in
connection with the Merger. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Secretary of State of Delaware,
or at such later time as is specified in the Certificate of Merger (the
"Effective Time").
(c) EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the DGCL. Without limiting the generality of the foregoing, and subject thereto,
at the Effective Time, all the properties, rights, privileges, powers and
franchise of the Constituent Corporations shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Constituent
Corporations shall become the debts, liabilities and duties of the Surviving
Corporation.
(d) PRIOR APPROVALS. The parties hereto acknowledge that the requisite
approvals for the Transaction must be received from or notices must be given to
certain federal governmental bodies and agencies including, but not limited to:
(i) the Office of Thrift Supervision of the Department of the Treasury (the
"OTS"); (ii) the Federal Deposit Insurance Corporation (the "FDIC"); (iii) the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"); and
(iv) any other regulatory authorities having jurisdiction, which approvals or
notices (x) shall not contain conditions that, individually or in the aggregate,
could likely have or lead to a Material Adverse Effect (as hereinafter defined)
on FBOP, CNB or Acquisition or (y) shall not, individually or in the aggregate,
so materially reduce the economic or business benefits of the transactions
contemplated by this Agreement to FBOP that had such condition or requirement
been known, FBOP, in its reasonable judgment, would not have entered into this
Agreement. The governmental bodies and agencies referred to in items
(i)-(iv) above are referred to herein as the "Applicable Governmental
Authorities".
(e) CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
Holding Company in effect at the time of the Merger shall be the Certificate of
Incorporation of the Surviving Corporation, until thereafter amended as provided
thereunder and in the DGCL.
(f) BYLAWS. The Bylaws of Acquisition in effect at the time of the Merger
shall be the Bylaws of the Surviving Corporation until altered, amended or
repealed, as provided thereunder and in the Certificate of Incorporation and the
DGCL.
(g) DIRECTORS AND OFFICERS. The directors and officers of Acquisition at
the time of the Merger shall be the directors and officers of the Surviving
Corporation, in each case to serve, in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation, until their successors
shall have been elected and shall qualify. If at the Effective Time a vacancy
shall exist on the Board of Directors or in any of the offices of the Surviving
Corporation, such vacancy may thereafter be filled in the manner provided by the
Bylaws of the Surviving Corporation.
(h) ADDITIONAL ACTIONS. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any further assignments
or assurances in law or any other acts are necessary or desirable (a) to best
perfect or confirm, of record or otherwise, in the Surviving Corporation, title
to and possession of any property or right of Acquisition acquired or to be
acquired by reason of, or as a result of, the Merger, or (b) otherwise to carry
out the purposes of this Agreement, Holding Company and its proper officers and
directors shall be deemed to have granted to the Surviving Corporation an
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irrevocable power of attorney to execute and deliver all such proper deeds,
assignments and assurances in law and to do all acts necessary or proper to
vest, perfect or confirm title to and possession of such property or rights in
the Surviving Corporation are fully authorized in the name of Holding Company or
otherwise to take any and all such actions.
(i) CONVERSION OF SHARES. The manner and basis of converting and
exchanging the shares of Holding Company Common Stock, and the manner and basis
of making distributions, if any, to stockholders of Holding Company, shall be as
follows:
(i) Each share of Common Stock of Holding Company which is issued and
outstanding immediately prior to the Effective Time other than Dissenting
Shares (as defined below) shall, by virtue of the Merger and without any
action on the part of the holder thereof, at and after the Effective Time be
converted into the right to receive $10.00 (the "Per Share Merger
Consideration") without interest thereon, after the date when such holder
satisfies the procedures contemplated by subpart (k) below in accordance
with the provisions of this Agreement.
(ii) At the Effective Time, Acquisition shall pay or cause to be paid to
each of the persons listed on Schedule 1(q) hereto, with respect to the
outstanding options for Holding Company Common Stock (without regard to the
expiration date thereof) (collectively, the "Options") set forth opposite
such person's name therein, an amount per share of Common Stock subject to
an Option equal to the excess of the Per Share Merger Consideration over the
exercise price per share of such Option, as set forth on Schedule 1(q) (the
"Cash Consideration Per Option"). Concurrently with the payment of the Cash
Consideration Per Option, each holder of an Option shall deliver to
Acquisition evidence satisfactory to Acquisition of the cancellation of such
Option. At the Effective Time, each Option shall be canceled and retired and
shall cease to exist and shall be deemed to represent only the right to
receive the Cash Consideration Per Option. Payment of the Cash Consideration
Per Option in accordance with this Article I(i)(ii) shall be deemed to be
full satisfaction of all rights pertaining to the Options. All amounts
payable under this Article I(i)(ii) shall be subject to any required
withholding of taxes and shall be paid without interest.
(iii) Each share of Holding Company Common Stock, if any, which is
issued and held in the treasury of Holding Company, shall, by virtue of the
Merger, at the Effective Time, be retired and canceled, and no cash or other
consideration shall be issued with respect thereto.
(iv) Each share of common stock, par value $1.00 per share, of
Acquisition issued and outstanding immediately prior to the Effective Time
shall be converted into and exchangeable for one share of common stock,
$0.01 par value per share, of the Surviving Corporation ("Surviving
Corporation Common Stock").
(j) TOTAL MERGER CONSIDERATION. Notwithstanding the preceding subparts of
this Article, except to the extent payments made to holders of Dissenting Shares
exceed the Per Share Merger Consideration, in no event shall the total cash
consideration paid by Acquisition hereunder (the "Aggregate Merger
Consideration") exceed $198,762,050 plus the cash payment for the Options as
described in subpart (i)(ii) above. To the extent that any of the Options are
exercised prior to the Closing, the $198,762,050 amount shall be increased by an
amount equal to the product of (A) the number of shares of Holding Company
Common Stock issued pursuant to the exercise of such Options and (B) $10.00.
(k) SURRENDER OF SHARES. As promptly as practicable after the Effective
Time, each holder of shares of Holding Company Common Stock shall, upon
presentation and surrender of the certificate or certificates therefor to the
Paying Agent (as defined below) for cancellation in accordance with the
transmittal materials described below, be entitled to receive in exchange
therefor a check or checks payable to such person representing the payment of
cash into which such holder's shares of Holding Company Common Stock have been
converted at the Effective Time. Each certificate which
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represented issued and outstanding shares of Holding Company Common Stock
immediately prior to the Effective Time shall be deemed canceled at the
Effective Time and shall represent only the right to receive cash for each share
represented by such certificate. In no event shall the holder of any such
surrendered certificates be entitled to receive interest on any of the funds to
be received in the Merger.
(l) DESIGNATION OF PAYING AGENT; INVESTMENT OF FUNDS. Registrar and
Transfer Company shall act as paying agent hereunder ("Paying Agent"), and
Acquisition and FBOP shall make available to Paying Agent at the Effective Time
(i) an amount in cash equal to the product of the Per Share Merger Consideration
times the number of shares of Holding Company Common Stock outstanding
immediately prior to the Effective Time, which shall not include the number of
shares of Holding Company Common Stock held in Holding Company's treasury, less
the number of Holding Company Dissenting Shares whose holders have complied with
the provisions of Section 262 of the DGCL as described in subpart (n) below at
or prior to the Effective Time and less any shares owned by Acquisition or any
other subsidiary or affiliate of Acquisition, and (ii) an amount in cash equal
to the aggregate Cash Consideration Per Option. The cash deposited with the
Paying Agent shall be invested by the Paying Agent as directed by Acquisition.
(m) TRANSMITTAL MATERIALS. As promptly as practicable after the Effective
Time, but in any event within three business days following the Effective Time,
Acquisition shall send or cause to be sent to each former holder of record of
shares of Holding Company Common Stock transmittal materials for use in
surrendering their certificate or certificates in exchange for cash. The letter
of transmittal will contain instructions with respect to the surrender of such
certificates. Acquisition shall instruct record date holders of Holding Company
Common Stock who hold such shares for the account of others to provide the
respective beneficial holders of such shares instructions with respect to the
surrender of their shares.
(n) DISSENTING SHARES. Each outstanding share of Holding Company Common
Stock as to which a proper written objection to the Merger is filed in
accordance with Section 262 of the DGCL and which is not voted in favor of the
Merger shall not be converted into or represent a right to receive cash
hereunder unless and until the holder shall have failed to perfect or shall have
effectively withdrawn or lost his or her right to appraisal of and payment for
such shares of Common Stock under Section 262 of the DGCL, at which time such
shares of Common Stock shall be converted into a right to receive cash in the
same manner and subject to the same conditions as provided for other outstanding
shares of Common Stock in this Article. All such shares of Holding Company
Common Stock as to which such a written objection is so filed and which are not
voted in favor of the Merger, except any such shares of Holding Company Common
Stock the holder of which shall have effectively withdrawn or lost his or her
right to appraisal of and payment for such shares of Common Stock under the DGCL
are herein called "Dissenting Shares" and each holder is herein called a
"Dissenting Shareholder." Holding Company shall give Acquisition prompt notice
upon receipt by Holding Company of any such written objection to the Merger.
Holding Company agrees that prior to the Effective Time it will not, except with
the prior written consent of Acquisition, voluntarily make any payment with
respect to, or settle or offer to settle, any such objection. Each Dissenting
Shareholder who becomes entitled, pursuant to the provisions of the DGCL, to
payment for the fair cash value of his or her shares of Holding Company Common
Stock shall receive payment therefor from Holding Company as the Surviving
Corporation (but only after the amount thereof shall have been agreed upon or
finally determined pursuant to such provisions), and such shares of Common Stock
shall be retired and canceled.
(o) TERMINATION OF PAYING AGENT'S DUTIES. Promptly following the date
which is twelve months after the Effective Time, the Paying Agent shall deliver
to FBOP all cash and other documents in its possession relating to the
transactions described in this Agreement, and the Paying Agent's duties shall
terminate. Thereafter, each holder of a certificate formerly representing shares
of Holding Company Common Stock who has not previously surrendered such
certificate may surrender such certificate to
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FBOP and (subject to applicable abandoned property, escheat and similar laws)
receive in exchange therefore the Per Share Merger Consideration for each share
of Holding Company Common Stock represented by such certificate.
(p) CLOSING OF HOLDING COMPANY'S TRANSFER BOOKS. At the Effective Time,
the stock transfer records of Holding Company shall be closed and no transfer of
shares of Holding Company Common Stock shall thereafter be made.
(q) EMPLOYEE STOCK OPTIONS; RESTRICTED STOCK. Schedule 1(q) hereto
contains an accurate and complete list of all outstanding options and restricted
stock awards, including the name of the grantee, date of grant, number of shares
and exercise price.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF HOLDING COMPANY
Holding Company represents and warrants to Acquisition and FBOP with respect
to Holding Company and the Subsidiaries (as defined below) as follows (it being
understood and acknowledged that no representations and warranties are made with
respect to BYL Bancorp, a California corporation, and BYL Bank Group, a
California commercial bank and wholly owned subsidiary of BYL Bancorp):
(a) ORGANIZATION AND STANDING OF HOLDING COMPANY. Holding Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Holding Company has the corporate power and authority
to own or lease all of its properties and assets and to carry on its business as
it is now being conducted, and is duly licensed or qualified to do business in
each jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary, except where the failure to be so
licensed or qualified would not have a Material Adverse Effect (as defined
below) on Holding Company and the Subsidiaries (defined below), taken as a
whole. Holding Company is duly registered as a savings and loan holding company
under the Home Owners' Loan Act, as amended ("HOLA"), and the regulations issued
thereunder.
As used in this Agreement, the term "Material Adverse Effect" or "Material
Adverse Change" means with respect to any person, any effect or change that
(i) is material and adverse to the financial condition, results of operations or
business of such person or (ii) materially impairs the ability of such person to
consummate the transactions contemplated by this Agreement or the Bank Merger
Agreement; provided, however, that Material Adverse Effect shall not be deemed
to include: (x) the impact of changes in (a) laws, regulations or policies of
any Applicable Governmental Authority or interpretations thereof, or
(b) generally accepted accounting principles, that in each case are generally
applicable to the banking industry; or (y) in the case of Holding Company,
actions taken or to be taken by Holding Company upon the written request of FBOP
and/or Acquisition pursuant to this Agreement or the Bank Merger Agreement.
(b) ORGANIZATION AND STANDING OF SAVINGS INSTITUTION. Savings Institution
is a federally-chartered stock savings and loan association, duly organized,
validly existing, and in good standing under the laws of the United States of
America, and Savings Institution has the requisite corporate power and authority
to enter into the Bank Merger. Savings Institution is duly authorized to conduct
a savings and loan business, is a member of the Federal Home Loan Bank of San
Francisco, and is duly authorized to operate each of its offices, including
branch offices (collectively, the main office and each branch location are
referred to herein as the "Branches"). Savings Institution is a wholly-owned
subsidiary of Holding Company.
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(c) HOLDING COMPANY SUBSIDIARIES. Schedule 2(c) hereto sets forth a list
of all of Holding Company's direct and indirect subsidiaries including Savings
Institution (hereinafter separately called a "Subsidiary" and collectively
called the "Subsidiaries"). The Schedule sets forth the authorized capital
stock, the number of shares duly issued and outstanding, the number so owned by
each shareholder of the Subsidiary and the jurisdiction of incorporation of each
Subsidiary. The shares of capital stock of the Subsidiaries are validly issued,
fully paid and non-assessable (subject to statutory obligations of holders, if
any), and are owned free and clear of any liens, claims, charges or
encumbrances. Except as disclosed on such Schedule, neither Holding Company nor
any of the Subsidiaries has any investment in any subsidiary or any investment
in any partnership, joint venture, limited liability company or similar entity,
all of which investments are owned free and clear of any liens, claims, charges
or encumbrances except as disclosed thereon. Each of the Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the corporate power to own or
lease its properties and carry on its business as now being conducted. Each of
the Subsidiaries is duly qualified or otherwise authorized to transact business
as a foreign corporation and is in good standing in every jurisdiction in which
such qualification or authorization is required by law to carry on its business
as now being conducted, except where the failure so to qualify or to be
authorized would not have a Material Adverse Effect on the assets, properties,
business or financial condition of Holding Company and the Subsidiaries, taken
as a whole. Schedule 2(c) sets forth a true and correct description of the
activities of each of the Subsidiaries. No certificate of authority identified
in such Schedule has been revoked, restricted, suspended, limited or modified
nor is any certificate of authority the subject of, nor to the knowledge of
Holding Company is there a basis for, a proceeding for revocation, restriction,
suspension, limitation or modification.
(d) CAPITALIZATION. The authorized capital stock of Holding Company
consists of 25,000,000 shares of Preferred Stock, $0.01 par value per share,
none of which has been issued, and 75,000,000 shares of Common Stock, par value
$0.01 per share, of which 19,876,205 shares are issued and outstanding as of the
date hereof. All of the issued and outstanding shares of Holding Company Common
Stock have been validly issued and are fully paid and non- assessable (subject
to statutory obligations of holders, if any) and free of preemptive rights. As
of the date hereof, 2,012,212 shares of Holding Company Common Stock were
reserved for issuance upon exercise of outstanding Holding Company stock options
granted pursuant to Holding Company's 1999 Stock Option Plan and 2000 Stock
Incentive Plan. Except for the options and shares specified above and as
reflected in Schedule 2(d), there is no contract, understanding, restriction or
agreement, including any voting trust or other agreement or understanding with
respect to the voting of any of the capital stock of Holding Company, or any
convertible, exchangeable or exercisable security, option, warrant, call, or
commitment on the part of Holding Company of any character relating to issued or
unissued shares of the capital stock of Holding Company.
(e) AUTHORIZATION. The Board of Directors of Holding Company has adopted
resolutions approving the Agreement and the Transaction and has authorized the
execution and delivery of the Agreement and has directed by resolution that the
Agreement be submitted to a vote of the holders of shares of Holding Company
Common Stock taken at a meeting called for the purpose of considering and acting
upon this Agreement. Holding Company has full power and authority to enter into
this Agreement and, upon appropriate consent of its stockholders in accordance
with law, subject to obtaining all required regulatory approvals, to consummate
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by Holding Company and constitutes the valid and legally binding
obligation of Holding Company, enforceable against it in accordance with its
terms, subject to bankruptcy, receivership, insolvency, reorganization,
moratorium or similar laws affecting or relating to creditors rights generally
and subject to general principles of equity.
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(f) CERTIFICATES OF INCORPORATION AND BYLAWS. Holding Company has
delivered to FBOP true and complete copies of its and each of the Subsidiaries'
Certificates of Incorporation and Bylaws as in effect as of the date hereof, and
in the case of Savings Institution, has delivered true and complete copies of
Savings Institution's Federal Stock Charter and Bylaws.
(g) CONSENTS AND APPROVALS. Except for the consents and approvals of the
Applicable Governmental Authorities, no filing with, and no permit,
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Holding Company of the transactions contemplated by this
Agreement and the Bank Merger Agreement.
(h) DEFAULTS AND CONFLICTS. Neither Holding Company, Savings Institution
or any other Subsidiary is or immediately prior to the Effective Time will be in
conflict with or default under its Certificate of Incorporation (or similar
organizational document) or Bylaws, or in default under any indenture or under
any material agreement or other material instrument to which it is a party or by
which it or any of its properties is bound or to which it is subject. Subject to
the receipt of all consents and approvals contemplated by this Agreement,
neither the execution and delivery of this Agreement, the consummation of the
Transaction nor the fulfillment of and compliance with the terms and provisions
hereof, will (i) violate any judicial, administrative or arbitral order, writ,
award, judgment, injunction or decree involving Holding Company, Savings
Institution or any other Subsidiary, (ii) conflict with the terms, conditions or
provisions of the charter or Bylaws of Holding Company, Savings Institution or
any other Subsidiary, (iii) conflict with, result in a breach of, constitute a
default under or accelerate or permit the acceleration of the performance
required by, any indenture or any agreement or other instrument to which Holding
Company, Savings Institution or any other Subsidiary is a party or by which
Holding Company, Savings Institution or any other Subsidiary is bound,
(iv) result in the creation of any lien, charge or encumbrance upon any of the
assets of Holding Company, Savings Institution or any other Subsidiary under any
such agreement or instrument, or (v) terminate or give any party thereto the
right to terminate any such indenture, agreement or instrument, except with
respect to (iii) or (iv) above, such as individually or in the aggregate could
not reasonably be expected to have a Material Adverse Effect on the Holding
Company and its Subsidiaries, taken as a whole, and which could not reasonably
be expected to jeopardize or delay consummation of the Transaction. Except as
disclosed in Schedule 2(h) hereto, no consent of any third party to any
indenture or any material agreement or other material instrument to which
Holding Company, Savings Institution or any other Subsidiary is a party is
required in connection with the Transaction. Holding Company agrees that prior
to the Effective Time it will use its best efforts to obtain all required
consents to the Transaction of parties to any such indenture, agreement, or
other instrument which is material to the business of Holding Company and its
Subsidiaries taken as a whole.
(i) SEC REPORTS; FINANCIAL STATEMENTS. Holding Company has filed all
required forms, reports, registration statements and documents with the
Securities and Exchange Commission (the "SEC"), since December 31, 1995
(collectively, the "SEC Reports"), each of which, as of its respective date,
complied in all material respects with all applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act") and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As of their respective
dates, none of the SEC Reports, including, without limitation, any financial
statements or schedules included therein, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements of Holding Company included in its Annual
Report on Form 10-K for the years ended December 31, 1997, 1998 and 1999, and
the unaudited consolidated interim financial statements included in its
Quarterly Report on Form 10-Q for the quarters ended March 31, 2000, June 30,
2000, and September 30, 2000 fairly present in conformity with generally
accepted accounting principles applied on a consistent basis (except as may be
indicated therein or in the notes thereto), the consolidated financial position
of Holding Company and its Subsidiaries as of
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the dates thereof and their consolidated statements of operations, stockholders'
equity, and cash flows for the periods then ended (in the case of any unaudited
interim financial statements, subject to (i) normal year-end adjustments and
(ii) standard limitations on the application of generally accepted accounting
principles).
Except as and to the extent reflected in the interim consolidated statement
of financial position of Holding Company and the Subsidiaries as of
September 30, 2000, and notes thereto (the "September 30, 2000 Balance Sheet")
or in Schedule 2(i) hereto, neither Holding Company nor any Subsidiary had, as
of September 30, 2000, any liability or obligation (absolute, contingent or
otherwise) except for contractual liabilities arising in the ordinary course
which are not required to be reflected in a balance sheet prepared in accordance
with generally accepted accounting principles. Except as and to the extent
disclosed in Schedule 2(i) hereto, neither Holding Company nor any Subsidiary
has incurred any liability or obligation (absolute, contingent or otherwise)
since September 30, 2000 other than in the ordinary course of business.
(j) REGULATORY REPORTS AND FILINGS. Holding Company, Savings Institution
and each Subsidiary has filed all reports, notices and other statements,
together with any amendments required to be made with respect thereto, if any,
that it was required to file with the OTS, the FDIC, the Federal Home Loan Bank,
and any other governmental agency or authority with jurisdiction over Holding
Company, Savings Institution or such Subsidiary and each such report, notice and
other statement, including the financial statements, exhibits and schedules
thereto, complied in all material respects with the relevant statutes, rules and
regulations enforced or promulgated by the regulatory authority with which it
was filed. No material deficiencies have been asserted by any such governmental
or regulatory body with respect to such registrations, filings and submissions
that have not been satisfied. Holding Company has furnished to FBOP or
Acquisition copies of all regulatory filings (and all related correspondence)
for Holding Company and any Subsidiary for and during the years ended
December 31, 1996, 1997, 1998 and 1999 and the quarters ended March 31, 2000,
June 30, 2000 and September 30, 2000 as filed with the OTS (the "Regulatory
Reports"). The Regulatory Reports, including, without limitation, the provisions
made therein for investments and the valuation thereof, and loan loss reserves,
together with the notes thereto, fairly present the financial position, assets,
liabilities, change in financial position, surplus and other funds of Holding
Company and Savings Institution as of the dates thereof and the results of its
operations for the periods indicated in conformity with regulatory accounting
principles prescribed or permitted by law or the rules and regulations of OTS,
applied on a consistent basis with prior periods, except as set forth therein.
Except for liabilities and obligations disclosed or provided for in the
Regulatory Reports, Savings Institution did not have, as of the respective dates
of each such Regulatory Reports, any liabilities or obligations (whether
absolute or contingent and whether due or to become due) except for contractual
liabilities arising in the ordinary course which are not required to be
reflected in regulatory financial statements. All books of account of Savings
Institution and each other Subsidiary fairly and accurately disclose in all
material respects all the transactions, properties, assets, investments,
liabilities and obligations of Savings Institution or the respective Subsidiary
and all such books of account are in the possession of Savings Institution or
the respective Subsidiary and are true and complete in all material respects.
(k) CHANGES SINCE SEPTEMBER 30, 2000. Except as disclosed in
Schedule 2(k) hereto, since September 30, 2000 there has been no Material
Adverse Change in the assets, properties, business, financial condition or
results of operations of Holding Company and its Subsidiaries, taken as a whole;
and neither Holding Company, Savings Institution nor any other Subsidiary has,
since September 30, 2000 (i) made any change in its authorized capital stock,
(ii) issued any stock options, warrants or other rights calling for the issue,
transfer, sale or delivery of its capital stock or other securities, (iii) paid
any stock dividend or made any reclassification in respect of its outstanding
shares of capital stock, (iv) issued, transferred, sold or delivered any shares
of its capital stock (or securities convertible into or exchangeable, with or
without additional consideration, for such capital stock), (v) purchased or
A-8
otherwise acquired for consideration any outstanding shares of its capital
stock, (vi) disposed of a material portion of its assets, properties or business
other than in the ordinary course of business, or (vii) authorized or made any
distribution to Holding Company's stockholders of any assets of Holding Company,
Savings Institution or any other Subsidiary, by way of cash dividends or
otherwise.
(l) PROPERTIES.
(i) REAL ESTATE AND MORTGAGES. Schedule 2(l)(i) hereto sets forth a
list and summary description of (a) all real property owned by Holding
Company or any Subsidiary and all buildings and other structures located on
such real property, (b) all leases, subleases or other agreements under
which Holding Company or any Subsidiary is the lessor or lessee of any real
property, (c) all unexpired options held by Holding Company or any
Subsidiary or contractual obligations on its part to purchase or acquire any
interest in real property, (d) all unexpired options granted by Holding
Company or any Subsidiary or contractual obligations on its part to sell or
dispose of any interest in real property, and (e) all mortgages held by
Holding Company or any Subsidiary (other than as investment securities),
identifying all such mortgages, if any, for which deficiency notices have
been issued or that are otherwise not current. Except as disclosed in
Schedule 2(l)(i) hereto as of the date hereof such leases, subleases,
options and other agreements are in full force and effect and neither
Holding Company nor any Subsidiary has received any notice of any material
default thereunder.
(ii) INVESTMENTS. The common stock, preferred stock, bonds, and other
investments owned by Holding Company or any Subsidiary as of the date hereof
are evidenced by written instruments and certificates (except where in
non-certificated form), and to the best knowledge of Holding Company after
due inquiry, are valid and genuine in all material respects. All such bonds,
stocks, and other investments are permissible investments under applicable
laws and regulations. Except as disclosed in Schedule 2(l)(ii) hereto, none
of such investments is in default on the payment of principal, interest or
other required distributions.
(iii) TITLE TO PROPERTY; ZONING. Except as disclosed in
Schedule 2(l)(iii) hereto, Holding Company and each Subsidiary has good and
marketable title to all real properties reflected in Section 2(l)(i) and
good and marketable title to all other assets and properties shown as owned
by it on Holding Company's September 30, 2000 Balance Sheet or acquired
since that date (except properties disposed of in the ordinary course of
business subsequent to said date), in each case free of all mortgages,
liens, security interests, charges and encumbrances of any nature
whatsoever, other than liens for Taxes (as defined below) not yet due and
payable, except such as individually or in the aggregate could not
reasonably be expected to have a Material Adverse Effect on Holding Company
and its Subsidiaries taken as a whole. All such real property complies with
all applicable private agreements, zoning requirements, Environmental Laws
(defined below), and other governmental laws and regulations relating
thereto, except where the failure to do so could not reasonably be expected
to have a Material Adverse Effect on the Holding Company and its
Subsidiaries taken as a whole. There are no condemnation proceedings pending
or, to the best knowledge of Holding Company, threatened with respect to the
Real Property.
(m) ENVIRONMENTAL LAWS. Except as disclosed in Schedule 2(m) hereto, and
to the best knowledge of Holding Company after due inquiry, but without the
requirement that Holding Company conduct a Phase I environmental review as part
of its due inquiry, Holding Company and each Subsidiary has conducted and is
conducting its business in compliance with all applicable federal, state, and
local laws, regulations and requirements currently in force relating to the
protection of the environment ("Environmental Laws"), except where the failure
to do so could not reasonably be expected to have a Material Adverse Effect on
the Holding Company and its Subsidiaries taken as a whole. There is no pending
or, to the best knowledge of Holding Company, threatened, civil or criminal
litigation, written notice of violation, or administrative proceeding relating
to such
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Environmental Laws involving Holding Company or any Subsidiary. There has not
been and to Holding Company's best knowledge, there is no condition existing,
with respect to the release, emission, discharge or presence of hazardous
substances in connection with the business of Holding Company or any Subsidiary,
which condition could subject Holding Company or any Subsidiary to any
proceeding or remediation under such Environmental Laws or could otherwise have
a Material Adverse Effect on the Holding Company and its Subsidiaries taken as a
whole. Holding Company and each Subsidiary has received all approvals, consents,
licenses, and permits with respect to environmental matters necessary to carry
on its business substantially as currently conducted.
(n) PROPRIETARY RIGHTS. Schedule 2(n) hereto discloses all the trademarks,
trade names and service marks (and all registrations and applications with
respect thereto) (collectively the "Proprietary Rights") used in the business of
Holding Company or any Subsidiary. Except as otherwise disclosed in such
Schedule, either Holding Company or one of the Subsidiaries owns or is duly
authorized to use all of such Proprietary Rights. Such Proprietary Rights as
used by Holding Company or a Subsidiary in its business do not violate or
infringe upon the proprietary rights of any third party, except where such
violation or infringement could not reasonably be expected to have a Material
Adverse Effect on Holding Company or the Subsidiaries, taken as a whole, and
there is no claim, action, proceeding or investigation pending or, to the best
of Holding Company's knowledge, threatened against Holding Company or any of the
Subsidiaries with respect to any such Proprietary Rights.
(o) AGREEMENTS. Except as set forth and described on Schedule 2(o) hereto,
neither Holding Company nor any Subsidiary is a party to nor is Holding Company
or any Subsidiary bound by any oral or written (i) contract for the employment
of any officer or employee, or contract with a former officer or employee
pursuant to which payments are required to be made at any time following the
date hereof, or contract with any labor union or association representing any
employee, (ii) stock ownership, profit-sharing, bonus, deferred compensation,
stock option, severance pay, pension, retirement or similar plan or agreement,
(iii) mortgage, indenture, note or installment obligation the unpaid balance of
which exceeds $500,000, or other instrument for or relating to any borrowing of
money by Holding Company or any of the Subsidiaries, the unpaid balance of which
exceeds $500,000, (iv) guaranty of any obligation for borrowings or otherwise
which in the aggregate exceed $200,000, (v) agreement or arrangement for the
sale or lease of any material amount of its assets or part of its business other
than in the ordinary course of business or for the grant of preferential rights
to purchase or lease any material amount of its assets or part of its business,
(vi) agreement or arrangement obligating it to register any of its outstanding
shares or other securities with the SEC, (vii) agreement or arrangement with any
officer or director of Holding Company, any Subsidiary, or any other affiliate
of Holding Company, or (viii) contract, agreement or other instrument which is
material to the assets, properties, business, financial condition or results of
operations of Holding Company or any Subsidiary. True and correct copies of each
such document described in (i)--(viii) have been provided to FBOP or
Acquisition. All contracts, plans, mortgages, indentures, guaranties and other
agreements disclosed in Schedule 2(o) hereto are in full force and effect as of
the date hereof, and neither Holding Company nor any Subsidiary or any other
party thereto is in default in any material respect under such agreement and no
event has occurred which with the passage of time or the taking of any action,
or both, would constitute a default in any material respect under any such
contract or agreement. No party thereto may terminate any of such agreements by
reason of the transactions contemplated by this Agreement (other than change of
control provisions in employment agreements).
A-10
(p) LITIGATION; CLAIMS. Except as disclosed in Schedule 2(p) hereto, there
are no actions, suits, claims, investigations or proceedings pending, settled
since January 1, 2000, or to the best knowledge of Holding Company, threatened,
against or affecting Holding Company or any Subsidiary or its properties or
businesses, at law or in equity, or before any governmental or administrative
body or agency or before any arbitrator (i) which involve a claim in excess of
$200,000, or (ii) which alone or in the aggregate, could have a Material Adverse
Effect on Holding Company or any Subsidiary. Holding Company is not aware of any
facts that would reasonably afford a basis for any such actions, suits, claims,
investigations or proceedings. Except as may be disclosed on such Schedule,
there are no unresolved disputes under any contract to which Holding Company or
any Subsidiary is a party or by which Holding Company or any Subsidiary is bound
involving in the aggregate an amount in excess of $100,000. Neither Holding
Company nor any Subsidiary is in default with respect to any order, writ, award,
judgment, injunction or decree of any court, governmental or administrative body
or agency, or arbitrator applicable to it which could have a Material Adverse
Effect on the Holding Company or any Subsidiary.
(q) COMPLIANCE WITH LAWS. Holding Company and each of the Subsidiaries has
complied with all laws, regulations, opinions, orders, ordinances, judgments or
decrees of all governmental authorities (federal, state, local, foreign or
otherwise) applicable to its businesses, including without limitation, the FDIC
and OTS, except where the failure to have so complied would not, individually or
in the aggregate, have a Material Adverse Effect on the Holding Company or any
Subsidiary. Except as disclosed in Schedule 2(q) hereto, neither Holding Company
nor any Subsidiary has received any notification of any asserted failure by it
to comply with any of such laws.
(r) TAXES.
(i) Except as disclosed in Schedule 2(r) hereto: (a) all Tax Returns (as
defined below) required to be filed with the appropriate taxing authorities
have been filed by or on behalf of Holding Company or any Subsidiary and all
Taxes (as defined below) due have been paid or provided for in full;
(b) there are no liens for Taxes upon the assets of Holding Company or any
Subsidiaries except statutory liens for Taxes not yet due; (c) there are no
outstanding deficiencies in respect of Taxes asserted or threatened or
assessments of Taxes made or threatened, nor any administrative or judicial
proceedings pending or threatened concerning Taxes, with respect to Holding
Company or any Subsidiary and any deficiencies, assessments or proceedings
shown in Holding Company Schedule are being contested in good faith through
appropriate proceedings; (d) Holding Company has established on the
financial statements described in Section 2(i) of this Agreement reserves
and accruals adequate for the payment of all Taxes accruing with respect to
or payable by Holding Company and each Subsidiary for all periods reflected
therein; (e) there are no outstanding agreements or waivers extending the
statutory period of limitations applicable to any Tax Returns required to be
filed with respect to Holding Company or any Subsidiary; and (f) neither
Holding Company nor any Subsidiary has requested any extension of time
within which to file any Tax Return, which Tax Return has not been filed.
(ii) The appropriate income Tax Returns of Holding Company and each
Subsidiary have been examined by (a) the Internal Revenue Service or the
statute of limitations has expired for all periods up to and including
December 31, 1996, and (b) the taxing authorities of all of the states
disclosed in Schedule 2(c) or the statute of limitations has expired for all
periods up to and including December 31, 1996, respectively, and there are
no outstanding or unresolved proposed adjustments.
(iii) Except as disclosed in Schedule 2(r)(iii) hereto, no power of
attorney has been granted by Holding Company or any Subsidiary with respect
to any matter relating to Taxes which is currently in force.
A-11
(iv) The consummation of the transactions contemplated by this Agreement
will not give rise to any payments by Holding Company or any Subsidiary
which payments will not be deductible (in whole or in part) by reason of
Sections 280G or 162(m) of the Internal Revenue Code (the "Code").
For purposes of this Agreement, the term "Taxes" shall mean all taxes,
charges, fees, levies or other assessments, including without limitation, all
net income, gross income, premium or privilege, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, estimated, severance, stamp, occupation, property or other
taxes, customs duties, fees, assessments, or charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any governmental authority (domestic or foreign) upon Holding
Company or any Subsidiary and the term "Tax Returns" shall mean all returns,
declarations, reports, estimates, and statements, regarding Taxes, required to
be filed under United States federal, state, local or any foreign laws.
(s) RELATED PARTY TRANSACTIONS. Except as disclosed in Schedule 2(s)
hereto, and other than transactions exclusively between or among Holding Company
and/or any of the Subsidiaries, neither Holding Company nor any Subsidiary has
made any loan to any director, officer or other Affiliate (as defined below in
Article V(b)) of Holding Company or a Subsidiary which remains outstanding nor
has Holding Company or any Subsidiary entered into any agreement, other than an
agreement referred to in subpart (o) hereof, for the purchase or sale of any
property or services from or to any director, officer or other Affiliate of
Holding Company or a Subsidiary.
(t) EMPLOYEE BENEFIT PLANS.
(i) Schedule 2(t)(i) hereto sets forth a true and complete list of each
employee benefit plan, as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and each other plan,
arrangement and agreement providing employee benefits (collectively the
"Plans"), that covers current or former employees of Holding Company or any
Subsidiary or affiliate and is presently maintained by Holding Company or
any Subsidiary or any affiliate thereof or by any trade or business, whether
or not incorporated (an "ERISA Affiliate"), which together with Holding
Company would be deemed a "single employer" within the meaning of
Section 4001 of ERISA. None of the Plans is a "multiemployer plan," as
defined in Section 3(37) of ERISA. Holding Company has delivered or made
available to FBOP or Acquisition: copies of all such Plans; any related
trust agreements, group annuity contracts, insurance policies or other
funding agreements or arrangements relating thereto; the most recent
determination letter, if any, from the Internal Revenue Service with respect
to each of the Plans which is subject to ERISA ("ERISA Plans"); actuarial
valuations, if applicable, for the most recent plan year for which such
valuations are available; the current summary plan descriptions; and the
annual return/report on Form 5500 and summary annual reports for each of the
Plans for each of the last three years.
(ii) Each of the ERISA Plans is in compliance in all material respects
with all applicable provisions of law, including the Code and ERISA. Neither
Holding Company nor any ERISA Affiliate currently maintains or sponsors a
defined benefit pension plan as defined in Section 414(j) of the Code and
neither Holding Company nor any ERISA Affiliate has ever maintained or
sponsored any such plan that could give rise to a liability against Holding
Company or any Subsidiary.
(iii) The written terms of each of the Plans, and any related trust
agreement, group annuity contract, insurance policy or other funding
arrangement are in compliance with all applicable laws in all material
respects including ERISA, the Code, and the Age Discrimination in Employment
Act, as applicable, and each of such Plans has been administered in
substantial compliance with such requirements.
A-12
(iv) Except with respect to income taxes on benefits paid or provided,
no income, excise or other tax or penalty (federal or state) has been waived
or excused, has been paid or is owed by any person (including, but not
limited to, any Plan, any Plan fiduciary, Holding Company and ERISA
Affiliates) with respect to the operations of, or any transactions with
respect to, any Plan. No action has been taken, nor has there been any
failure to take any action, nor is any action or failure to take action
contemplated, that would subject any person or entity to any material
liability for any tax or penalty in connection with any Plan. No reserve for
any taxes or penalties has been established with respect to any Plan, nor
has any advice been given to any person with respect to the need to
establish such a reserve.
(v) There are no (A) actions, suits, arbitrations or claims (other than
routine claims for benefits), (B) legal, administrative or other proceedings
or governmental investigations or audits, or (C) complaints to or by any
governmental entity, which are pending, anticipated, or to the Holding
Company's best knowledge, threatened, against the Plans or their assets.
(vi) The present value of the future cost to Holding Company and ERISA
Affiliates of post-retirement medical benefits that Holding Company or any
ERISA Affiliate is obligated to provide, calculated on the basis of
actuarial assumptions Holding Company considers reasonable estimates of
future experience and which have been provided to Acquisition, does not
exceed the amount specified in Schedule 2(t)(vi) hereto.
(vii) Neither Holding Company nor any ERISA Affiliate, nor any of the
ERISA Plans, nor any trust created thereunder, nor any trustee or
administrator thereof has engaged in a transaction in connection with which
Holding Company or any ERISA Affiliate, any of the ERISA Plans, any such
trust, or any trustee or administrator thereof, or any party dealing with
the ERISA Plans or any such trust could be subject to either a civil penalty
assessed pursuant to Section 409 or 502(i) of ERISA or a tax imposed
pursuant to Section 4975 or 4976 of the Code. Neither Holding Company nor
any ERISA Affiliate is, or, as a result of any actions, omissions,
occurrences or state of facts existing prior to the Effective Time, may
become liable for any tax imposed under Section 4978 of the Code.
(u) INSURANCE. All properties of Holding Company and each Subsidiary are
covered by valid and currently effective insurance policies issued in favor of
Holding Company or a Subsidiary and such insurance policies provide Holding
Company and its Subsidiaries with coverage and limits for its operations
consistent with past practices and reasonably believed by the Holding Company to
be adequate. Schedule 2(u) hereto sets forth a true and correct list of all
insurance policies covering Holding Company and the Subsidiaries. Holding
Company or a Subsidiary is included as an insured party under such policies or
has full rights as a loss payee. No notice of cancellation or termination has
been received with respect to any such policy. Such policies will not be
terminable or cancelable by reason of this Agreement and the consummation of the
transactions contemplated hereby.
(v) INTENTIONALLY OMITTED.
(w) DEPOSITS. Schedule 2(w) hereto is a schedule of the aggregate deposit
accounts of Savings Institution, prepared as of the date indicated thereon,
listing by category and by Branch the amount of such deposits, together with the
amount of accrued but unpaid interest thereon (the "Deposits"). All such
Deposits are insured to the fullest permissible extent by the Savings
Association Insurance Fund ("SAIF") administered by the FDIC. All related
insurance premiums due and owing have been paid to the FDIC as of the date
hereof. Savings Institution has, and will have at the Effective Time, all rights
and full authority to transfer the Deposits pursuant to the Bank Merger without
restriction to the extent customary for a SAIF-insured institution (subject to
any notification or similar requirements pursuant to laws and regulations
limiting deposit insurance to $100,000 per account). As of the date hereof, with
respect to the Deposits, subject to immaterial bookkeeping errors, Savings
Institution has
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administered all of the Deposits in accordance with good and sound financial
practices and procedures, and has properly made all appropriate credits and
debits thereto.
(x) LOANS.
(i) All loans of Savings Institution (the "Loans") and loan commitments
extended by Savings Institution and any extensions, renewals or
continuations of such Loans and loan commitments were made in accordance
with applicable regulatory requirements in the ordinary course of business.
The Loans are evidenced by appropriate and sufficient documentation based
upon customary and ordinary past practices for federal savings institutions.
(ii) All documents and instruments which evidence the Loans are in all
material respects legal and enforceable in accordance with the terms
thereof, except as may be limited by bankruptcy, insolvency, moratorium or
other laws affecting creditors generally or by the exercise of judicial
discretion, and authorized under applicable federal and state laws and
regulations. For purposes of the foregoing sentence, it is agreed and
understood that the phrase "enforceable in accordance with the terms
thereof" shall not mean that the borrower has the financial ability to pay a
loan or that the collateral is sufficient in value to result in payment of
the loan secured thereby.
(iii) Except for loans pledged to the Federal Home Loan Bank or
participations purchased or sold by the Savings Institution or loans held in
custody and in each case as fully described at Schedule 2(x) hereto, the
note evidencing each Loan and the collateral documents securing each Loan
have not been assigned or pledged, the Savings Institution has good and
marketable title thereto, and the Savings Institution is the sole owner and
holder of each note evidencing a Loan and each collateral document securing
such Loan, and except as fully described at Schedule 2(x), each Loan and
each collateral document securing a Loan is free and clear of any and all
prior liens, claims, encumbrances, participation interests, equities,
pledges, charges or security interests of any nature.
(y) RESERVES. The loan loss reserves of Savings Institution, as set forth
on the September 30, 2000 financial statements have been computed in accordance
with generally accepted methods and principles consistently applied and, in all
cases, have been properly computed in all material respects and in management's
opinion are adequate under applicable requirements of law and generally accepted
accounting standards to provide for possible losses on Loans outstanding.
(z) AGREEMENTS WITH REGULATORY AGENCIES. Except as set forth in
Schedule 2(z) hereto, neither Holding Company nor any of its Subsidiaries is
subject to any cease-and-desist or other order issued by, or is a party to any
written agreement, consent agreement or memorandum of understanding (each a
"Regulatory Agreement"), with any regulatory agency or other government entity
that restricts in any respect the conduct of its business or that relates to its
capital adequacy, its credit policies or its management, nor has Holding Company
or any of its Subsidiaries been notified by any regulatory agency or other
governmental entity that it is considering issuing or requesting any Regulatory
Agreement. Except as set forth in Schedule 2(z) hereto, no regulatory agency has
initiated any investigation or proceeding into the business or operations of
Holding Company or any of its Subsidiaries.
(aa) INFORMATION FOR REGULATORY APPROVALS. The information furnished or to
be furnished by Holding Company or Savings Institution in any regulatory
application filed by Holding Company, Savings Institution, FBOP or Acquisition
in connection with the Transaction, will be true and complete in all material
respects as of the date so furnished.
(ab) GOVERNMENTAL NOTICES. Neither Holding Company nor Savings Institution
has received notice from any federal, state, or other governmental agency
indicating that such agency would oppose or not grant or issue its consent or
approval, if requested, with respect to the Transaction. To the best knowledge
of Holding Company, there are no facts that could reasonably be expected to have
an
A-14
adverse effect on the ability of Holding Company or Savings Institution to
obtain all requisite regulatory consents or to perform their respective
obligations under this Agreement and in connection with the Transaction.
(ac) SEC FILINGS. None of the information contained in the proxy statement
to be mailed to the stockholders of Holding Company in connection with the
Merger or in any amendments thereof or supplements thereto (the "Proxy
Statement") will, at the time of (i) the first mailing thereof, and (ii) the
meeting of stockholders to be held in connection with the Merger, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided
that the foregoing representation shall not apply to information supplied by
Acquisition or FBOP in writing expressly for inclusion in the Proxy Statement.
(ad) FINDERS AND INVESTMENT BANKERS. Neither Holding Company nor any
Subsidiary has retained any broker, finder or other agent or incurred any
liability for any brokerage fees, commissions or finders' fees with respect to
the Transaction except for Holding Company's retention of Sandler O'Neill &
Partners, L.P. ("Sandler O'Neill") and Keefe Bruyette & Woods, Inc. ("Keefe
Bruyette") pursuant to the terms of their agreements dated November 29, 2000.
True and correct copies of the agreements with Sandler O'Neill and Keefe
Bruyette have been delivered to FBOP.
(ae) THIRD PARTY DISCUSSIONS. Holding Company is not currently negotiating
or discussing with any third party a possible sale or merger of Holding Company
or any Subsidiary or a substantial portion of any of their assets or business.
(af) DISCLOSURE. No representation or warranty of Holding Company and no
statement or information relating to Holding Company or any Subsidiary or their
respective businesses or properties contained in (i) this Agreement (including
the Schedules hereto), or (ii) in any certificate furnished or to be furnished
to FBOP or Acquisition pursuant to this Agreement contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary to make the statements made herein or therein, in light of the
circumstances in which they were made, not misleading.
(ag) BONUSES; ACCRUED VACATION. Bonuses paid or payable by the Holding
Company, Savings Institution and the other Subsidiaries during or for the fiscal
year ended December 31, 2000 shall not exceed $2,500,000 in the aggregate, and
liabilities for accrued vacation, if any, for employees of any of Holding
Company, Savings Institution and any other Subsidiary shall not, at
December 31, 2000 exceed $200,000 in the aggregate.
(ah) EXPENSES. The sum of all third party fees and expenses incurred by
Holding Company and Savings Institution in connection with the Transaction,
including finders' and brokers' fees, legal expenses and filing and printing
fees shall not exceed in the aggregate $3,750,000.
(ai) CHANGE IN CONTROL PAYMENTS. The following sets forth a list of all
cash payments due to officers and employees of Holding Company, Savings
Institution or any Subsidiary under any employment, severance or other agreement
as a result of the Transaction:
NAME AMOUNT
- ---- ----------
Rudolf P. Guenzel........................................... $1,301,370
J. Michael Holmes........................................... $ 795,718
William W. Flader........................................... $ 646,046
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUISITION AND FBOP
FBOP and Acquisition each represent and warrant to Holding Company as
follows:
(a) ORGANIZATION OF ACQUISITION AND FBOP. Acquisition is a corporation
duly organized, validly existing and in good standing under the laws of
Delaware. Acquisition is a wholly-owned subsidiary of FBOP. FBOP is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Illinois.
(b) AUTHORIZATION. The Boards of Directors of FBOP and Acquisition have
adopted resolutions approving the Agreement and the Transaction and have
authorized the execution and delivery of this Agreement. Acquisition and FBOP
have full power and authority to enter into this Agreement and, subject to
obtaining all required regulatory approvals, to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Acquisition and FBOP and constitutes the valid and legally binding obligation of
Acquisition and FBOP, enforceable against them in accordance with its terms,
subject to bankruptcy, receivership, insolvency, reorganization, moratorium or
similar laws affecting or relating to creditors rights generally and subject to
general principles of equity.
(c) CONSENTS AND APPROVALS. Except for consents and approvals of the
Applicable Governmental Authorities, no filing with, and no permit,
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Acquisition and FBOP of the transactions contemplated by
this Agreement.
(d) DEFAULTS AND CONFLICTS. Subject to the receipt of all consents and
approvals contemplated by this Agreement, the execution and delivery of this
Agreement, the consummation of the transactions contemplated hereby or the
fulfillment of and compliance with the terms and provisions hereof will not
(i) violate any judicial or administrative order, writ, award, judgment,
injunction or decree involving Acquisition or FBOP or (ii) conflict with any of
the terms, conditions or provisions of the charter or bylaws of Acquisition or
FBOP. No consent of any third party to any indenture or any material agreement
or other material instrument to which Acquisition or FBOP is a party is required
in connection with the Transaction.
(e) SEC FILINGS. None of the information supplied or to be supplied by
Acquisition or FBOP in writing expressly for inclusion in the Proxy Statement
will, at the time of (i) the first mailing thereof and (ii) the meeting of
stockholders to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(f) FUNDS AVAILABLE. Acquisition and FBOP have or will have available to
them sufficient funds to perform all of their obligations pursuant to the
Merger.
(g) FINDERS AND INVESTMENT BANKERS. FBOP and Acquisition will be
responsible for any of their respective brokerage fees, commissions or finders'
fees with respect to the Transaction.
(h) GOVERNMENTAL NOTICES. Neither FBOP nor Acquisition has received any
notice from any federal, state, or other governmental agency indicating that
such agency would oppose or not grant or issue its consent or approval, if
requested, with respect to the Transaction. To the best knowledge of Acquisition
and FBOP, there are no facts that could reasonably be expected to have an
adverse effect on the ability of Acquisition or FBOP to obtain all requisite
regulatory consents or to perform their respective obligations under this
Agreement.
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(i) ARTICLES; BYLAWS. FBOP will deliver to Holding Company true and
complete copies of its Articles of Incorporation and Bylaws as in effect as of
the date hereof.
(j) ACCESS TO CERTAIN INFORMATION. For a period of 14 days from the date
hereof, FBOP shall make available to Holding Company FBOP's consolidated
financial statements for the year ended December 31, 1999 and the quarters ended
March 31, 2000, June 30, 2000 and September 30, 2000.
ARTICLE IV
RIGHT TO INVESTIGATE
Holding Company shall afford (during regular business hours) to the officers
and authorized representatives of Acquisition and FBOP reasonable access to the
offices, properties, books, contracts, commitments and records (including all
relevant computer files and databases) of Holding Company and Savings
Institution in order that FBOP and Acquisition may have full opportunity to make
such investigations as they shall desire of the affairs of Holding Company,
Savings Institution and the other Subsidiaries. The officers of Holding Company
shall furnish Acquisition and FBOP with such additional financial and operating
data and other information as to the assets, properties and business of Holding
Company, Savings Institution and the other Subsidiaries as Acquisition or FBOP
shall from time to time reasonably request; provided that such requested data
and information may be presented in the format maintained by Holding Company in
the normal course of its business. Holding Company, Savings Institution and the
Subsidiaries shall consent to the review by the officers and authorized
representatives of Acquisition or FBOP of the reports and working papers of
Holding Company's independent auditors (upon reasonable advance notice) and to
discussions by the officers and authorized representatives of Acquisition or
FBOP with parties with which Holding Company, Savings Institution and the other
Subsidiaries have business relationships.
ARTICLE V
COVENANTS OF HOLDING COMPANY
The covenants in this Article V relate to Holding Company and the
Subsidiaries, but specifically do not include BYL Bancorp or BYL Bank Group.
(a) Operation in Ordinary Course. From the date hereof to the Effective
Time, each of Holding Company, Savings Institution and the other Subsidiaries
shall: (a) not engage in any transaction except in the ordinary course of
business and shall conduct its business consistent with past practices;
(b) maintain the Branches in a condition substantially the same as on the date
of this Agreement, reasonable wear and use excepted; (c) maintain its books of
accounts and records in the usual, regular and ordinary manner; and (d) duly
maintain compliance in all material respects with all laws, regulatory
requirements and agreements to which it is subject or by which it is bound.
Without limiting the generality of the foregoing, prior to the Effective Time,
Holding Company, Savings Institution and other Subsidiaries shall not, without
the prior written consent of FBOP:
(1) fail to maintain its tangible property and assets in their present
state of repair, order and condition, reasonable wear and tear and damage by
fire or other casualty excepted;
(2) fail to maintain its books, accounts and records in accordance with
generally accepted accounting principles consistently applied;
(3) fail to comply in all material respects with all applicable laws and
regulations;
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(4) make, renew or modify the terms (including, but not limited to, any
release or substitution of collateral, change of the interest rate, or
release or substitution of any guarantor) of any loan, letter of credit or
other extension of credit, or commitment to make a loan, in excess of
$2,000,000, provided, however, that loans which are originated pursuant to
binding commitments entered into prior to the date hereof and loans that are
secured by secondary market qualified mortgages on single-family dwellings
shall be permitted under this subsection;
(5) except for the terminations of benefit agreements listed on
Schedule 5(a)(5) hereto, enter into, adopt, amend or terminate any bonus,
profit sharing, compensation, termination, stock option, stock appreciation
right, restricted stock, performance unit, pension, retirement, deferred
compensation, employment, severance or other employee benefit agreements,
trusts, plans, funds or other arrangements for the benefit or welfare of any
director, officer or employee;
(6) authorize or enter into any employee contract or employment
agreement, grant any pay raise or increase in any manner the compensation or
fringe benefits of any director, officer or employee or pay any benefit not
required by an existing plan or arrangement or authorize or enter into any
contract, agreement, commitment or arrangement to do any of the foregoing;
provided however, that bonuses described in Article II (ag) hereof and pay
raises to employees pursuant to regularly scheduled reviews in the ordinary
course of business not to exceed 6% of such employee's current salary shall
not be prohibited hereunder; and provided further that nothing contained in
this subparagraph (6) shall restrict the hiring of non-officer, clerical or
teller employees whose compensation does not exceed $50,000 per year;
(7) Intentionally Omitted;
(8) authorize or enter into, or amend, modify or supplement any contract
or commitment (excluding all loans and loan commitments and except as
otherwise set forth in Article V(a)(14)) which provides for the receipt or
payment of amounts, in the aggregate, in excess of $100,000;
(9) sell, transfer, convey, assign or otherwise dispose of any of its
assets or properties (other than assets which are being sold pursuant to
binding commitments entered into prior to the date hereof and immaterial
assets or properties sold, transferred, conveyed, assigned or otherwise
disposed of in the ordinary course of business consistent with past
practices and policies), or authorize any of the foregoing, or sell loans in
bulk other than (i) up to $5,000,000 per month of residential mortgage loans
sold in the ordinary course of business pursuant to existing and on-going
commitments, and (ii) other loans which are sold in the ordinary course of
business pursuant to existing written commitments, which commitments will
not be amended, modified or supplemented except in accordance with the terms
of this Agreement;
(10) authorize or make any expenditures for assets in excess of $100,000
for any item, or lease or encumber any assets outside the ordinary course of
business;
(11) authorize or make any amendment to its charter or bylaws;
(12) fail to keep in force all insurance policies presently in effect,
including insurance of deposit accounts with the FDIC;
(13) do any act which, or omit to do any act the omission of which, will
cause a material breach of any material contract, commitment or obligation;
(14) make any borrowing, incur any debt (other than (i) deposits in the
ordinary course of business and consistent with past practice and
(ii) overnight borrowings from the Federal Home Loan Bank and federal funds
purchased or securities sold under agreements to repurchase, in each case in
the ordinary course of business and for less than one year in duration and
consistent with past practices), or assume, guarantee, endorse or otherwise
become liable with respect to any such obligations;
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(15) fail to maintain deposit rates substantially in accord with the
average of the prevailing rates of competing financial institutions in the
local Los Angeles area market, provided that in no event will Savings
Institution accept any deposits for which the interest rate payable thereon
exceeds by more than 1.00 percent the average interest rate being paid on
similar deposits by savings banks and savings and loan associations in the
local Los Angeles area market;
(16) waive, release or cancel any claims in excess of $100,000 against
third parties or debts in excess of $100,000 owing to it, or any rights
which have any value in excess of $100,000;
(17) make any changes in its accounting systems, policies, principles or
practices, except as required by changes in laws or regulations or generally
accepted accounting principles;
(18) enter into, authorize, or permit any transaction, except as now
existing and disclosed to Acquisition or FBOP, with any affiliate of Holding
Company or any Subsidiary (other than transactions between Holding Company
and Savings Institution on the one hand, and Peoples Preferred Capital
Corporation on the other hand, in the ordinary course of business and
consistent with past practices);
(19) make any capital contribution to any person or purchase or invest in
any securities issued by any person other than securities which are issued
or guaranteed by the United States government or an agency thereof having a
maturity of more than twelve (12) months from the date of purchase;
(20) sell any investment securities except in the ordinary course of
business consistent with past practices;
(21) enter into, amend or renew any data processing service contract;
(22) materially change or amend its schedules and policies relating to
service charges or service fees;
(23) fail to use its best efforts to (i) preserve the present business
organizations intact, (ii) keep available the services of its present
officers and employees or (iii) preserve its present relationships with
persons having business dealings with it;
(24) fail to maintain, consistent with its past practices, a reserve for
possible loan and lease losses which is adequate under the requirements of
generally accepted accounting principles to provide for possible losses, net
of recoveries relating to loans previously charged off, on loans outstanding
(including, without limitation, accrued interest receivable);
(25) make any material change in any lease of real property;
(26) fail to file in a timely manner all required filings with all proper
regulatory authorities and fail to cause such filings to be true and correct
in all material respects;
(27) foreclose upon or take deed or title to any commercial real estate
without first conducting a Phase I environmental assessment of the property;
or foreclose upon such commercial real estate if such environmental
assessment indicates the presence of hazardous material in amounts that, if
such foreclosure were to occur, would be reasonably likely to result in a
material adverse effect on Savings Institution;
(28) amend or modify any of its promotional, deposit account or account
loan practices, other than amendments or modifications in the ordinary
course of business; or
(29) (i) make any change in its authorized capital stock, (ii) issue any
stock options, or issue any warrants, or other rights calling for the issue,
transfer, sale or delivery of its capital stock or other securities,
(iii) pay any stock dividend or make any reclassification in respect of its
outstanding shares of capital stock, (iv) except for the issuance of Common
Stock upon exercise of
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any Options, issue, sell, exchange or deliver any shares of its capital
stock (or securities convertible into or exchangeable, with or without
additional consideration, for such capital stock), (v) purchase or otherwise
acquire for consideration any outstanding shares of its capital stock, or
(vi) declare, pay or set apart in respect of its capital stock any dividends
or other distributions or payments.
For purposes of this Article V(a), FBOP and Acquisition shall be deemed to
have consented to any action described in (1)--(29) above if the chief financial
officer of FBOP shall have received a written request for consent to any action
described in (1)--(29) above, which request describes in sufficient detail the
proposed action, and FBOP shall have failed to respond to such request within
five (5) business days of his receipt of such request.
(b) EXCLUSIVITY. Except as may be required by any regulatory authority, or
except to the extent required by fiduciary obligations under applicable law in
reliance upon the opinion of outside counsel, neither Holding Company, Savings
Institution, nor any other Subsidiary or any of their respective directors,
officers, employees, representatives, investment bankers (including but not
limited to Sandler O'Neill and Keefe Bruyette), agents or Affiliates (as defined
below) shall, directly or indirectly, solicit, initiate, encourage or respond
favorably to inquiries or proposals from, or provide any confidential
information or access to Savings Institution's or Holding Company's premises to,
or participate in any discussions or negotiations with, any person (other than
Acquisition and FBOP and their directors, officers, employees, representatives
and agents) concerning (i) any merger, sale of assets not in the ordinary course
of business, acquisition, business combination, change of control or other
similar transaction involving Holding Company or Savings Institution, or
(ii) any purchase or other acquisition by any person of any shares of capital
stock of Holding Company or Savings Institution, or (iii) any issuance by
Holding Company or Savings Institution of any shares of its capital stock. It is
understood that notwithstanding the foregoing or anything to the contrary
herein, Holding Company will promptly advise FBOP or Acquisition of, and
communicate to FBOP or Acquisition the terms and conditions of (and the identity
of the person making), any such inquiry or proposal received, and will promptly
furnish FBOP or Acquisition with copies of any documents received and summaries
of any other communications with respect thereto. Holding Company will cease any
such existing activities, discussions or negotiations with any person conducted
heretofore with respect to any of the foregoing.
As used in this Agreement, the term "Affiliate" shall mean, with respect to
any specified person, (1) any other person which, directly or indirectly, owns
or controls, is under common ownership or control with, or is owned or
controlled by, such specified person, (2) any other person which is a director,
officer or partner, of the specified person or a person described in clause (1)
of this paragraph, (3) another person of which the specified person is a
director, officer or partner, (4) another person in which the specified person
has a substantial beneficial interest or as to which the specified person serves
as trustee or in a similar capacity, or (5) any relative or spouse of the
specified person or any of the foregoing persons, any relative of such spouse or
any spouse of any such relative.
(c) STOCKHOLDER MEETING. Holding Company shall take all steps necessary to
duly call, give notice of, convene and hold a meeting of its stockholders to be
held as soon as is practicable for the purpose of voting upon the approval of
the Merger and this Agreement. Holding Company will, through its Board of
Directors, use its best efforts to obtain stockholder approval and, except to
the extent otherwise specifically required by the Board of Directors' fiduciary
duties under applicable law as set forth in Article V(b) above, will recommend
to its stockholders approval of this Agreement and the transactions contemplated
hereby and such other matters as may be submitted to its stockholders in
connection with this Agreement. As soon as practicable, Holding Company shall
prepare and cause to be filed with the SEC the related proxy material and shall
use its best efforts to obtain clearance by the SEC for the mailing of such
material to Holding Company stockholders. FBOP or Acquisition shall have the
right to review the proxy material prior to filing with the SEC.
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(d) CONSENTS. Holding Company shall, and shall cause the Savings
Institution to, as soon as practicable, prepare or cause to be prepared and make
all filings required to be made by either of them, if any, with Applicable
Governmental Authorities and shall use its best efforts to obtain all consents,
waivers, approvals, authorizations, rulings or orders from all governmental or
regulatory bodies or other entities and furnish true, correct and complete
copies of each thereof to FBOP or Acquisition.
(e) REPORTS. Promptly after filing with the applicable authorities,
Holding Company shall provide to FBOP or Acquisition copies of: (i) all reports
filed with the SEC, including its Annual Report on Form 10-K for the year ended
December 31, 2000, which shall conform to the requirements for SEC Reports
specified in Article II(i) above; and (ii) its Regulatory Reports, which shall
conform to the requirements for Regulatory Reports specified in Article II(j)
and (v) above.
(f) NOTICE. Holding Company shall give prompt notice to FBOP or
Acquisition of (i) any notice of, or other communication relating to, a default
or event which with notice or lapse of time or both would become a default,
received by Holding Company or any Subsidiary subsequent to the date of this
Agreement and prior to the Effective Time, under its charter or bylaws or any
indenture, or material instrument or agreement, to which Holding Company or any
Subsidiary is a party, by which it or any of its properties is bound or to which
it or any of its properties is subject, (ii) any notice or other communication
from any third party alleging that the consent of such third party is or may be
required in connection with the transactions contemplated hereby and (iii) any
matter which, if it had occurred prior to the date hereof, would have been
required to be included on the Schedules hereto.
(g) REGULATORY MATTERS. Holding Company shall, from the date hereof
through the Effective Time, keep FBOP and Acquisition advised with respect to
any and all regulatory matters or proceedings affecting Holding Company or
Savings Institution and shall promptly forward to FBOP or Acquisition copies of
all correspondence, notices, orders, memoranda or other written material
received from any regulatory agency (to the extent permitted by law) and shall
provide FBOP and Acquisition full access to its regulatory files to the extent
permitted by law.
(h) SCHEDULES. Within seven (7) days of the date hereof, Holding Company
will deliver to FBOP each of the Schedules to this Agreement, which Schedules
will be attached hereto and made a part hereof, and which Schedules will be in
form and substance acceptable to FBOP in its sole discretion, pursuant to such
format and presentation as Holding Company and FBOP shall mutually agree.
(i) SUPPLEMENTAL INFORMATION; DISCLOSURE SUPPLEMENTS. From time to time
prior to the Effective Time, Holding Company will promptly disclose in writing
to FBOP and Acquisition any matter hereafter arising which, if existing,
occurring or known at the date of this Agreement would have been required to be
disclosed or which would render inaccurate any of the representations,
warranties or statements set forth in this Agreement. From time to time prior to
the Effective Time, Holding Company will promptly supplement or amend the
Schedules delivered in connection with the execution of this Agreement to
reflect any matter which, if existing, occurring or known at the date of this
Agreement, would have been required to be set forth or described in such
Schedule or which is necessary to correct any information in such Schedule that
has been rendered inaccurate thereby.
(j) COOPERATION. Holding Company and its Subsidiaries shall execute such
documents and other papers, provide such information, and take such further
actions as may be reasonably requested by FBOP or Acquisition to carry out the
provisions hereof and to consummate the Transaction.
(k) CONDITIONS PRECEDENT. Holding Company and the Subsidiaries shall use
their commercially reasonable best efforts to cause all of the conditions
precedent to the consummation of the Transaction applicable to them to be met.
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(l) BEST EFFORTS. Subject to the terms and conditions of this Agreement,
Holding Company and the Subsidiaries shall use their commercially reasonable
best efforts to take or cause to be taken all actions necessary, proper or
advisable to consummate the Merger on a prompt basis.
(m) PROXIES. Holding Company shall deliver to FBOP irrevocable proxies, in
substantially the form attached hereto as Exhibit A (the "Proxies"), from
Arbur, Inc. and the individuals set forth on Schedule 7(m), which shall include
all of the members of the board of directors of Holding Company, to vote the
shares of Common Stock owned by such persons.
ARTICLE VI
COVENANTS OF ACQUISITION AND FBOP
(a) CONSENTS. Acquisition and FBOP shall, as soon as practicable, prepare
and make all necessary filings with all Applicable Governmental Authorities and
shall use their best efforts to obtain all consents, waivers, approvals,
authorizations, rulings or orders from all governmental or regulatory bodies or
other entities and furnish true, correct and complete copies of each to Holding
Company.
(b) COOPERATION. Acquisition and FBOP shall execute such documents and
other papers, provide such information, and take such further actions as may be
reasonably requested by Holding Company to carry out the provisions hereof and
to consummate the transactions contemplated hereby.
(c) CONDITIONS PRECEDENT. Acquisition and FBOP shall use their
commercially reasonable best efforts to cause all of the conditions precedent to
the consummation of the Transaction applicable to each to be met.
(d) BEST EFFORTS. Subject to the terms and conditions of this Agreement,
Acquisition and FBOP will use their commercially reasonable best efforts to take
or cause to be taken all actions necessary, proper or advisable to consummate
the Merger on a prompt basis.
(e) SHAREHOLDER RIGHTS AGREEMENT. Acquisition and CNB will assume the
rights and obligations of Holding Company and Savings Institution to the extent
required under that certain Shareholder Rights Agreement dated as of April 20,
1998 by and among Holding Company, Savings Institution, the Trustees of the
Estate of Bernice Pauahi Bishop, BIL Securities (Offshore) Limited and
Arbur, Inc.
(f) BENEFIT PLANS AND ARRANGEMENTS. As soon as administratively
practicable after the Effective Time, FBOP and CNB shall take reasonable action
so that employees of Holding Company and Savings Institution who, in the sole
discretion of FBOP or CNB, are retained by FBOP and/or CNB and become employees
thereof, shall be entitled to participate in the respective FBOP and CNB
employee benefit plans of general applicability. For purposes of determining
eligibility to participate in and the vesting of benefits under the FBOP and CNB
employee benefit plans (other than under any defined benefit plan), FBOP and CNB
shall recognize years of service with Holding Company and Savings Institution
prior to the Effective Time.
(g) INDEMNIFICATION; INSURANCE.
(i) From and after the Effective Time through the fourth anniversary of
the Effective Time, FBOP and CNB (each an "Indemnifying Party" and together
the "Indemnifying Parties"), agrees to indemnify and hold harmless each
present director, officer or employee of Holding Company or Savings
Institution, determined as of the Effective Time (the "Indemnified
Parties"), against any costs or expenses (including reasonable attorneys'
fees), judgments, fines, losses, claims, damages or liabilities incurred in
connection with any claim, action, suit, proceeding or investigation,
whether civil, criminal, administrative or investigative, arising out of
matters existing or occurring at or prior to the Effective Time, whether
asserted or claimed prior to, at or after the Effective Time, to the fullest
extent to which Holding Company or Savings Institution is or was required by
law or their respective Bylaws to indemnify such Indemnified Parties and in
the manner to which it
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could indemnify such parties under the Bylaws of Holding Company and Savings
Institution, in each case as in effect on the date hereof, provided,
however, that all rights to indemnification in respect of any claim asserted
or made within such period shall continue until the final disposition of
such claim.
(ii) Any Indemnified Party wishing to claim indemnification under this
Article VI(g), upon learning of any such claim, suit, proceeding or
investigation, shall promptly notify the appropriate Indemnifying Party
thereof, but the failure to so notify shall not relieve the Indemnifying
Party of any liability it may have to such Indemnified Party if such failure
does not materially prejudice the Indemnifying Party. In the event of any
such claim, action, suit, proceeding or investigation (whether arising
before or after the Effective Time), (i) the Indemnifying Party shall have
the right to assume the defense thereof and the Indemnifying Party shall not
be liable to such Indemnified Parties for any legal expenses of other
counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if the
Indemnifying Party elects not to assume such defense or a conflict of
interest exists or arises between the Indemnified Party and the Indemnifying
Parties, the Indemnified Parties may retain counsel which is reasonably
satisfactory to the Indemnifying Party, and the Indemnifying Party shall
pay, promptly as statements therefor are received, the reasonable fees and
expenses of such counsel for the Indemnified Parties (which may not exceed
one firm in any jurisdiction); (ii) the Indemnified Parties will cooperate
in the defense of any such matter; (iii) the Indemnifying Party shall not be
liable for any settlement effected without its prior written consent; and
(iv) the Indemnifying Party shall have no obligation hereunder in the event
that a federal or state banking agency or a court of competent jurisdiction
shall determine that indemnification of an Indemnified Party in the manner
contemplated hereby is prohibited by applicable laws and regulations.
(iii) Holding Company shall be permitted to maintain up to $15,000,000
in aggregate directors' and officers' liability insurance coverage for acts
or omissions occurring prior to the Effective time by persons who are
currently covered by the directors' and officers' liability insurance policy
maintained by Holding Company and to purchase an extension of the claims
reporting period for the policy providing such coverage for a period of four
years following the Effective Date.
(h) STANDSTILL. For the period beginning on the date of this Agreement and
ending on the earlier of (x) December 21, 2000, (y) the date of termination of
this Agreement by FBOP or Acquisition pursuant to Article XI(a)(v), or (z) the
date that FBOP delivers to Holding Company written notice of its intent to waive
its right to terminate this Agreement pursuant to Article XI(a)(v), neither FBOP
nor Acquisition nor any of their respective subsidiaries nor any of the
shareholders, directors, officers or affiliates (as defined in Rule 12b-2 under
the Exchange Act) of any of the foregoing will in any manner directly or
indirectly: (i) acquire, purchase, agree to acquire or offer, assist, advise or
encourage any other person in acquiring any additional equity securities of
Holding Company, any warrants or options to acquire such securities, any
securities convertible into or exchangeable for such securities or any other
right to acquire such securities; (ii) have any discussions or enter into any
arrangements, understandings or agreements (whether written or oral) with, or
advise, encourage, finance or assist, any other persons in connection with any
of the foregoing; and (iii) make any publicly disclosed proposal regarding any
of the foregoing or make any proposal, statement or inquiry, or disclose any
intention, plan or arrangement (whether written or oral) inconsistent with the
foregoing.
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ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF ACQUISITION AND FBOP
The obligations of Acquisition and FBOP under this Agreement to cause this
Agreement to become effective and have the transactions contemplated hereby be
consummated are, at their option, subject to the conditions that:
(a) VALIDITY OF REPRESENTATION AND WARRANTIES. The representations and
warranties of Holding Company herein contained shall be true and correct in
all material respects when made and, in addition, shall be true and correct
in all material respects on and at the Effective Time with the same force
and effect as though made on and at the Effective Time.
(b) CONSENTS. All required consents, waivers, approvals,
authorizations or orders in connection with the Transaction (other than
those set forth in Article IX(a)) shall have been obtained by Holding
Company and copies of the same shall have been delivered to Acquisition and
FBOP.
(c) COMPLIANCE WITH COVENANTS; SCHEDULES. Holding Company shall have
performed in all material respects all obligations and agreements and
complied in all material respects with all covenants and conditions
contained in this Agreement to be performed and complied with by it at or
prior to the Effective Time. The Schedules and information disclosed to FBOP
pursuant to Articles V(h) and V(i) hereof shall be in form and substance
acceptable to FBOP in its sole discretion and shall not, in the case of
Schedules provided pursuant to Article V(i), be materially different from
the Schedules provided to FBOP pursuant to Article V(h).
(d) OPINION OF COUNSEL. FBOP and Acquisition shall have received the
opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel for Holding
Company, specified in Article X(b)(ii).
(e) APPROVAL OF HOLDING COMPANY STOCKHOLDERS. This Agreement shall
have been approved and adopted at a duly called meeting of the stockholders
of Holding Company Common Stock by at least a majority of the issued and
outstanding shares of Holding Company Common Stock entitled to vote thereon.
(f) DISSENTING HOLDING COMPANY SHARES. The holders of not more than
10% of the issued and outstanding shares of Holding Company Common Stock at
the Effective Time shall have delivered written notice of intent to demand
payment of the fair value oftheir shares of Holding Company Common Stock
pursuant to Section 262 of the DGCL.
(g) RESIGNATIONS. The directors of Holding Company, Savings
Institution and the Subsidiaries shall have tendered their resignations in
writing, effective on the Effective Time.
(h) ADVERSE CHANGES. From September 30, 2000 to the Effective Time,
there shall not have been any Material Adverse Effect on Holding Company and
Savings Institution, taken as a whole, but not including Material Adverse
Effects which result solely from FBOP's unreasonable failure to consent to
actions under Article V(a).
(i) EFFECTIVE TIME. The Effective Time shall be no later than
5:00 P.M. Central Time on June 30, 2001; provided however, that if the
condition in Article IX(a) shall not have been satisfied prior to June 30,
2001, but all other conditions to Closing shall be substantially satisfied,
the Effective Time shall automatically be extended for an additional period
of 90 days.
(j) STOCK OPTION PLANS AND INCENTIVE PLANS; OPTIONS. Acquisition shall
have received evidence satisfactory to it that, upon payment of the Cash
Consideration Per Option, each Option shall have been canceled, and any
other options or warrants for Common Stock and all related plans have been
cancelled.
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ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF HOLDING COMPANY
The obligations of Holding Company under this Agreement to cause this
Agreement to become effective and have the transactions contemplated hereby be
consummated are, at its option, subject to the conditions that:
(a) VALIDITY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Acquisition and FBOP herein contained shall have been true
and correct in all material respects when made and, in addition, shall be
true and correct in all material respects on and at the Effective Time with
the same force and effect as though made on and at the Effective Time.
(b) CONSENTS. All consents, waivers, approvals, authorizations or
orders (other than those set forth in Article IX(a)) required to be obtained
by Acquisition and FBOP shall have been obtained and copies of the same
shall have been delivered to Holding Company.
(c) COMPLIANCE WITH COVENANTS. Acquisition and FBOP shall have
performed in all material respects all obligations and agreements and
complied in all material respects with all covenants and conditions
contained in this Agreement to be performed and complied with by them at or
prior to the Effective Time.
(d) OPINION OF COUNSEL. Holding Company shall have received the
opinion of Lord, Bissell & Brook, counsel for Acquisition, specified in
Article X(c)(ii).
(e) FAIRNESS OPINION. Holding Company shall have received an opinion
from Keefe, Bruyette dated as of the date of this Agreement to the effect
that, in its opinion, the consideration to be paid to the shareholders of
Holding Company hereunder is fair to such shareholders from a financial
point of view.
(f) EFFECTIVE TIME. The Effective Time shall be no later than
5:00 P.M. Central Time on June 30, 2001; provided however, that if the
condition in Article IX(a) shall not have been satisfied prior to June 30,
2001, but all other conditions to Closing shall be substantially satisfied,
the Effective Time shall automatically be extended for an additional period
of 90 days.
(g) FUNDS TO PAYING AGENT. FBOP or Acquisition shall have made
available to the Paying Agent the funds as described at Article I(l) hereof.
ARTICLE IX
CONDITIONS APPLICABLE TO ACQUISITION, FBOP AND HOLDING COMPANY
The obligations of Acquisition, FBOP and Holding Company under this
Agreement to cause this Agreement to become effective and have the transactions
contemplated hereby be consummated are subject to the following terms and
conditions:
(a) GOVERNMENTAL APPROVALS. To the extent required by applicable law
or regulation, the OTS, the Federal Reserve Board, the FDIC and/or such
other state or federal agencies whose approval of the Transaction and the
other transactions contemplated by this Agreement is so required, shall have
approved or authorized the Transaction and all of the transactions
contemplated by this Agreement and such approval (x) shall not contain
conditions that, individually or in the aggregate, could likely have or lead
to a Material Adverse Effect on FBOP, CNB or Acquisition or (y) shall not,
individually or in the aggregate, so materially reduce the economic or
business benefits of the transactions contemplated by this Agreement to FBOP
that had such condition or requirement been known, FBOP, in its reasonable
judgment, would not have entered into this Agreement. All other statutory or
regulatory requirements for the valid
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consummation of the Transaction shall have been satisfied and all other
required governmental consents and approvals shall have been obtained.
(b) INJUNCTION. The consummation of the Merger shall not have been
restrained, enjoined or prohibited by any court or governmental authority of
competent jurisdiction. No material litigation or administrative proceeding
shall be pending or threatened as of the Effective Time seeking to restrain,
enjoin or prohibit the consummation of this Agreement, the Merger or the
Transaction.
ARTICLE X
CLOSING AND CLOSING DOCUMENTS
(a) CLOSING. The closing ("Closing") under this Agreement shall be held at
the offices of Lord, Bissell & Brook in Los Angeles, California, as promptly as
practicable after the fulfillment or waiver of all the terms and conditions
contained in Articles VII, VIII, IX and X of this Agreement, or at such other
place and time as shall be mutually agreeable to the parties. The required
number of fully executed and verified copies of the Certificate of Merger shall
be filed immediately after the Closing with the Secretary of State of Delaware.
(b) HOLDING COMPANY CLOSING DOCUMENTS. At the Closing, Holding Company
shall deliver, or cause to be delivered, to FBOP and Acquisition:
(i) A certificate of Holding Company, signed by its Chairman or
President, which shall confirm the compliance in all material respects by
Holding Company with its covenants and agreements contained in this
Agreement and the accuracy in all material respects of the representations
and warranties made by Holding Company in this Agreement at and as of the
Effective Time as if made at such time and as contemplated by this
Agreement.
(ii) The opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel for
Holding Company, dated the Effective Time, and in form and substance
reasonably satisfactory to FBOP and Acquisition.
(iii) A certificate of Holding Company's inspector of elections as to
the vote taken at the meeting of the holders of shares of Holding Company
Common Stock with respect to this Agreement and as to the holders of shares
of Holding Company Common Stock that shall have demanded payment of the fair
value of their shares of Holding Company Common Stock pursuant to the DGCL.
(iv) Written resignations, effective the Effective Time, of all of the
directors of Holding Company and the Subsidiaries.
(v) Certificate of Incorporation and Certificate of Good Standing of
Holding Company each certified by the Secretary of State of Delaware within
ten (10) days prior to the Closing.
(c) ACQUISITION CLOSING DOCUMENTS. At the Closing, Acquisition shall
deliver, or cause to be delivered, to Holding Company:
(i) A Certificate of Acquisition, signed by its President or Vice
President, which shall confirm the compliance in all material respects by
Acquisition with its covenants and agreements contained in this Agreement
and the accuracy in all material respects of the representations and
warranties made by it in this Agreement at and as of the Effective Time as
if made at such time and as contemplated by this Agreement.
(ii) The opinion of Lord, Bissell & Brook, counsel for Acquisition,
dated the Effective Time, and in form and substance reasonably satisfactory
to Holding Company.
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ARTICLE XI
TERMINATION AND TERMINATION FEE
(a) TERMINATION. This Agreement and the Transaction may be terminated at
any time prior to the filing of the Certificate of Merger with the Secretary of
State of Delaware, whether before or after action by the stockholders of Holding
Company as contemplated by Article V(k) of this Agreement and without further
approval by the outstanding stockholders of Holding Company (i) by mutual
written consent of the Boards of Directors of Acquisition and Holding Company,
(ii) by action of the Board of Directors of Acquisition in the event of a
failure of a condition set forth in Article VII of this Agreement as of the time
such condition is required hereunder to be fulfilled, (iii) by action of the
Board of Directors of Holding Company in the event of failure of a condition set
forth in Article VIII of this Agreement as of the time such condition is
required hereunder to be fulfilled, or (iv) by action of the Board of Directors
of either Acquisition or Holding Company in the event of a failure of a
condition set forth in Article IX of this Agreement as of the time such
condition is required hereunder to be fulfilled, or (v) by action of the Board
of Directors of Acquisition or FBOP at any time on or prior to December 21, 2000
if the results of FBOP's investigation of the business, operations, assets,
liabilities, capital, prospects, investments, affairs, condition (financial or
otherwise) of Holding Company and its Subsidiaries are not satisfactory to FBOP
or Acquisition in their sole discretion, whether or not any of the foregoing
would constitute a Material Adverse Change.
(b) TERMINATION FEE. If Holding Company and Acquisition fail to consummate
the Merger and (i) Holding Company or Savings Institution enters into a letter
of intent, commitment letter or other written agreement with a third party
regarding a merger, consolidation, sale of assets or other similar transaction
involving Holding Company or Savings Institution within twelve (12) months
following the termination of the Merger, and (ii) Holding Company shall not have
terminated this Agreement by reason of paragraphs (a)(iii) or (a)(iv) above, and
(iii) Acquisition shall not have terminated this Agreement by reason of
paragraph (a)(i) or (a)(v) above, Holding Company shall, upon execution of any
such letter or agreement, promptly pay Ten Million Dollars ($10,000,000) to
FBOP, and Holding Company shall have no further liability or obligation to FBOP
or Acquisition with respect to this Agreement.
(c) SURVIVAL OF RIGHTS. Except as otherwise provided in paragraph (b)
above, nothing in this Article XI or in this Agreement shall be construed as
limiting the rights of any party in the event of a breach by any party of this
Agreement.
ARTICLE XII
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
Except for the agreements set forth in Articles I, II(ad), V(j), VI(e),
VI(f), VI(g), VII(g),XI, XII, XIII(a), XIII(f) and XIII(g), no representations,
warranties or agreements shall survive beyond the Effective Time.
ARTICLE XIII
MISCELLANEOUS
(a) PAYMENT OF EXPENSES. Whether or not the Merger shall be consummated,
each party hereto shall pay its own expenses incident to preparing for, entering
into and carrying out this Agreement and incident to the consummation of the
Merger and the Transaction.
(b) ENTIRE AGREEMENT. This Agreement (together with the Schedules and
Exhibits hereto and the documents referred to herein) contains, and is intended
as, a complete statement of all of the terms of
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the arrangements between the parties with respect to the matters provided for
herein, and supersedes any previous agreements and understandings between the
parties with respect to those matters.
(c) MODIFICATIONS, AMENDMENTS AND WAIVERS. At any time prior to the
Effective Time, the parties hereto may, by written agreement, (a) extend the
time for the performance of any of the obligations or other acts of the parties
hereto, (b) waive any inaccuracies in the representations and warranties
contained in this Agreement or in any document delivered pursuant hereto,
(c) waive compliance with any of the covenants or agreements contained in this
Agreement, or (d) make any other modification of this Agreement approved by the
respective Boards of Directors of the parties hereto. This Agreement shall not
be altered or otherwise amended except pursuant to an instrument in writing
executed and delivered on behalf of each of the parties hereto. For the
convenience of the parties hereto, this Agreement may be executed in any number
of counterparts, and each such counterpart shall be deemed to be an original
instrument, and all such counterparts shall together constitute the same
agreement.
(d) ASSIGNMENT; GOVERNING LAW. Except as provided in Article I(a) hereto,
this Agreement shall not be assignable by any of the parties hereto and shall be
construed in accordance with the laws of the State of Illinois.
(e) SCHEDULES. All information set forth in the Schedules hereto shall be
deemed a representation and warranty of Holding Company as to the accuracy and
completeness of such information.
(f) PRESS RELEASES. Except as may otherwise be required by law, no
publicity release or announcement concerning this Agreement or the transactions
contemplated hereby shall be made prior to the Effective Time without advance
approval thereof by Holding Company and FBOP. Holding Company and FBOP will
cooperate with each other in the development and distribution of all news
releases and other public information disclosures with respect to this
Agreement, the Transaction or any of the transactions contemplated hereby or
thereby.
(g) NOTICES. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, overnight
express service or confirmed facsimile transmission as follows:
If to Holding Company: PBOC Holdings, Inc.
5900 Wilshire Blvd.
Los Angeles, CA 90036
Facsimile: 323-965-6216
Attn: Rudolf P. Guenzel
With a copy to: Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
Facsimile: 202-347-2172
Attn: Norman B. Antin
Jeffrey D. Haas
If to FBOP or FBOP Corporation
Acquisition: 11 West Madison Street
Oak Park, IL 60302
Facsimile: 708-445-3223
Attn: Michael E. Kelly
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With a copy to: Lord, Bissell & Brook
115 S. LaSalle Street
Chicago, IL 60603
Facsimile: 312-443-0336
Attn: Edward C. Fitzpatrick
(h) ATTORNEYS' FEES. If any action at law or in equity, including an
action for declaratory relief is brought to enforce or interpret the provisions
of this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees from the other party, which fees shall be in addition to any
other relief which may be awarded.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the day and year first above written.
PBOC HOLDINGS, INC.
Attest:
By:
Name:
Title:
FBOP ACQUISITION COMPANY
Attest:
By:
Name:
Title:
FBOP CORPORATION
Attest:
By:
Name:
Title:
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APPENDIX B
__________________, 2001
Board of Directors
PBOC Holdings, Inc.
5900 Wilshire Boulevard
Los Angeles, CA 90036
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of PBOC Holdings, Inc. ("PBOC") of the Merger
Consideration (as defined below) set forth in the Agreement and Plan of Merger,
dated as of December 8, 2000 (the "Agreement") by and between FBOP Corporation
("FBOP"), FBOP Acquisition Company ("Acquisition"), a wholly owned subsidiary of
FBOP, and PBOC.
As more fully described in the Agreement, and subject to the terms and
conditions thereof, (i) Acquisition will be merged with and into PBOC (the
"Merger") and (ii) each outstanding share of common stock, par value $0.01 per
share, of PBOC, other than dissenting shares, will be converted into and
exchangeable for the right to receive $10.00 in cash, without interest thereon
(the "Merger Consideration"). Keefe, Bruyette & Woods, Inc. ("KBW") has assumed
for purposes of its opinion, that the Merger will be consummated on the terms
contemplated by the Agreement.
KBW as part of its investment banking business is continually engaged in the
valuation of banking businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. As specialists in the
securities of banking companies we have experience in, and knowledge of, the
valuation of banking enterprises. In the ordinary course of our business as a
broker-dealer, we may purchase securities from and sell securities to PBOC and
FBOP. We may also trade the debt and equity securities of PBOC and FBOP for our
own account and for the accounts of our customers and, accordingly, may at any
time hold a long or short position in such securities. We have acted as a
financial advisor to the Board of Directors of PBOC in rendering this fairness
opinion and will receive a fee from PBOC for our services, a significant portion
of which is payable only upon the consummation of the Merger. We will also
receive a fee for rendering this opinion.
In connection with this opinion, we have reviewed, among other things:
(i) the Agreement and Plan of Merger; (ii) certain publicly available financial
statements and other historical financial information of PBOC that we deemed
relevant; (iii) certain publicly available information of FBOP that we deemed
relevant; (iv) certain internal financial analyses and forecasts of PBOC
prepared by management of PBOC and the views of senior management of PBOC
regarding PBOC's business, financial condition, results of operations and future
prospects; (v) the views of senior management of FBOP, based on certain limited
discussions with certain members of senior management, regarding FBOP's ability
to obtain regulatory approval of the Merger and to fund the Merger Consideration
(vi) the publicly reported historical price and trading activity for PBOC's
common stock, including comparison of certain financial and stock market
information for PBOC with similar publicly available information for certain
other companies the securities of which are publicly traded; (vii) the financial
terms of recent business combinations in the savings institution industry, to
the extent publicly available; (viii) the current market environment generally
and the banking environment in particular;
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and (ix) such other information, financial studies, analyses and investigations
and financial, economic and market criteria as we considered relevant.
In conducting our review and arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of all of the financial and other
information provided to us or publicly available and we have not assumed any
responsibility for independently verifying any of such information. We have
relied upon the management of PBOC as to the reasonableness and achievability of
the forecasts (and the assumptions and bases therefor) provided to us, and we
have assumed that such forecasts reflect the best currently available estimates
and judgments of PBOC and that such forecasts will be realized in the amounts
and in the time period currently estimated by such management. We have also
assumed that the aggregate allowances for loan losses for PBOC are adequate to
cover such losses. We have also relied upon the accuracy and completeness of
statements of management of FBOP as to the availability of resources to fund the
Merger Consideration. In rendering our opinion, we have not made or obtained any
evaluations or appraisals of the property of PBOC or FBOP nor have we examined
any individual credit files.
Our opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Events occurring after the date hereof could materially affect this
opinion. We have not undertaken to update, revise, reaffirm or withdraw this
opinion or otherwise comment upon events occurring after the date hereof. We are
expressing no opinion herein as to the prices at which PBOC's common stock will
trade at any time. In opining on the fairness to holders of PBOC stock of the
Merger Consideration to be received by them, we have not opined on the fairness
relative to the amount of consideration which may be paid to shareholders had
PBOC sought to enter into alternative transactions with other buyers.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of PBOC in its evaluation of the proposed
Merger and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on any
matters relating to the proposed Merger.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, it is
our opinion that, as of the date hereof, the Merger Consideration to be received
by the holders of PBOC common shares, pursuant to the Agreement, is fair to such
shareholders from a financial point of view.
Very truly yours,
KEEFE, BRUYETTE & WOODS, INC
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APPENDIX C
SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW--APPRAISAL RIGHTS
SECTION 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to
Section 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder' means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock' and "share' mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt' mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257,
Section 258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
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c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by a
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation, or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent corporation,
either before the effective date of the merger or consolidation or within
10 days thereafter, shall notify each of the holders of any class or series
of stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or series of stock
of such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given by
the surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of the mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's
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shares. If such notice did not notify stockholders of the effective date of
the merger or consolidation, either (i) each such constituent corporation
shall send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders on
or within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice,
each constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given, provided,
that if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day
on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within
10 days after such stockholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereof of the
C-3
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter within
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-4
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER: 000-24215
PBOC HOLDINGS, INC.
DELAWARE 33-0220233
------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
5900 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA 90036
(323) 938-6300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest possible date:
CLASS SHARES OUTSTANDING AT NOVEMBER 1, 2000
----- ---------------------------------------
Common Stock, $.01 par value 19,876,205
================================================================================
1
PBOC HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Statements of Financial Condition - September 30, 2000
and December 31, 1999......................................................................... 3
Consolidated Statements of Operations - Three and Nine months ended
September 30, 2000 and 1999................................................................... 4
Consolidated Statements of Comprehensive Earnings (Loss) - Three and Nine
months ended September 30, 2000 and 1999...................................................... 5
Consolidated Statements of Cash Flows - Nine months ended September 30, 2000
and 1999...................................................................................... 6
Notes to Consolidated Financial Statements.................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................................................ 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................... 21
PART II -- OTHER INFORMATION
----------------------------
ITEMS 1-5 NOT APPLICABLE................................................................................... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................................................ 22
SIGNATURES....................................................................................... 23
2
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------------- -------------------
(Unaudited)
ASSETS
------
Cash and cash equivalents................................................ $ 29,039 $ 19,582
Federal funds sold....................................................... 28,800 2,000
Securities available-for-sale, at estimated market values................ 514,585 771,864
Mortgage-backed securities held-to-maturity, market values
$3,918 at September 30, 2000 and $4,274 at December 31, 1999............. 3,924 4,326
Loans receivable, net.................................................... 2,531,929 2,462,837
Real estate held for sale, net........................................... 1,006 846
Premises and equipment, net.............................................. 6,818 7,105
Federal Home Loan Bank stock, at cost.................................... 58,082 66,643
Accrued interest receivable.............................................. 18,944 16,863
Goodwill ................................................................ 21,174 7,246
Deferred tax assets...................................................... 55,145 31,569
Other assets............................................................. 7,241 7,347
-------------------- -------------------
Total assets........................................................ $3,276,687 $3,398,228
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits................................................................. $2,000,631 $1,647,337
Securities sold under agreements to repurchase........................... 135,000 381,109
Advances from Federal Home Loan Bank..................................... 871,000 1,123,700
Accrued expenses and other liabilities................................... 12,293 28,754
Other borrowings - line of credit........................................ -- 4,621
-------------------- -------------------
Total liabilities..................................................... 3,018,924 3,185,521
-------------------- -------------------
Company-obligated mandatorily redeemable preferred securities of a
subsidiary trust holding solely junior subordinated deferrable
interest notes of the Company......................................... 10,000 --
Minority interest........................................................ 33,250 33,250
Stockholders' equity:
Common stock, par value $.01 per share. Authorized 75,000,000 shares;
issued 21,876,205 shares; and outstanding 19,876,205 and 19,941,005
at September 30, 2000 and December 31, 1999, respectively........... 219 219
Treasury stock, at cost (2,000,000 shares and 1,935,200 shares at
September 30, 2000 and December 31, 1999, respectively)............. (19,331) (18,710)
Additional paid-in capital............................................ 259,207 259,260
Accumulated other comprehensive loss.................................. (32,353) (38,300)
Retained earnings (accumulated deficit)............................... 6,771 (23,012)
-------------------- -------------------
Total stockholders' equity...................................... 214,513 179,457
-------------------- -------------------
Total liabilities and stockholders' equity...................... $3,276,687 $3,398,228
==================== ===================
See accompanying notes to consolidated financial statements.
3
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------ ---------------- ------------ ---------------
Interest, fees and dividend income:
Short term investments ................................. $ 1,246 $ 194 $ 3,306 $ 853
Securities purchased under agreements to resell ........ -- -- 267 396
Investment securities .................................. 6,334 6,064 18,769 17,894
Mortgage-backed securities ............................. 6,255 9,387 19,603 26,219
Loans receivable ....................................... 48,897 43,056 146,416 121,278
Federal Home Loan Bank stock ........................... 1,062 857 3,231 2,494
------------ ------------ ------------ ------------
Total interest, fees and dividend income .......... 63,794 59,558 191,592 169,134
------------ ------------ ------------ ------------
Interest expense:
Deposits ............................................... 25,009 18,189 66,979 53,867
Advances from the Federal Home Loan Bank ............... 16,246 17,031 49,186 49,468
Securities sold under agreements to repurchase ......... 5,401 6,382 18,654 16,957
Other borrowings ....................................... 260 -- 569 --
Hedging costs, net ..................................... 8 32 67 113
------------ ------------ ------------ ------------
Total interest expense ............................ 46,924 41,634 135,455 120,405
------------ ------------ ------------ ------------
Net interest income ....................................... 16,870 17,924 56,137 48,729
Provision for loan losses .............................. 2,500 1,200 5,500 3,300
------------ ------------ ------------ ------------
Net interest income after provision for loan
losses........................................... 14,370 16,724 50,637 45,429
------------ ------------ ------------ ------------
Other income:
Loan service and loan related fees ..................... 169 116 568 183
Gain (loss) on mortgage-backed securities sales, net ... (8,330) 3 (8,203) 200
Gain on loan and loan servicing sales, net ............. 2 -- 4 49
Income (loss) from real estate operations, net ......... (48) 418 (37) 533
Deposit fee income ..................................... 634 434 1,897 1,340
Other income ........................................... 82 145 383 459
------------ ------------ ------------ ------------
Total other income (loss) ......................... (7,491) 1,116 (5,388) 2,764
Operating expenses:
Personnel and benefits ................................. 4,442 3,994 13,607 11,702
Occupancy .............................................. 2,821 2,651 8,548 7,203
FDIC insurance ......................................... 237 368 663 1,041
Professional services .................................. 718 280 2,139 964
Office related expenses ................................ 1,215 1,431 4,378 3,835
Other ................................................ 1,774 1,299 4,707 2,619
------------ ------------ ------------ ------------
Total operating expenses .......................... 11,207 10,023 34,042 27,364
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (benefit) and minority
interest................................................ (4,328) 7,817 11,207 20,829
Income taxes (benefit) .................................... 807 (1,500) (21,184) (3,500)
------------ ------------ ------------ ------------
Earnings (loss) before minority interest .................. (5,135) 9,317 32,391 24,329
Minority interest ......................................... 869 869 2,607 2,607
------------ ------------ ------------ ------------
Net earnings (loss) ............................... $ (6,004) $ 8,448 $ 29,784 $ 21,722
============ ============ ============ ============
Earnings (loss) per share basic and diluted ............... $ (0.30) $ 0.41 $ 1.50 $ 1.06
============ ============ ============ ============
Basic and diluted weighted average shares ................. 19,876,205 20,423,705 19,877,821 20,533,824
See accompanying notes to consolidated financial statements.
4
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net earnings (loss) ........................................ $ (6,004) $ 8,448 $ 29,784 $ 21,722
Other comprehensive loss:
Unrealized gain (loss) on securities available-for-sale.. 7,118 (12,326) (2,256) (31,451)
Reclassification of realized loss included in earnings... 8,330 3 8,203 200
-------- -------- -------- --------
Other comprehensive earnings (loss) ..................... 15,448 (12,323) 5,947 (31,251)
-------- -------- -------- --------
Comprehensive earnings (loss) .............................. $ 9,444 $ (3,875) $ 35,731 $ (9,529)
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
5
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
------------------- -------------------
Cash flows from operating activities:
Net earnings ................................................................... $ 29,784 $ 21,722
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Provision for loan losses................................................... 5,500 3,300
Depreciation................................................................ 1,443 1,359
Amortization/accretion of premiums, discounts and deferred fees ............ (5,049) 8,960
Increase in net deferred tax assets......................................... (22,630) (3,750)
Amortization of purchase accounting intangibles............................. 135 139
(Gain) loss on sale of securities available-for-sale........................ 8,203 (200)
(Gain) loss on sale of real estate owned................................... 3 (562)
FHLB stock dividend......................................................... (3,228) (2,528)
Increase in accrued interest receivable..................................... (1,494) (1,496)
Decrease in accrued interest payable........................................ (732) (1,086)
(Increase) decrease in other assets......................................... 1,150 (2,690)
Amortization for discontinued lease operations.............................. 38 38
Increase (decrease) in accrued expenses and other liabilities............... (15,947) 6,148
Gain on sale of loans ...................................................... (4) (49)
Amortization of goodwill.................................................... 1,412 240
------------------- -------------------
Net cash provided by (used in) operating activities......................... (1,416) 29,545
------------------- -------------------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale............................ 272,458 121,331
Proceeds from sale of loans .................................................... 464 92,548
Investment and mortgage-backed securities principal repayments and maturities... 361,048 128,457
Loan originations, net of repayments............................................ 5,122 (196,237)
Purchases of investments and mortgage-backed securities available-for-sale...... (330,090) (270,731)
Purchases of loans.............................................................. (9,823) (193,148)
Cost capitalized on real estate, net of insurance settlements................... 123 46
Proceeds from the sale of real estate........................................... 831 7,691
Net increase in premises and equipment.......................................... (489) (1,145)
Redemption of FHLB stock........................................................ 11,789 --
Bank of Hollywood acquisition................................................... 12,063 --
------------------- -------------------
Net cash provided by (used in) investing activities............................. 323,496 (311,188)
------------------- -------------------
Cash flows from financing activities:
Purchases of treasury stock .................................................... (621) (6,152)
Net increase in deposits........................................................ 208,228 148,954
Net increase (decrease) in securities sold under agreements to repurchase....... (246,109) 64,901
Issuance of FHLB advances....................................................... 4,886,379 721,950
Repayments of FHLB advances..................................................... (5,139,079) (674,950)
Net change in other borrowings - line of credit................................. (4,621) --
Issuance of preferred securities of a subsidiary trust.......................... 10,000 --
------------------- -------------------
Net cash provided by (used in) financing activities............................ (285,823) 254,703
------------------- -------------------
Net increase (decrease) in cash..................................................... 36,257 (26,940)
Cash and cash equivalents at beginning of period.................................... 21,582 46,401
------------------- -------------------
Cash and cash equivalents at end of period.......................................... $ 57,839 $ 19,461
=================== ===================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest...................................................................... $ 136,187 $ 121,377
Income taxes.................................................................. 2,690 330
Supplemental schedule of non cash investing and financing activities:
Foreclosed real estate.......................................................... 1,185 6,384
Transfer of loans held for investment to loans held for sale.................... 460 92,499
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF CONSOLIDATION
The consolidated financial statements include all the accounts of
PBOC Holdings, Inc. (the "Company") and its subsidiaries, all of which are
wholly owned, except for PBOC Capital Trust I (the "subsidiary trust") in
which the Company owns all the common stock (see Note 7 herein), and for
People's Preferred Capital Corporation ("PPCC") in which People's Bank of
California (the "Bank") owns all of the common stock. All significant
inter-company accounts and transactions have been eliminated in consolidation.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and
liabilities as of the dates of the balance sheets and revenues and expenses
for the periods presented. Actual results could differ significantly from
those estimates. Prior period's consolidated financial statements have been
reclassified to conform to the 2000 presentation.
3. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by
dividing earnings (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in
earnings.
Earnings per share is calculated by taking the net earnings and dividing
by the weighted average number of shares of common stock outstanding. The
weighted average number of shares of common stock for the three months ended
September 30, 2000 and 1999 were 19,876,205 and 20,423,705, respectively. The
weighted average number of shares of common stock for the nine months ended
September 30, 2000 and 1999 were 19,877,821 and 20,533,824, respectively.
4. STOCK INCENTIVE PLAN
In April 1999, the stockholders of the Company approved the 1999
Stock Option Plan (the "1999 Plan"), which authorized granting up to 985,500
options to officers and key employees of the Company. All 985,500 options
were granted in January 1999 at an exercise price of $13.75 per share.
Options under the 1999 Plan have a life of 10 years and vest over 3 years.
In September 1999, the Board of Directors of the Company approved
the 2000 Stock Incentive Plan (the "2000 Plan"), which authorized granting up
to 991,822 options to officers, directors and key employees of the Company.
In September 1999, 479,250 options were granted at an exercise price of $9
per share. In January 2000, the Board of Directors of the Company granted an
additional 100,000 options to officers, directors and key employees of the
Company at an exercise price of $10 per share. In April 2000, the
stockholders of the Company approved the 2000 Plan.
7
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. Among other things,
it amends SFAS No.107, "Disclosure about Fair Value of Financial
Instruments," to include in SFAS No. 107 disclosure provisions about
concentrations of credit risk from SFAS No. 105. SFAS 133 established
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,
an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This Statement, as
amended, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. In June 2000, SFAS No. 133 was further amended by SFAS No.
138, which addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS No. 133. SFAS No. 138 also
amends SFAS No. 133 for the decisions reached by the Derivatives
Implementation Group Process. Management believes that adoption of SFAS 133,
as amended, will not have a material impact on the Company's financial
position and results of operations.
6. VOLUNTARY SUPERVISORY AGREEMENT
On June 16, 2000, the Company formalized on-going plans to reduce
interest rate risk, strengthen its lending infrastructure, and fill open
positions on the Board of Directors at the request of the Office of Thrift
Supervision ("OTS") through a voluntary supervisory agreement between the OTS
and the Bank. The adoption of the supervisory agreement formalizes many of
the steps the Company has already taken to expand and strengthen its lending
programs, particularly in the consumer and commercial areas.
7. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
NOTES OF THE COMPANY
On July 26, 2000, the subsidiary trust, a subsidiary of the
Company, issued $309,000 of 11.045% Common Securities (the "common
securities") to the Company and $10,000,000 of 11.045% Trust Preferred
Securities (the "preferred securities") in a private placement transaction.
In connection with the subsidiary trust's issuance of the common securities
and the preferred securities, the Company, issued to the subsidiary trust
$10,309,000 principal amount of its 11.045% junior subordinated notes, due
July 2030 (the "subordinated notes"). The sole assets of the subsidiary trust
are and will be the subordinated notes. The Company's, obligations under the
subordinated notes and related agreements, taken together, constitute a full
and unconditional guarantee by the Company of the subsidiary trust's
obligations under the preferred securities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
WHEN USED IN THIS FORM 10-Q OR FUTURE FILINGS BY THE COMPANY WITH
THE SECURITIES AND EXCHANGE COMMISSION ("SEC"), IN THE COMPANY'S PRESS
RELEASES OR OTHER PUBLIC OR STOCKHOLDER COMMUNICATIONS, OR IN ORAL STATEMENTS
MADE WITH AN APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS OR
PHRASES "WOULD BE", "WILL ALLOW", "INTENDS TO", "WILL LIKELY RESULT", "ARE
EXPECTED TO", "WILL CONTINUE", "IS ANTICIPATED", "ESTIMATE", "PROJECT", OR
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY "FORWARD LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE LITIGATION REFORM ACT OF 1995.
THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON
ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE,
AND TO ADVISE READERS THAT VARIOUS FACTORS, INCLUDING REGIONAL AND NATIONAL
ECONOMIC CONDITIONS, SUBSTANTIAL CHANGES IN LEVELS OF MARKET INTEREST RATES,
CREDIT AND OTHER RISK OF LENDING AND INVESTMENT ACTIVITIES AND COMPETITIVE
AND REGULATORY FACTORS, COULD AFFECT THE COMPANY'S FINANCIAL PERFORMANCE AND
COULD CAUSE THE COMPANY'S
8
ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED
OR PROJECTED. THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY
OBLIGATION, TO UPDATE ANY FORWARD-LOOKING STATEMENTS TO REFLECT OCCURRENCES
OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
ACQUISITION OF THE BANK OF HOLLYWOOD
On January 31, 2000, the Company completed the acquisition of The Bank
of Hollywood ("BOH"), a California-chartered commercial bank with $157.4
million in assets and $145.1 million in deposits for a cash purchase price of
$27.4 million. In connection with the acquisition, the Company recorded an
addition of $15.3 million in Goodwill which is being amortized on a
straight-line basis over 15-years.
PENDING ACQUISITIONS
On October 4, 2000, the Company announced the execution of an
agreement to acquire two branch offices and related deposits from Universal
Bank, a West Covina based bank. The purchase of the Encino and Woodland Hills
offices includes buildings, furniture, fixtures and equipment. The branches
have a combined deposit base of just over $54 million. The transaction,
pending regulatory approval, will be accounted for as a purchase and is
expected to be completed in December 2000.
On November 2, 2000, the Company announced the signing of a
definitive merger agreement for the Company to acquire BYL Bancorp and its
wholly owned commercial bank subsidiary, BYL Bank Group ("BYL"). BYL, which
was chartered as a California commercial bank in 1980, is headquartered in
Orange, California and operates seven full-service branches and two loan
origination offices in Orange and Riverside counties. The combined
institution will have 31 branch offices and approximately $3.6 billion in
total assets, servicing Los Angeles, Orange, Ventura and Riverside counties.
BYL also originates for sale, single-family residential loans. BYL had total
assets of $322.3 million, total deposits of $293.3 million and stockholders'
equity of $29.0 million at June 30, 2000.
Under the terms of the agreement, which was approved unanimously by
both boards of directors, holders of BYL Bancorp common stock will receive
$15.00 in cash for each share of BYL common stock owned. The cash amount may
be adjusted upward or downward under certain circumstances which are set
forth in the agreement. The transaction, which has an approximate value of
$39 million, will be accounted for as a purchase and will add $11 million in
goodwill to the balance sheet. The purchase is expected to close during the
first half of calendar 2001 pending regulatory approvals and approval of
BYL's shareholders.
FINANCIAL CONDITION
ASSETS.
At September 30, 2000 the Company's consolidated assets were of $3.3
billion, a decrease of $121.5 million or 4%, from $3.4 billion at December
31, 1999. The decrease was primarily the result of the sale and principal
repayments of securities available-for-sale of $257.3 million and a decrease
in the Federal Home Loan Bank stock ("FHLB") of $8.6 million. These decreases
were partially offset by increases in net loans receivable of $69.1 million,
cash and federal funds sold of $36.3 million, the goodwill asset account
(primarily due to the BOH acquisition) of $13.9 million, and an increase in
deferred tax assets of $23.6 million.
LOAN PORTFOLIO.
Total loans receivable at September 30, 2000 were $2.6 billion an
increase of $39.3 million from December 31, 1999. The increase in loan
receivable balances was primarily the result of the origination of new loans.
During the first nine months of 2000 the Company's loan originations were
$355.5 million, exclusive of the $66.7 million acquired through The Bank of
Hollywood acquisition. Including the BOH acquisition total new loan
originations were $422.2 million, of which business, commercial real estate
and consumer new loan originations and purchases accounted for $350.2
million, or 83.0%. Single and multi-family new loan originations and
purchases accounted for $72.0 million or 17.0%. Loan repayments of $342.9
million offset this increase in loans receivable.
9
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------------------- --------------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family residential.................. $1,397,526 53% $1,475,151 57%
Multi-family residential................... 315,266 12 327,252 13
Commercial................................. 458,345 18 420,919 16
Land ..................................... 706 -- 847 --
---------------- ---------------- ---------------- ----------------
Total mortgage loans ................... 2,171,843 83 2,224,169 86
---------------- ---------------- ---------------- ----------------
Other loans:
Commercial business........................ 181,209 7 159,740 6
Consumer................................... 269,376 10 199,879 8
Secured by deposits........................ 2,595 -- 1,918 --
---------------- ---------------- ---------------- ----------------
Total loans receivable.................. 2,625,023 100% 2,585,706 100%
---------------- ================ ---------------- ================
Less:
Undisbursed loan proceeds ................. 67,510 95,683
Unamortized net loan discounts and
Deferred origination fees............... (2,256) 4,045
Deferred gain on servicing sold............ 1,509 2,090
Allowance for loan losses ................. 26,331 21,051
---------------- ----------------
Loans receivable, net.......................... $2,531,929 $2,462,837
================ ================
LIABILITIES
During the nine months ended September 30, 2000, the Company reduced
higher cost borrowings by decreasing the securities sold under agreements to
repurchase by $246.1 million and reducing FHLB advances by $252.7 million.
These decreases were funded by an increase of $353.3 million in deposits and
a decrease in securities available-for-sale of $257.3 million.
The following table sets forth the composition of the Bank's deposits at the
dates indicated:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------------------- --------------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
Transaction accounts:
Checking accounts.......................... $ 281,747 14.1% $ 214,113 13.0%
Passbook accounts.......................... 112,524 5.6 134,377 8.1
Money market accounts...................... 273,673 13.7 152,899 9.3
---------------- ---------------- ---------------- ----------------
Transaction accounts.................... 667,944 33.4 501,389 30.4
---------------- ---------------- ---------------- ----------------
Term Certificates:
Certificates of deposit.................... 931,288 46.5 825,515 50.1
$100,000 and over.......................... 401,399 20.1 320,433 19.5
---------------- ---------------- ---------------- ----------------
Total certificates...................... 1,332,687 66.6 1,145,948 69.6
---------------- ---------------- ---------------- ----------------
Total deposits................................. $2,000,631 100.0% $1,647,337 100.0%
================ ================ ================ ================
10
Transaction accounts increased to $667.9 million, or 33% of total
deposits at September 30, 2000, an increase of $166.6 million compared to
$501.4 million at December 31, 1999. Checking accounts comprised 41% of the
increase in transaction accounts.
EQUITY.
The Company's stockholders' equity increased by $35.1 million to
$214.5 million at September 30, 2000 from December 31, 1999. The increase was
primarily due to the Company's net earnings of $29.8 million and a decrease
in the unrealized loss on securities available-for-sale of $5.9 million,
offset by an additional purchase of treasury stock during the period of
$621,000.
RESULTS OF OPERATIONS
The Company reported a net loss for the third quarter 2000 of $6.0
million, or $0.30 per diluted share compared to net earnings of $8.4 million,
or $0.41 per diluted share during the same period a year ago. The third
quarter 2000 loss was the result of steps taken by the Company to improve its
net interest margin and reduce interest rate risk by selling $197.4 million
of low-yielding fixed-rate securities from its available-for-sale portfolio.
On a proforma fully-tax-effected basis and excluding the $8.7 million loss on
the sale of fixed-rate securities, net earnings for the third quarter would
have been $1.7 million, or $0.09 per diluted share compared to fully-taxed
earnings in the like quarter a year ago of $3.8 million, or $0.18 per diluted
share.
Net earnings for the nine months ended September 30, 2000 were $29.8
million, or $1.50 per diluted share compared to $21.7 million, or $1.06 per
diluted share during the like period a year ago. On a proforma
fully-tax-effected basis and excluding the $8.7 million loss on the sale of
securities, net earnings for the nine months ended September 30, 2000 would
have been $9.2 million, or $0.46 per diluted share, compared to a proforma
fully-tax-effected net earnings of $9.7 million, or $0.47 per diluted share
during the like period a year ago.
FINANCIAL RATIOS
The table below reflects selected financial performance ratios:
Financial Ratios: Three months ended September 30, Nine months ended September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
---------------- --------------- --------------- ---------------
Return (loss) on average assets.................. (0.68)% 0.94% 1.12% 0.85%
Proforma return on average assets,
fully-tax-effected, excluding losses
on securities sales 0.19 0.42 0.34 0.38
Return (loss) on average equity.................. (11.88) 20.18 20.98 16.97
Proforma return on average equity,
fully-tax-effected, excluding losses
on securities sales 3.36 8.98 6.45 7.60
Average equity to average assets................. 5.70 4.68 5.33 4.98
Interest-earning assets to interest-bearing
liabilities................................... 106.02 105.65 105.68 105.49
Interest rate spread............................. 1.66 1.81 1.84 1.65
Net interest margin.............................. 1.95 2.03 2.14 1.92
Operating expenses to average assets............. 1.27 1.12 1.28 1.07
Efficiency ratio excluding losses on
securities sales.............................. 62.13 52.64 57.30 53.14
NET INTEREST INCOME
A higher cost of funds impacted the net interest margin in the third
quarter. The net interest margin was 1.95% compared to 2.03% for the third
quarter of 1999 and 2.20% for the second quarter of 2000. The net
11
interest margin for the nine months ended September 30, 2000 was 2.14%, an
improvement over 1.92% for the same period a year ago. Impacted by the higher
cost of funds, net interest income before provision for loan losses for the
third quarter decreased 6% to $16.9 million, compared to $17.9 million in the
year-ago quarter. Net interest income before provision for loan losses for
the first nine months of 2000 rose 15% to $56.1 million from $48.7 million in
the comparable period of 1999. The loan loss provision was $2.5 million in
the third quarter 2000, an increase of $1.3 million over the third quarter of
1999. This increase coupled with the higher cost of funds led to a decrease
in net interest income after provision for loan losses to $14.4 million for
the third quarter 2000 compared to $16.7 million for the like quarter a year
ago. Net interest income after provision for loan losses for the first nine
months of 2000 increased 11% to $50.6 million compared to $45.4 million in
the like period a year ago.
The Company's interest rate spread was 1.66% for the three months
ended September 30, 2000, compared to 1.81% for the same period in 1999. This
decrease in the interest rate spread was due primarily to the increased cost
of deposits and borrowings. For the nine months ended September 30, 2000, the
interest rate spread was 1.84% an increase of 19 basis points higher than the
1.65% reported in the like period a year ago.
The following tables set forth, for the periods indicated,
information regarding: (a) the total dollar amount of interest income of the
Company from interest-earning assets and the resultant average yields; (b)
the total dollar amount of interest expense on interest-bearing liabilities
and resultant average rates; (c) net interest income; (d) interest rate
spread; and (e) net interest margin. Information is based on average daily
balances during the indicated periods.
Three months ended September 30,
--------------------------------------------------------------------------------------
2000 1999
------------------------------------------ -----------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- ----------- ------------ ---------- ----------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1) ............. $2,570,748 $ 48,897 7.61% $2,382,557 $ 43,056 7.23%
Mortgage-backed securities (2) .. 402,506 6,255 6.22 659,544 9,387 5.69
Other interest-earning assets (3) 433,231 7,580 7.00 415,639 6,258 6.02
FHLB stock ...................... 57,873 1,062 7.30 65,505 857 5.19
---------- ---------- ---------- ----------
Total interest-earning assets ... 3,464,358 63,794 7.37% 3,523,245 59,558 6.76%
---------- ====== ---------- ======
Non-interest-earning assets ....... 60,704 27,231
---------- ----------
Total assets ................ $3,525,062 $3,550,476
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts(4) ....... $ 639,892 5,005 3.11% $ 445,005 3,269 2.91%
Term certificates of deposit .. 1,284,794 20,004 6.19 1,190,516 14,920 4.97
---------- ---------- ---------- ----------
Total deposits ............ 1,924,686 25,009 5.17 1,635,521 18,189 4.41
Other borrowings (5) ............ 1,334,093 21,647 6.46 1,699,195 23,413 5.47
Other borrowings - line of credit 1,555 58 14.84 -- -- --
Preferred securities of a
subsidiary trust .......... 7,204 202 11.17 -- -- --
Hedging costs ................... -- 8 -- -- 32 --
---------- ---------- ---------- ----------
Total interest-bearing
liabilities .............. 3,267,538 46,924 5.71% 3,334,716 41,634 4.95%
---------- ====== ---------- ======
Non-interest-bearing liabilities .. 56,459 49,686
---------- ----------
Total liabilities .......... 3,323,997 3,384,402
Stockholders' equity .............. 201,065 166,073
---------- ----------
Total liabilities and
stockholders' equity ..... $3,525,062 $3,550,475
========== ==========
Net interest-earning assets ....... $ 196,820 $ 188,529
========== ==========
Net interest income/interest rate
spread ....................... $ 16,870 1.66% $ 17,924 1.81%
========== ====== ========== ======
Net interest margin ... 1.95% 2.03%
====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities .......... 106.02% 105.65%
====== ======
12
Nine months ended September 30,
-------------------------------------------------------------------------------------------
2000 1999
------------------------------------------ ---------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------- ---------- ------------ ------------- ------------ -------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)........... $2,568,898 $146,416 7.60% $2,253,816 $121,278 7.17%
Mortgage-backed securities (2) 424,449 19,603 6.16 632,738 26,219 5.52
Other interest-earning assets (3) 444,483 22,342 6.70 430,339 19,143 5.93
FHLB stock.................... 59,008 3,231 7.31 64,669 2,494 5.16
------------- ----------- ------------- ------------
Total interest-earning assets. 3,496,838 191,592 7.31% 3,381,562 169,134 6.67%
----------- =========== ------------ =============
Non-interest-earning assets..... 58,286 52,813
------------- -------------
Total assets.............. $3,555,124 $3,434,375
============= =============
Interest-bearing liabilities:
Deposits:
Transaction accounts(4)..... 620,727 13,833 2.98% 435,486 9,357 2.87%
Term certificates of deposit 1,218,637 53,146 5.83 1,147,839 44,510 5.18
------------- ----------- ------------- ------------
Total deposits.......... 1,839,364 66,979 4.86 1,583,325 53,867 4.55
Other borrowings (5).......... 1,462,933 67,840 6.19 1,622,273 66,425 5.47
Other borrowings - line of credit 4,161 367 11.78 -- -- --
Preferred securities of a
subsidiary trust........ 2,409 202 11.17 -- -- --
Hedging costs................. -- 67 -- -- 113 --
------------- ----------- ------------- ------------
Total interest-bearing
liabilities............ 3,308,867 135,455 5.47% 3,205,598 120,405 5.02%
----------- =========== ------------ =============
Non-interest-bearing liabilities 56,666 57,687
------------- -------------
Total liabilities........ 3,365,533 3,263,285
Stockholders' equity............ 189,591 171,090
------------- -------------
Total liabilities and
stockholders' equity... $3,555,124 $3,434,375
============= =============
Net interest-earning assets..... $ 187,971 $ 175,964
============= =============
Net interest income/interest rate
spread..................... $ 56,137 1.84% $ 48,729 1.65%
=========== =========== ============ =============
Net interest margin............. 2.14% 1.92%
=========== =============
Ratio of average interest-earning
assets to average interest-
bearing liabilities........ 105.68% 105.49%
=========== =============
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(2) Includes mortgage-backed securities classified as held-to-maturity and
available-for-sale.
(3) Includes short-term investments, securities purchased under agreements to
resell and investment securities.
(4) Includes passbook, checking and money market accounts.
(5) Includes advances from FHLB and securities sold under agreements to
repurchase.
The following tables set forth the effects of changing rates and
volumes on net interest income of the Company. Information is provided with
respect to (a) effects on interest income attributable to changes in rate
(changes in rate multiplied by prior volume); (b) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior
rate); and (c) changes in rate/volume (change in rate multiplied by change in
volume).
13
THREE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO SEPTEMBER 30, 1999
(IN THOUSANDS)
---------------------------------------------------------------------------
INCREASE (DECREASE) DUE TO
-------------------------------------------------
TOTAL NET
RATE VOLUME RATE/VOLUME INCREASE/(DECREASE)
---- ------ ----------- -------------------
Interest-earning assets:
Loans receivable............................. $ 2,262 $ 3,401 $ 178 $ 5,841
Mortgage-backed securities................... 863 (3,658) (337) (3,132)
Other interest-earning assets ............... 1,014 265 43 1,322
FHLB stock................................... 345 (100) (40) 205
---------------------------------------------------------------------------
Total net change in income on interest-
earning assets .............................. 4,484 (92) (156) 4,236
---------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Transaction accounts.................... 212 1,428 96 1,736
Term certificates of deposit............ 3,616 1,178 290 5,084
---------------------------------------------------------------------------
Total deposits........................ 3,828 2,606 386 6,820
Other borrowings............................. 4,158 (5,031) (893) (1,766)
Other borrowings - line of credit............ -- 58 -- 58
Preferred securities of a subsidiary trust... -- 202 -- 202
Hedging costs................................ -- -- (24) (24)
---------------------------------------------------------------------------
Total net change in expense on interest-
bearing liabilities.......................... 7,986 (2,165) (531) 5,290
---------------------------------------------------------------------------
Change in net interest income.................. $(3,502) $ 2,073 $ 375 $ (1,054)
===========================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO SEPTEMBER 30, 1999
(IN THOUSANDS)
---------------------------------------------------------------------------
INCREASE (DECREASE) DUE TO
--------------------------------------------------
TOTAL NET
RATE VOLUME RATE/VOLUME INCREASE/(DECREASE)
---- ------ ----------- -------------------
Interest-earning assets:
Loans receivable............................. $ 7,180 $16,955 $ 1,003 $25,138
Mortgage-backed securities................... 3,004 (8,631) (989) (6,616)
Other interest-earning assets ............... 2,488 629 82 3,199
FHLB stock................................... 1,047 (219) (91) 737
---------------------------------------------------------------------------
Total net change in income on interest-
earning assets .............................. 13,719 8,734 5 22,458
---------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Transaction accounts.................... 348 3,984 144 4,476
Term certificates of deposit............ 5,548 2,748 340 8,636
---------------------------------------------------------------------------
Total deposits........................ 5,896 6,732 484 13,112
Other borrowings............................. 8,804 (6,530) (859) 1,415
Other borrowings - line of credit............ -- 367 -- 367
Preferred securities of a subsidiary trust... -- 202 -- 202
Hedging costs................................ -- -- (46) (46)
---------------------------------------------------------------------------
Total net change in expense on interest-
bearing liabilities.......................... 14,700 771 (421) 15,050
---------------------------------------------------------------------------
Change in net interest income.................. $ (981) $ 7,963 $ 426 $ 7,408
===========================================================================
PROVISION FOR LOAN LOSSES
The provision for loan losses for the third quarter 2000 was $2.5
million compared with $1.2 million for the like quarter a year ago. The
Company's provision for loan losses increased by $2.2 million for the nine
months ended September 30, 2000, compared to the same period in 1999. The
provision for loan losses was $5.5 million
14
for the nine months ended September 30, 2000 compared to $3.3 million for the
nine months ended September 30, 1999. These increases were primarily due to
an increase in non- performing loans, to loan portfolio growth and the change
in the current portfolio mix to a higher proportion of consumer and
commercial loans.
OTHER INCOME
Due to an $8.3 million net loss on the sale of fixed-rate
securities, non-interest income (loss) decreased to $(7.5) million in the
third quarter 2000 compared to $1.1 million in the like quarter a year ago.
Additionally income (loss) from real estate operations decreased by $466,000
to $(48,000) compared to income from real estate operations of $418,000 for
the same quarter a year ago. Loan service and deposit fee income increased by
$53,000 and $200,000, respectively, from the same quarter a year ago. For the
nine months ended September 30, 2000 other income (loss) was $(5.4) million
compared to $2.8 million at September 30, 1999.
OPERATING EXPENSES
Reflecting the costs associated with acquisitions, PBOC's operating
expenses for the third quarter of 2000 rose 12% over third quarter 1999
levels. For the three months ended September 30, 2000, operating expenses
were $11.2 million compared to $10.0 million for the same period last year.
Operating expenses for the first nine months of the year rose 24% to $34.0
million versus $27.4 million in the like period of 1999. The acquisition of
two branches during the third quarter of 1999 and the Bank of Hollywood
during the first quarter of 2000 resulted in the increase in personnel,
occupancy and office related expenses of $1.9 million, $1.3 million and
$543,000, respectively, for the first nine months of 2000. Other expenses
increased by $2.1 million, to $4.7 million for the nine months ended
September 30, 2000 compared to $2.6 million for the like period a year ago.
The increase in other expense was primarily the result of an increase in
goodwill amortization of $1.2 million for the nine months ended September 30,
2000.
INCOME TAXES
Third quarter income taxes include applicable federal and state income
taxes. The income tax provision for the third quarter was $807,000, compared
to an income tax benefit of $1.5 million, reported during the like period a
year ago. For the nine months ended September 30, 2000 the Company reported
an income tax benefit of $21.2 million, compared to an income tax benefit of
$3.5 million during the same period a year ago. During the first quarter of
2000, the Company recorded a $25.0 million income tax benefit, resulting from
a decrease in the valuation allowance on its deferred tax assets which the
Company expects will be realizable in future periods.
15
ASSET QUALITY
The following table sets forth information with respect to
non-performing assets identified by the Bank, including non-accrual loans,
real estate owned and troubled debt restructurings at the dates indicated:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(DOLLARS IN THOUSANDS)
-------------------------------------------------------
Non-performing loans, net:
Mortgage loans:
Single-family residential loans.................... $ 2,319 $ 2,331
Multi-family residential loans..................... 561 557
Commercial real estate loans....................... 18 20
Commercial business loans.............................. 10,258 163
Consumer loans......................................... 694 107
---------------------- -----------------------
Total non-performing loans, net........................ 13,850 3,178
---------------------- -----------------------
Real estate owned, net:
Single-family residential.......................... 1,006 846
---------------------- -----------------------
Total real estate owned, net........................... 1,006 846
---------------------- -----------------------
Total non-performing assets............................ 14,856 4,024
Troubled debt restructurings........................... 3,743 6,470
---------------------- -----------------------
Total non-performing assets and troubled debt
restructurings..................................... $18,599 $10,494
====================== =======================
Non-performing loans to total loans, net............... 0.55% 0.13%
Non-performing loans to total assets................... 0.42 0.09
Non-performing assets to total assets.................. 0.45 0.12
Total non-performing assets and troubled debt
restructurings to total assets..................... 0.57 0.31
Assets considered to be non-performing include nonaccrual loans and
foreclosed assets. Classification of a loan as nonaccrual does not
necessarily indicate that the principal of the loan is uncollectible in whole
or in part. Loans are generally placed on a nonaccrual status when they are
four payments or more past due. Non-performing assets as presented in the
table above and stated at fair value as of September 30, 2000 and December
31, 1999 were $14.9 million and $4.0 million, respectively. As a result, the
ratio of non-performing assets to total assets increased from 0.12% at
December 31, 1999 to 0.45% at September 30, 2000. The increase was primarily
the result of delinquencies in two participations in syndicated loans
totaling $7.5 million. In January, the Company chose to discontinue its
participation in syndicated loans and to focus solely on local originations.
16
The following table sets forth the activity in the Bank's allowance
for loan losses during the periods indicated:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
2000 1999
------------------- -------------------
(DOLLARS IN THOUSANDS)
-----------------------------------------
BEGINNING BALANCE................................................... $21,051 $18,897
------------------- -------------------
Addition to allowance due to Bank of Hollywood acquisition.......... 2,084 --
Transfer to other real estate owned................................. (53) --
Provision for loan losses........................................... 5,500 3,300
CHARGE-OFFS:
Single-family residential loans..................................... -- 303
Multi-family residential loans...................................... -- 131
Commercial real estate loans........................................ 7 175
Commercial business loans........................................... 606 703
Consumer loans...................................................... 2,155 823
------------------- -------------------
Total charge-offs................................................ 2,768 2,135
------------------- -------------------
RECOVERIES:
Single-family residential loans..................................... 2 32
Commercial business................................................. 1 11
Consumer............................................................ 514 245
------------------- -------------------
Total recoveries.................................................... 517 288
------------------- -------------------
Net charge-offs..................................................... 2,251 1,847
------------------- -------------------
ENDING BALANCE ..................................................... $26,331 $20,350
=================== ===================
Allowance for loan losses to total non-performing loans at end of
period........................................................... 190.12% 412.95%
Allowance for loan losses to total non-performing loans and
troubled debt restructurings at the end of period................ 149.67 204.21
Allowance for loan losses to total gross loans, at the end of
period........................................................... 1.00 0.79
Net loan charge-offs were $2.3 million for the nine months ended
September 30, 2000, compared to $1.8 million for the nine months ended
September 30, 1999.
On an ongoing basis, management monitors the loan portfolio and
evaluates the adequacy of the allowance for loan losses. In determining the
adequacy of the allowance for loan losses, management considers such factors
as historical loan loss experience, underlying collateral values, evaluations
made by bank regulatory authorities, assessment of economic conditions and
other appropriate data to identify the risks in the loan portfolio.
17
The following table sets forth information concerning the
allocation of the Bank's allowance for loan losses by loan category at the
dates indicated.
September 30, 2000 December 31, 1999
------------------ -----------------
Percent to Percent to
Total Total
Amount Allowance Amount Allowance
-------- ------------- -------- ------------
(Dollars in Thousands)
Residential real estate........ $ 3,732 14.2% $ 5,020 23.8%
Multi-family residential....... 3,960 15.0 4,990 23.7
Commercial real estate......... 3,505 13.3 4,073 19.4
Land........................... 36 0.1 42 0.2
Commercial business............ 9,948 37.8 3,959 18.8
Consumer ...................... 197 0.8 243 1.2
Auto........................... 4,953 18.8 2,724 12.9
------------ ---------- ------------ ----------
Total..................... $26,331 100.0% $21,051 100.0%
============ ========== ============ ==========
Based on management's analysis of loss experience and various other
factors of the loan portfolio components, certain percentage allocations were
revised at March 31, 2000.
Loans deemed by management to be uncollectible are charged to the
allowance for loan losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan losses are charged to expense
and credited to the allowance in amounts deemed appropriate by management
based upon its evaluation of the known and inherent risks in the loan
portfolio.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. It is the objective of
the Company to attempt to control the risk associated with interest rate
movements. In general, management's strategy is to match asset and liability
balances within maturity categories to limit the Bank's exposure to earnings
variations and variations in the value of assets and liabilities as interest
rates change over time. The Company's asset and liability management strategy
is formulated and monitored by the Bank's Asset/Liability Management
Committee, which is comprised of senior officers of the Bank, in accordance
with policies approved by the Board of Directors of the Bank.
The Asset/Liability Management Committee's methods for evaluating
interest rate risk include an analysis of the Bank's interest rate
sensitivity "gap," which is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities. A gap is considered negative when the amount of
interest-rate sensitive liabilities exceeds interest-rate sensitive assets.
During a period of falling interest rates, a negative gap would tend to
result in an increase in net interest income, while a positive gap would tend
to affect net interest income adversely.
On June 16, 2000, the Company formalized on-going plans to reduce
interest rate risk and strengthen its lending infrastructure at the request
of the OTS through a voluntary supervisory agreement between the OTS and the
Bank. See note 6 to Consolidated Financial Statements.
18
The following table summarizes the anticipated maturities or
repricing of the Company's interest-earning assets and interest-bearing
liabilities as of September 30, 2000, based on the information and
assumptions set forth in notes below.
MORE THAN MORE THAN
THREE TO ONE YEAR THREE YEARS
WITHIN THREE TWELVE TO TO FIVE OVER FIVE
MONTHS MONTHS THREE YEARS YEARS YEARS TOTAL
------------ -------- ----------- ----------- --------- -----
(DOLLARS IN THOUSANDS)
Interest-earning assets: (1)
Loans receivable(2)
Single-family residential:
Fixed.............................. $ 23,809 $ 111,907 $ 221,280 $ 218,025 $ 391,421 $ 966,442
Adjustable ........................ 128,902 108,795 88,930 102,138 -- 428,765
Multi-family residential:
Fixed.............................. 317 1,559 5,137 4,047 15,342 26,402
Adjustable ........................ 270,190 18,113 -- -- -- 288,303
Commercial, industrial and land:
Fixed.............................. 4,567 11,714 34,111 36,056 125,939 212,387
Adjustable ........................ 129,249 117,397 -- -- -- 246,646
Other loans(3)........................ 136,833 114,400 115,668 59,325 16,002 442,228
Mortgage-backed and other securities (4). 77,892 25,227 35,651 30,200 26,702 195,672
Other interest-earning assets (5)........ 281,925 -- -- -- 160,553 442,478
-----------------------------------------------------------------------------------------
Total........................ $1,053,684 $ 509,112 $ 500,777 $ 449,791 $ 735,959 $3,249,323
=========================================================================================
Interest-bearing liabilities:
Deposits:
Checking accounts.................... $ 110,415 $ -- $ -- $ -- $ -- $ 110,415
Passbook accounts.................... 112,524 -- -- -- -- 112,524
Money market accounts................ 273,673 -- -- -- -- 273,673
Term certificates of deposit......... 106,371 755,624 440,094 30,531 67 1,332,687
Other borrowings......................... -- -- 656,000 170,000 190,000 1,016,000
-----------------------------------------------------------------------------------------
Total......................... $ 602,983 $ 755,624 $1,096,094 $ 200,531 $ 190,067 $2,845,299
=========================================================================================
Excess (deficiency) of interest earning
assets over interest-bearing
liabilities............................ $ 450,701 $(246,512) $ (595,317) $ 249,260 $ 545,892 $ 404,024
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities as a percent of total
assets................................. 13.75% (7.52%) (18.17%) 7.61% 16.66% 12.33%
=========================================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest
-bearing liabilities................... $ 450,701 $ 204,189 $ (391,128) $(141,868) $ 404,024
===========================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percentage of
total assets........................... 13.75% 6.23% (11.94%) (4.33%) 12.33%
===========================================================================
- -------------------------------------------------------------------------------
(1) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due, and fixed rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, in each case as
adjusted to take into account estimated prepayments based on assumptions
used by the OTS in assessing the interest rate sensitivity of savings
associations in the Company's region.
(2) Balances have been reduced for non-performing loans, which amounted to
$13.9 million at September 30, 2000.
(3) Comprised of commercial and consumer loans and loans secured by deposits.
(4) Does not include an unrealized loss on securities available-for-sale of
$32.8 million.
(5) Comprised of short-term investments, securities purchased under agreements
to resell, investment securities and FHLB stock.
19
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Liquidity refers to a company's ability to generate sufficient cash
to meet the funding needs of current loan demand, deposit withdrawals,
principal and interest payments with respect to outstanding borrowings and to
pay operating expenses. The Bank monitors its liquidity in accordance with
guidelines established by the Bank and applicable regulatory requirements.
The Bank's need for liquidity is affected by loan demand, net changes in
deposit levels and the scheduled maturities of its borrowings. The Bank can
minimize the cash required during the times of heavy loan demand by modifying
its credit policies or reducing its marketing effort. Liquidity demand caused
by net reductions in deposits are usually caused by factors over which the
Bank has limited control. The Bank derives its liquidity from both its assets
and liabilities. Liquidity is derived from assets by receipt of interest and
principal payments and prepayments, by the ability to sell assets at market
prices and by utilizing unpledged assets as collateral for borrowings.
Liquidity is derived from liabilities by maintaining a variety of funding
sources, including deposits, advances from the FHLB of San Francisco and
other short and long-term borrowings.
At September 30, 2000, the Bank had $257.4 million in borrowing
capacity under a collateralized line of credit with the FHLB of San
Francisco. At September 30, 2000, the Bank had total FHLB advances of $871
million with a weighted average interest rate of 6.2%, which mature between
2002 and 2008. Additionally, at September 30, 2000, the Bank had securities
sold under agreements to repurchase totaling $135 million with a weighted
average interest rate of 7.0%, which mature between 2001 and 2002.
At September 30, 2000, the Bank had outstanding commitments to
originate and/or purchase mortgage and non-mortgage loans of $3.3 million. In
addition, at September 30, 2000 the Bank had unused lines of credit in the
amount of $17.1 million, which amount is included by loan type in the loan
portfolio composition table. Certificates of deposit which are scheduled to
mature within one year totaled $862 million at September 30, 2000, and there
are no borrowings that are scheduled to mature within the same period.
Management anticipates that it will have sufficient funds available to meet
its current loan commitments.
CAPITAL RESOURCES
The OTS capital regulations include three separate minimum capital
requirements for savings institutions - a "tangible capital requirement," a
"leverage limit" and a "risk based capital requirement." These capital
standards must be no less stringent than the capital standards applicable to
national banks.
As of September 30, 2000 the Bank was deemed to be "well
capitalized" under applicable requirements. To be categorized as "well
capitalized", the Bank must maintain minimum tier 1 leverage capital, tier 1
risk-based capital and total risk-based capital ratios as set forth in the
table below. The following table reflects the Bank's actual levels of
regulatory capital and applicable regulatory capital requirements at
September 30, 2000:
WELL CAPITALIZED
MINIMUM REQUIREMENT ACTUAL EXCESS
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Tangible capital...................... $ 64,934 2.00% $ 222,283 6.85% $157,349 4.85%
Tier 1 leverage capital .............. 162,334 5.00 222,283 6.85 59,949 1.85
Tier 1 risk-based capital ............ 127,668 6.00 222,283 10.45 94,615 4.45
Total risk-based capital ............. 212,780 10.00 245,866 11.55 33,086 1.55
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
LIST OF EXHIBITS (FILED HEREWITH UNLESS INDICATED)
No. Description
- ------------ -------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of PBOC Holdings,
Inc.1/
3.2 Bylaws of PBOC Holdings, Inc.(5)
4 Stock Certificate of PBOC Holdings, Inc.(2)
10.1 Employment Agreement between PBOC Holdings, Inc.,
People's Bank of California and Rudolf P. Guenzel(1)
10.2 Employment Agreement between PBOC Holdings, Inc.,
People's Bank of California and J. Michael Holmes(1)
10.3 Employment Agreement between PBOC Holdings, Inc.,
People's Bank of California and William W. Flader(1)
10.4 Employment Agreement between the People's Bank of California and
Doreen J. Blauschild(2)
10.5 Deferred Compensation Plan(1)
10.6 Grantor Trust(1)
10.7 Shareholder Rights Agreement(1)
10.8 Stockholders' Agreement(1)
10.9 1999 Stock Option Plan(3)
10.10 2000 Stock Incentive Plan(4)
10.11 Amendment Number 1 to Employment Agreement between PBOC Holdings,
Inc., People's Bank of California and Rudolf P. Guenzel.(5)
10.12 Amendment Number 1 to Employment Agreement between PBOC Holdings,
Inc., People's Bank of California and J. Michael Holmes.(5)
10.13 Amendment Number 1 to Employment Agreement between PBOC Holdings,
Inc., People's Bank of California and William W. Flader.(5)
27 Financial Data Schedule
- -----------------
(1) Incorporated by reference from the Company's Form 10-K filed by the
Registrant with the SEC on December 31, 1998.
(2) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-48397) filed by the Registrant with the SEC on March
20, 1998, as amended.
(3) Incorporated by reference from the Company's Proxy Statement on Schedule
14A as filed on March 22, 1999 (File No. 000-24215).
(4) Incorporated by reference from the Company's Proxy Statement on Schedule
14A as filed on March 23, 2000 (File No. 000-24215).
(5) Incorporated by reference from the Company's Form 10-Q filed by the
Registrant with the SEC on August 11, 2000.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated July 6, 2000, reported the voluntary
supervisory agreement between the OTS and the Bank. See Note 6 to the Notes
to Consolidated Financial Statements herein.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PBOC HOLDINGS, INC.
Date: November 10, 2000 By: /s/ Rudolf P. Guenzel
-------------------------------
Rudolf P. Guenzel
President and Chief Executive
Officer
By: /s/ J. Michael Holmes
-------------------------------
J. Michael Holmes
Senior Executive Vice President
and Chief Financial Officer
23
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1999
Commission File No.: 0-24215
PBOC Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 33-0220233
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5900 Wilshire Boulevard, Los Angeles, California, 90036
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (323) 938-6300
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $0.01 per share)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of March 7, 2000, the aggregate value of the 19,262,913 shares of
Common Stock of the Registrant issued and outstanding on such date, which
excludes 613,292 shares held by all directors and executive officers of the
Registrant as a group, was approximately $163.7 million. This figure is based on
the last known trade price of $8.50 per share of the Registrant's Common Stock
on March 7, 2000.
Number of shares of Common Stock outstanding as of March 7, 2000:
19,876,205
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2000 Annual Meeting of
Stockholders are incorporated into Part III.
================================================================================
PBOC HOLDINGS, INC.
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS ........................................................ 3
General...................................................... 3
Lending Activities........................................... 5
Asset Quality................................................ 10
Investment Activities........................................ 12
Sources of Funds............................................. 13
Competition.................................................. 14
Subsidiaries................................................. 15
Regulation .................................................. 15
Regulation of Savings and Loan Holding Companies............. 16
Regulation of Federal Savings Banks.......................... 17
Taxation..................................................... 20
ITEM 2. PROPERTIES....................................................... 22
ITEM 3. LEGAL PROCEEDINGS................................................ 24
The Goodwill Litigation...................................... 24
The Shareholder Rights Agreement............................. 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 28
ITEM 6. SELECTED FINANCIAL DATA.......................................... 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 32
General...................................................... 32
Financial Condition.......................................... 32
Results of Operations........................................ 44
Average Balances, Net Interest Income, Yields Earned and
Rates Paid................................................. 45
Rate /Volume Analysis........................................ 46
Asset and Liability Management............................... 50
Liquidity and Capital Resources.............................. 54
Year 2000.................................................... 56
Recent Accounting Pronouncements............................. 56
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 57
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................... 92
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 92
ITEM 11. EXECUTIVE COMPENSATION........................................... 92
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 92
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 92
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K .................................................... 92
2
When used in this form 10-K or future filings by PBOC Holdings, Inc. (the
"Company") with the Securities and Exchange Commission ("SEC"), in the Company's
press releases or other public or stockholder communications, or in oral
statements made with an approval of an authorized executive officer, the words
or phrases "would be", "will allow", "intends to", "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project", or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risk of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected. The Company does not undertake, and specifically
disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such
statements.
PART I
ITEM 1. BUSINESS
General
The Company is a Delaware corporation which was organized in 1987 to
acquire the People's Bank of California (the "Bank") from the Federal Savings
and Loan Insurance Corporation ("FSLIC") in connection with its conversion from
mutual to stock form. (Unless the context otherwise requires, references herein
to the Company include the Bank and its other subsidiaries.) The Company owns
100% of the common stock of the Bank, which is its primary investment. The Bank
is a federally chartered savings bank which was originally organized in 1887
under California law and conducts business from its executive offices located in
Los Angeles, California and 23 full-service branch offices located primarily in
Los Angeles County as well as Orange and Ventura Counties in Southern
California. At December 31, 1999, the Company had total assets of $3.4 billion,
net loans receivable of $2.5 billion, total deposits of $1.6 billion and total
stockholders' equity of $179.5 million.
Business Strategy. The Bank experienced financial difficulties in the
early 1990s due in part to local economic conditions and the 1994 Northridge
earthquake, which resulted in significant increases in non-performing assets and
substantial losses. The Bank was required to be recapitalized in 1992 and again
in 1995. In connection with the 1995 recapitalization, the Bank replaced its
former senior managers with a new management team with considerable experience
in commercial banking and problem asset resolution.
The Bank's new management team initially adopted a business strategy
designed to enhance the Bank's internal controls and underwriting standards,
reduce problem assets, increase net interest income, reduce operating expenses
and cost of funds and maximize profitability while limiting interest rate and
credit risk. With the reduction in the Company's non-performing assets and the
Company's return to profitability in 1996, the Bank was able to actively resume
the origination and purchase of residential, commercial and consumer loans. In
order to fund the Bank's increased lending activities, in October 1997, the Bank
raised approximately $33.3 million in net proceeds in connection with the sale
of 1,426,000 shares of 9.75% Noncumulative Preferred Stock, Series A by Peoples
Preferred Capital Corporation ("PPCC"), all of the common stock of which is
owned by the Bank (the "Series A Offering") and, in May 1998 the Company raised
approximately $129.6 million in net proceeds in connection with an initial
public offering of common stock of the Company (the "IPO"), a substantial
portion of which was contributed as equity to the Bank. With the funds raised in
the Series A Offering and the IPO, management has been able to focus on the
following elements of its business strategy:
o Significantly Grow the Bank's Loan Portfolio. The Bank leveraged the
proceeds raised in the Series A Offering and the IPO through
wholesale purchases of $408.8 million and $876.9 million of
primarily single-family residential loans, respectively. The Bank
has since been shifting the composition of its assets toward the
types of commercial loans traditionally associated with commercial
banks. Accordingly, the Bank is replacing its whole loan purchases
with internally
3
originated loans, primarily of a commercial nature, and, since June
1995, has hired over 25 individuals with significant expertise in
commercial and consumer lending. The increase in staffing has
enabled the Bank to increase its multi-family residential,
commercial real estate, commercial business and consumer loan
originations (including loans secured by deposits), which during the
years ended December 31, 1999, 1998 and 1997 amounted in the
aggregate to $627.0 million, $218.1 million and $72.6 million or
75.6%, 35.9% and 45.2% of total loans originations, respectively.
Substantially all of such loans are secured by property or made to
customers located within the Bank's primary market area. Management
intends to continue to place increased emphasis on commercial and
consumer lending, with a corresponding decrease in emphasis on
single-family and multi-family residential lending. Commercial and
consumer loans generally have shorter terms and higher interest
rates than singly-family residential loans but are generally
considered to have a higher level of credit risk.
o Expand the Bank's Branch Network. Management is enhancing the Bank's
branch network by opening new facilities and acquiring other banking
institutions and branches in strategic locations within its primary
market area. Since December 31, 1998, the Bank has acquired three
branches with approximately $141.6 million in deposits which
includes two branches with approximately $124.5 million in deposits
which were acquired in August 1999. In addition, on January 31,
2000, PBOC acquired The Bank of Hollywood ("BOH"), a California
commercial bank headquartered in Hollywood, California with $157.4
million of assets, $145.1 million of deposits and $12.4 million of
stockholders' equity at December 31, 1999. The BOH acquisition will
permit the Bank to expand into a high growth market for the
individuals and small-to-medium sized businesses the Bank is seeking
to attract as customers. The Bank focuses on acquiring branches or
whole institutions when such acquisitions are expected to be
accretive to earnings, when such acquisitions will reduce the Bank's
cost of funds through a lower rate paid on the deposits acquired, or
when the deposit mix of the branches so acquired will further the
Bank's strategy of shifting the composition of its assets and
liabilities closer to that of a commercial bank.
o Reduce Funding Costs. The Bank leveraged the proceeds raised in the
Series A Offering and the IPO through the use of reverse repurchase
agreements and Federal Home Loan Bank ("FHLB") advances. The Bank is
currently replacing such wholesale borrowings with lower cost
deposits. The Bank is currently replacing such wholesale borrowings
with lower cost deposits. The Bank has reduced its overall cost of
funds by promoting retail deposit growth (particularly transaction
accounts) and by allowing its out-of-market, institutional jumbo
certificates of deposit to run off as they mature. The Bank's
transactional accounts (passbook, checking and money market
accounts) have increased from $183.2 million or 13.2% of total
deposits at December 31, 1994 to $501.4 million or 30.4% of total
deposits at December 31, 1999.
o Improve Operating Efficiency. The Bank has significantly reduced its
operating expenses through the consolidation of certain of its
operations and, to lesser extent, reducing its staff levels. The
ratio of the Bank's operating expenses to average total assets has
steadily decreased, from 2.14% during the year ended December 31,
1994 to 1.10% during the year ended December 31, 1999 (excluding the
effect of extraordinary items and losses on the sale of investment
securities). Despite the Bank's - recent cost-cutting efforts,
management believes that it has significant operating leverage, and,
therefore, continued incremental growth will not cause the Bank's
ratio of operating expenses to average total assets to increase by a
corresponding amount.
o Manage the Bank's Capital. A substantial portion of the net proceeds
in connection with the Series A Offering and the IPO was contributed
by the Company to the Bank in order to enhance its capital and fund
its growth strategy. The Company has not paid dividends on its
common stock and instead has retained its earnings in furtherance of
its overall business objectives. Management of the Bank has
established a targeted minimum level of core capital of 6.0% of
adjusted total assets. At December 31, 1999 the Bank's core capital
amounted to $231.4 million or 6.78% of adjusted total assets.
4
o Maintain a Community Focus. The Bank's growth strategy is focused on
individuals and businesses located in Los Angeles, Orange and
Ventura Counties in Southern California. Management of the Bank
believes that the recent consolidation of financial institutions
within Southern California has resulted in a decline in product
offerings and attention paid to the individuals and small-to medium
sized businesses which the Bank focuses on. The Bank intends to fill
this void by offering a community banking alternative and by
instilling a sales and service oriented culture in its personnel in
order to build relationships and maximize cross-selling
opportunities.
The Bank, as federally chartered savings bank, is subject to comprehensive
regulation and examination by the OTS, as its chartering authority and primary
regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), which
administers the Savings Association Insurance Fund ("SAIF"), which insures the
Bank's deposits to the maximum extent permitted by law. The Bank is a member of
the FHLB of San Francisco, which is one of the 12 regional banks which comprise
the FHLB System. The Bank is also subject to the regulations of the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") governing
reserves required to be maintained against deposits and certain other matters.
See "Regulation."
The Bank's principal executive offices are located at 5900 Wilshire
Boulevard, Los Angeles, California 90036, and its telephone number is (323)
938-6300.
Lending Activities
At December 31, 1999, the Bank's total loans receivable net amounted to
$2.5 billion, which represented 72.5% of the Company's $3.4 billion in total
assets at that date. The Bank has traditionally concentrated its lending
activities on conventional first mortgage loans secured by single-family
residential properties and, to a lesser extent, multi-family residential
properties. At December 31, 1999, such loans constituted $1.5 billion and $327.3
million, or 57.1% and 12.6%, respectively, of the total loan portfolio.
Substantially all of the Bank's loan portfolio consists of conventional loans,
which are loans that are neither insured by the Federal Housing Administration
nor partially guaranteed by the Department of Veterans Affairs. More recently,
the Bank has increased it emphasis on commercial and consumer lending. At
December 31, 1999, commercial real estate loans amounted to $420.9 million or
16.3% of the total loan portfolio, while commercial business and consumer loans
(including loans secured by deposits) amounted to $159.7 million and $201.8
million or 6.2% and 7.8% of the total loan portfolio, respectively. The Bank's
total loan portfolio also included a small amount of land and other
miscellaneous loans, which amounted to $847,000 at December 31, 1999.
The Bank has general authority to originate and purchase loans secured by
real estate located throughout the United States. Notwithstanding this
nationwide lending authority, the Bank's primary market area for originations is
Los Angeles, Orange and Ventura Counties in Southern California. The Bank may
from time to time purchase additional loans to supplement its loan origination
activity, which may include loans secured by properties outside of the Bank's
primary market area in California as well as in other states.
Origination, Purchase and Sale of Loans. The lending activities of the
Bank are subject to the written, non- discriminatory underwriting standards and
loan origination procedures established by the Bank's Board of Directors and
management. Loan originations are obtained by a variety of sources, including
referrals from real estate brokers, existing customers, walk-in customers and
advertising. In its present marketing efforts, the Bank emphasizes its community
ties, customized personal service, competitive rates, and an efficient
underwriting and approval process. With an orientation under new management to
make the branch office network more responsive to customers needs, loan
applications now are taken at all of the Bank's branch offices. The Bank's
centralized underwriting department supervises the obtaining of credit reports,
appraisals and other documentation involved with a loan. Property valuations are
performed by the Bank's Appraisal Department as well as by independent outside
appraisers approved by the Bank's Board of Directors. The Bank requires title,
hazard and, to the extent applicable, flood insurance on all security property.
Mortgage loan applications are initially processed by loan officers who
have approval authority up to designated limits. Senior officers of the Bank who
serve on the Credit Committee acting together have additional approval
authority. All loans in excess of such designated limits are referred to the
Bank's Credit Committee, comprised
5
of the Senior Lending Officer, the Chief Financial Officer and the Senior
Executive Vice President of Retail Banking, which has approval authority for all
loans in excess of $1.0 million and up to $5.0 million. Any loans exceeding $5.0
million must be approved by the Board of Directors of the Bank.
The Bank's commercial loan officers have approval authority up to
designated limits. The commercial loan officers do all of the underwriting
associated with an application and prepare the credit authorization for
submission to the Senior Commercial Lending Officer for verification. Loans in
excess of $100,000 are referred directly to the Senior Commercial Lending
Officer who has authority to approve loans up to $500,000. The Bank's Senior
Lending Officer can approve loans up to $1.0 million. Loans in excess of such
amounts fall under the jurisdiction of the Credit Committee or the Board of
Directors, based on the loan amounts set forth above.
Applications for consumer loans, as well as the Bank's smaller "business
express" loans, which range between $5,000 and $50,000, are taken in the Bank's
branches and submitted to the Vice President, Manager of the Bank's Business
Center, who has authority to approve consumer loans up to $300,000. Other
consumer loan officers have approval authority up to lesser designated amounts.
In order to improve the Bank's balance sheet as well as due to asset and
liability management considerations, during the year ended December 31, 1997,
the Bank sold $85.2 million of single-family residential mortgage loans tied to
the FHLB 11th District Cost of Funds ("COFI") and reinvested $59.0 million of
such proceeds in one year adjustable- rate single-family residential mortgage
loans. Management used the balance of the sale proceeds to purchase $4.8 million
and $5.0 million of multi-family residential loans and a land loan,
respectively. In addition, during the last quarter of 1997, management leveraged
the capital raised in the Series A Offering by purchasing in two transactions an
aggregate of $408.8 million of adjustable-rate single-family residential
mortgage loans.
In 1998, the Bank leveraged the capital raised from the IPO primarily
through purchases of single-family residential loans totaling $821.7 million.
Such loans were generally underwritten in accordance with the Bank's
underwriting guidelines for direct originations, and were a mix of adjustable
and fixed-rate loans.
During the year ended December 31, 1999, the Bank purchased $191.6 million
of single family residential loans. In order to decrease the Bank's interest
rate risk, of the single family loans purchased, $180.9 million become
adjustable after 5, 7 or 10 years. Additionally, the Bank sold $92.5 million of
long-term fixed-rate single family residential loans. The Bank intends to focus
on loan originations, but may continue to selectively purchase residential
mortgage loans that meet its underwriting criteria from time to time in order to
supplement its loan originations.
A savings institution generally may not make loans to any one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities. At December 31, 1999, the Bank's regulatory limit
on loans-to-one borrower was $37.4 million and its five largest loans or groups
of loans-to-one borrower, including related entities, aggregated $29.8 million,
$25.0 million, $25.0 million $21.0 million and $21.0 million. Four of the five
largest loans or loan concentrations were secured by commercial real estate and
multi-family residential properties. The fifth loan, a $25.0 million loan is
secured by marketable securities. All of these loans or loan concentrations were
performing in accordance with their terms at December 31, 1999.
Single-Family Residential Real Estate Loans. Although the Bank has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on existing single-family residences, more
recently, the Bank has placed less emphasis on such lending and has placed
increased emphasis on commercial and consumer lending. At December 31, 1999,
$1.5 billion or 57.1% of the Bank's total gross loan portfolio consisted of
single-family residential loans. The single-family residential loans originated
by the Bank are generally made on terms, conditions and documentation except for
non-conforming loan size which would permit the sale of loans to the Federal
Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA") and other institutional investors in the secondary market.
Although the Bank has historically originated its single-family
residential loans internally, in an effort to enhance its ability to originate
greater volumes of loans without increasing its staff, during 1997, the Bank
entered into agreements with various mortgage brokers with respect to the
origination of single-family residential loans. Under the
6
terms of such agreements, the mortgage brokers originate loans on behalf of the
Bank using the Bank's loan documents. Such loans (which generally conform except
for the size of the loans with FHLMC and FNMA resale requirements) are
originated and underwritten in accordance with the Bank's underwriting policies.
Currently, the Bank originates approximately 75% of its single-family
residential loans pursuant to such mortgage broker relationships. The Bank
currently utilizes approximately 38 mortgage brokers and management believes
that its single-family loan originations are of high quality based on its
scoring results (average FICO score as of December 31, 1999 of over 700).
Substantially all of the single-family residential loans originated by the Bank
(either internally or through mortgage brokers) are secured by properties
located within the Bank's market area.
Although the Bank had previously not been an active purchaser of
single-family residential loans, during 1997, the Bank established PPCCP as a
real estate investment trust ("REIT") and leveraged the capital generated from
two transactions through wholesale purchases of an aggregate of $408.8 million
of adjustable-rate (based upon a weekly average yield on U.S. Treasury
securities adjusted to a constant comparable maturity of one year) single-family
residential loans, which were funded by short- to intermediate-term FHLB
advances. Such purchases significantly increased the size of the Bank's
residential mortgage portfolio. Similarly, in 1998, the Bank leveraged the
proceeds raised from the IPO through wholesale purchases of $821.7 of
single-family residential loans. During the year ended, December 31, 1999, the
Bank purchased $180.9 million of fixed-rate single-family residential loans
which become adjustable after 5, 7 or 10 years. As the Bank is able to increase
its loan originations, management intends to, over time, replace its wholesale
loan purchases with loans which have been originated internally.
The Bank currently offers adjustable-rate single-family residential loans
with terms of 15 or 30 years. Such loans are amortized on a monthly basis with
principal and interest due each month. In addition to these products, the Bank
offers a fixed bi-weekly pay option, which results in 26 payments per year,
thereby permitting a customer to pay off the loan faster than would otherwise be
the case. At December 31, 1999, the Bank had $1.1 billion or 71.7% of fixed-rate
single-family residential loans in its single-family residential portfolio.
Since the 1980's, the Bank has also offered a variety of adjustable- rate
single-family residential mortgage loans. Such loans generally have up to 30
year terms. Presently, the Bank offers a "5/1 Product," in which the loan is
fixed- at origination for a five year period, after which the interest rate
adjusts every year in accordance with a designated index (the weekly average
yield on U.S. Treasury securities adjusted to a constant comparable maturity of
one year, as made available by the Federal Reserve Board). Such loans currently
have a 2% cap on the amount of any increase or decrease in the interest rate per
year, and a 6% limit on the amount by which the interest rate can increase or
decrease over the life of the loan. In addition, the Bank's adjustable-rate
loans are currently not convertible into fixed-rate loans and do not contain
prepayment penalties. Approximately 28.3% of the single-family residential loans
in the Bank's single-family residential loan portfolio at December 31, 1999 had
adjustable interest rates.
Under prior management, the Bank's adjustable-rate loans were tied to
COFI, which does not adjust as rapidly to changes in interest rates as the U.S.
Treasury constant comparable maturity index now utilized by the Bank. The Bank
has discontinued the use of COFI-based loans. At December 31, 1999, 31.7% of the
Bank's adjustable-rate single-family loans were tied to COFI.
Adjustable-rate mortgage loans decrease but do not eliminate the risks
associated with changes in interest rates. Because periodic and lifetime caps
limit the interest rate adjustments, the value of adjustable-rate mortgage loans
also fluctuates inversely with changes in interest rates. In addition, as
interest rates increase, the required payments by the borrower increase, thus
increasing the potential for default.
The Bank is permitted under applicable law to lend up to 100% of the
appraised value of the real property securing a residential loan (referred to as
the loan-to-value ratio). However, if the amount of a residential loan
originated or refinanced exceeds 90% of the appraised value, the Bank is
required by federal regulations to obtain private mortgage insurance on the
portion of the principal amount that exceeds 80% of the appraised value of the
security property. Pursuant to underwriting guidelines adopted by the Board of
Directors, the Bank will generally lend up to 90% of the appraised value of the
property securing a single-family residential loan. However, the Bank generally
obtains private mortgage insurance on the principal amount that exceeds 80% of
the appraised value of the security property. For properties with an appraised
value in excess of $400,000, the Bank will generally not lend in excess of 80%.
At December 31, 1999, $16.9 million or 1.1% of the Bank's single-family
residential loans had loan-to-value
7
ratios in excess of 80% and did not have private mortgage insurance. In
addition, as of such date, the Bank's single- family residential loans had a
weighted average loan-to-value ratio of 65%.
In 1997, the Bank sold the servicing rights both with respect to
substantially all of its residential mortgage loans as well as the residential
mortgage loans which the Bank was servicing for others to Temple Inland Mortgage
Corporation (the "Residential Servicing Agent"), a wholly owned subsidiary of
Guaranty Federal Bank, F.S.B., which is wholly owned by Temple-Inland Inc., an
unrelated third party. The sale of loan servicing was predicated upon new
management's determination that it was costly and inefficient for the Bank to
service a varied collection of loan products which it no longer offered. The
Bank recognized a gain on sale of $3.2 million during the year with respect to
the Bank's loans serviced for others and an additional $5.3 million, related to
the Bank's mortgage loans, which was deferred and is being recognized over the
estimated lives of the related loans.
In connection with the Bank's sale of servicing, the Bank entered into a
servicing agreement with the Residential Servicing Agent (the "Residential
Servicing Agreement"), pursuant to which the Residential Servicing Agent
serviced substantially all of such residential mortgage loans. The Bank also
entered into a forward production servicing purchase and sale agreement with the
Residential Servicing Agent with respect to new residential loan originations.
However, the Bank terminated this agreement in early 1998, and the Bank began
servicing all of the residential mortgage loans it originated after February 20,
1998.
Multi-Family and Commercial Real Estate Loans. At December 31, 1999, the
Bank had an aggregate of $327.3 million and $420.9 million invested in
multi-family and commercial real estate loans, respectively, or 12.6% and 16.3%
of the gross loan portfolio, respectively. The Bank has generally targeted
higher quality, smaller commercial real estate loans with principal balances of
up to $5.0 million. In originating such loans, the Bank relies on relationships
it has developed with brokers, correspondents and mortgage brokers.
The Bank's portfolio of multi-family loans are secured by multi-family
properties of five units or more, while the Bank's commercial real estate loans
are secured by industrial, warehouse and self-storage properties, office
buildings, office and industrial condominiums, retail space and strip shopping
centers, mixed-use commercial properties, mobile home parks, nursing homes,
hotels and motels. Substantially all of these properties are located in
California. The Bank will presently originate these loans for terms of up to 10
years based upon a 20 to 25 year loan amortization period and up to 15 years for
loans amortized over a period of 15 years or less. The Bank will originate these
loans on both a fixed-rate or adjustable-rate basis, with the latter based
primarily on the one year or ten year U.S. Treasury index of constant comparable
maturities. Adjustable-rate loans may have an established ceiling and floor, and
the maximum loan-to-value for these loan products is 75%. As part of the
criteria for underwriting commercial real estate loans, the Bank generally
requires a debt coverage ratio (the ratio of net cash from operations before
payment of debt service to debt service) of 1.20 or more. It is also the Bank's
general policy to seek additional protection to mitigate any weaknesses
identified in the underwriting process. Additional coverage may be provided
through secondary collateral and personal guarantees from the principals of the
borrowers.
Commercial real estate lending entails different and significant risks
when compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. The Bank attempts to minimize its
risk exposure by imposing stringent loan-to-value ratios, requiring conservative
debt coverage ratios, and continually monitoring the operation and physical
condition of the collateral.
Originations of multi-family and commercial real estate loans increased
from an aggregate $40.0 million during the year ended December 31, 1997 to
$124.1 million during the year ended December 31, 1998 to $264.5 million during
the year ended December 31, 1999. The Bank began making purchases of
multi-family and commercial real estate loans during the year ended December 31,
1997. Such loan purchases aggregated $23.5 million in 1998 and $1.6 million in
1999.
Commercial Business and Consumer Loans. The Bank is placing increased
emphasis on the development of commercial business and consumer lending programs
within the areas serviced by its branches. Toward that end,
8
during 1998 and 1999 the Bank hired over 25 individuals with significant
expertise in commercial and consumer credit administration and lending. Except
for loans secured by deposits, the Bank did not engage in this type of lending
activity prior to 1996. During the years ended December 31, 1999, 1998 and 1997,
the Bank originated $362.5 million, $94.0 million and $32.6 million,
respectively, of commercial business and consumer loans including loans secured
by deposits, which amounted to 43.7%, 15.5% and 20.3% of total originations
during such respective periods.
The Bank is originating and intends to originate commercial business loans
including working capital lines of credit, inventory and accounts receivable
loans (including a specialized accounts receivable loan product for small
business), equipment and other asset-based financing (including equipment
leases), term loans and loans guaranteed by the Small Business Administration
("SBA"). Depending on the collateral pledged to secure the extension of credit,
maximum loan-to-value ratios are 75% or less. Loan terms may vary from one to
seven years. The interest rates on such loans are generally variable and are
indexed to the Wall Street Journal Prime Rate, plus a margin.
The Bank intends to grow its SBA lending business, on which loans are
guaranteed up to certain levels by the SBA. The SBA-guaranteed loans bear
adjustable-rates tied to the lowest published New York prime rate, adjusted
monthly, plus a margin, which depends on the term of the loan. The loans
generally have amortization schedules of seven to 25 years, depending on the
purpose of the loan. Each loan is reviewed by the SBA and, depending on the size
of the loan and the proposed use of proceeds, the SBA establishes what
percentage of the loan it will guarantee. The guarantee cannot exceed 80% of the
loan or $750,000, whichever is less. The guarantee applies not only to the
principal, but also covers accrued interest, foreclosure costs, legal fees and
other expenses. The Bank plans to obtain preferred lender status, which will
permit it to underwrite and close such loans much more promptly. At December 31,
1999, approximately $18.4 million of the Bank's $159.7 million in commercial
business loans were comprised of SBA loans.
The Bank is authorized to make loans for a wide variety of personal or
consumer purposes but had not engaged in any lending other than loans secured by
deposits for most of the 1990s. The Bank began originating home equity loans and
lines of credit and automobile loans in August 1996 in order to provide a wide
range of products and services to its customers. The Bank also offers overdraft
protection and unsecured lines of credit. At December 31, 1999, home equity
loans and lines amounted to $9.7 million. On owner-occupied homes, these loans
and lines are originated by the Bank for up to 80% of the first $500,000 of
appraised value, plus 75% of the value from $500,001 to $1,000,000, plus 60% of
the value from $1,000,001 to $1,500,000, less the amount of any prior liens on
the property. For non- owner occupied properties, the Bank will lend up to 75%
of the first $400,000 of appraised value, plus 60% of the value from $400,001 to
$1,000,000, less the amount of any prior liens on the property. Home equity
loans and lines of credit have a maximum term of 25 years and carry variable
interest rates. The Bank will secure each of these types of loans with a
mortgage on the property (generally a second mortgage).
The Bank also originates loans secured by new and used automobiles,
primarily through an indirect lending program with automobile dealers. The
maximum term for the Bank's automobile loans is 84 months for a new luxury car
loan and 72 months for a used luxury car loan. For all other models, the maximum
term is 72 months for new vehicles and 60 months for used vehicles. The Bank
will lend up to 100% of the purchase price on new car loans with a purchase
price of $25,000 or more, and up to 80% for new and used vehicles (up to five
years). On used vehicles, the Bank will finance up to 80% of the lower of the
total purchase price or 100% of the National Automobile Dealers' Association
Wholesale Blue Book Value. The Bank requires all borrowers to maintain
automobile insurance with the Bank named as loss payee. At December 31, 1999,
the Bank had $2.6 million of direct automobile loans in portfolio. During 1998,
the Bank hired an individual with significant experience to manage the Bank's
indirect automobile lending program. As a result, the Bank has increased its
originations of indirect automobile loans. The Bank currently originates such
loans through approximately 61 dealers, all of which are located in California.
Although management believes that less than 10% of the Bank's indirect
automobile loan portfolio at December 31, 1999 consisted of loans made to
"subprime" borrowers at the time of origination, less than 10% of current
originations are being made to such "subprime" borrowers. The Bank intends to
securitize and sell a portion of its indirect automobile loan portfolio in the
future. At December 31, 1999, the Bank had $178 million of indirect automobile
loans in its portfolio with an effective yield of 9.03%. At December 31, 1999,
0.98% of the indirect automobile portfolio (net of repossessions) was delinquent
30 days or more.
9
Commercial business and consumer loans generally have shorter terms and
higher interest rates than mortgage loans but generally involve more credit risk
than mortgage loans because of the type and nature of the collateral. In
addition, consumer lending collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness and personal bankruptcy. The Bank
believes that the generally higher yields earned on commercial business and
consumer loans compensate for the increased credit risk associated with such
loans and the Bank intends to continue to offer such loans in order to provide a
full range of services to its customers.
Asset Quality
General. The Bank's loan review function is carried out through an
internal asset review process which is supplemented on a quarterly basis by loan
reviews conducted by an unaffiliated firm. The Bank maintains an Internal Asset
Review Committee and Loan Review and Special Assets Departments and maintains
updated loan underwriting, credit, collection and monitoring procedures.
Management initiated a policy to take title to non-performing assets as promptly
as practicable and improve the properties' physical condition where appropriate
so that marketing efforts may be commenced. In the case of commercial
properties, management takes steps to enhance net operating income with respect
to its properties in order to command a better sales price. The Bank's future
results of operations will be significantly affected by its ability to continue
to maintain its reduced level of non-performing assets without incurring
additional material losses.
Loan Delinquencies. When a borrower fails to make a required payment on a
loan, the Bank attempts to cure the deficiency by contacting the borrower and
seeking payment. Contacts are generally made following the grace period after a
payment is due, which is generally ten days on commercial loans and 15 days on
residential loans. At such time, a late payment fee is assessed. In most cases,
deficiencies are cured promptly. If a delinquency extends past the applicable
grace period, the loan file and payment history are reviewed and continued
efforts are made to collect the loan. In the event that no contact with the
borrower is made, or no payment is received by the end of the grace period, a
Notice of Intent to Foreclose ("Notice") is sent. Depending upon the scheduled
payment date, this Notice is sent no later than 30 days after the due date for
residential loans and no later than 15 days after the due date for commercial
loans.
With respect to commercial loans, a trial balance is updated weekly, and
those accounts that are identified as being past the due date are assigned to
staff to begin the collection process. With respect to commercial loans,
delinquent reports and a listing of those accounts for which a Notice has been
issued are sent to senior management and the Special Assets Department to
provide advance information as to potential problems which may fall under their
Department in the coming quarter. Generally when an account becomes 90 days
delinquent, the Bank institutes foreclosure or other proceedings, as necessary,
to minimize any potential loss.
Non-Performing Assets. With respect to residential mortgage loans, as
described under "--Single-family Residential Real Estate Loans," the Residential
Servicing Agent services a substantial amount of the Bank's loan portfolio. The
Bank began servicing all of the residential mortgage loans it originated after
February 20, 1998. The Residential Servicing Agreement requires the Residential
Servicing Agent to foreclose upon or otherwise comparably convert the ownership
of properties securing such residential mortgage loans as they come into and
continue in default and as to which no satisfactory agreements can be made for
collection of delinquent payments. When residential mortgage loans handled by
the Residential Servicing Agent go into non-accrual status, the Bank may request
that they be transferred back to the Bank. All loans serviced by the Residential
Servicing Agent which become real estate owned are automatically transferred to
the Bank.
All commercial loans held in the Bank's portfolio are reviewed on a
regular basis to determine any potential problems. Monthly committee meetings
are held to identify problem assets and to set forth a strategy for the
mitigation of loss and the resolution of the problem. Loans are placed on
non-accrual status if management has substantive doubts about payment in full of
both principal and interest, or if principal and interest is contractually in
default for a period of 90 days or more. The Bank provides an allowance for the
loss of previously accrued but uncollected interest on all non-accrual loans.
Typically, after a collection problem has necessitated the issuance of a Notice,
the Special Assets Department will review and recommend the selection and an
appointment of a receiver. The Bank's current policy is
10
to have a receiver appointed at the expiration of the Notice, which is 10 days
after issuance, unless some type of formal, written agreement with the borrower
has been arranged.
The receiver has specific criteria to fulfill with respect to the
management of the property on behalf of the Bank. The first responsibility is to
gain control of the cash generated from the property. The receiver is
responsible for all collection activity. In addition, the receiver is required
to prepare forward forecasting with respect to occupancy and potential rent
collections. Approximately 30 to 60 days after a receiver is appointed, the Bank
will order a third party appraisal report. The information pertaining to the
property operations will be supplied to the appraiser by the receiver. The
Bank's in-house Appraisal Department reviews the third party appraisal report
for accuracy and reasonableness of assumptions.
The receiver and the Bank work together in preparing a budget for
potential repairs and maintenance, as well as capital expenditure items needed
at the property. It is the policy of the Bank to instruct the receiver to
utilize all net operating income available to restore the property or units of
current vacancy to "lease ready" condition.
A review of the collateral value is performed to determine if sufficient
equity exists to repay the indebtedness in the event of a foreclosure and
subsequent sale of the property. The valuation is prepared by the Bank's
Appraisal Department. The valuation is performed under two scenarios. First, a
review of the current market conditions of similar properties within the
collateral property's market is completed to ascertain comparable rent and sale
data. Second, a discounted cash flow analysis is prepared, utilizing current
investor return requirements and capitalization rates. Once a value for the
property has been estimated based upon its ability to generate cash flow,
expenses associated with the sale of the property, such as broker commissions
and closing costs are deducted from the estimated value. A comparison of this
amount is made to the loan balance to determine whether a specific allowance or
a write-off is appropriate.
During this on-going process, the Bank and the receiver will identify and
catalogue any potential purchasers who call and express an interest in the
property prior to the Bank taking title. Once title is transferred, the Bank
will then begin the process of contacting those entities that previously
expressed an interest to confirm that interest and proceed with the
qualification stage.
Real Estate Owned. Real estate acquired through foreclosure is carried at
the estimated fair value less estimated selling expenses at the date of
transfer. A loan charge-off is recorded for any writedown in the loan's carrying
value to fair value at the date of transfer. Real estate loss provisions are
recorded if the properties' estimated fair value subsequently declines below the
value determined at the recording date. In determining the fair value at
acquisition, costs relating to development and improvement of property are
considered. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
In preparing a real estate owned property to be marketed for sale, certain
repairs are undertaken and other repair items are left as negotiating points
pertaining to the sale contract. The Bank may offer to adjust the sale price for
such minor repair items, or may offer to deliver the property in a repaired
state. As part of the disposition strategy, the Bank may offer financing at
current market terms to qualified buyers of the real estate owned. Generally,
the Bank requires that the purchaser/borrowing entity provide a minimum of 20%
cash toward the purchase of the property. Terms offered are similar to terms
being offered on other new originations and at comparable rates. The Special
Assets Department makes great efforts to ensure that the underwriting for a loan
to facilitate is comparable to other new loan production, and that the
transactions are done at arms-length and reflect fair market terms.
Troubled Debt Restructuring. A loan constitutes a troubled debt
restructuring ("TDR") if the Bank, for economic or legal reasons related to the
borrower's financial difficulties, grants a concession to the borrower that it
would not otherwise consider. Among other things, a TDR involves the
modification of terms of the loan, including a reduction of the interest rate,
an extension of the maturity date at a stated interest rate lower than the
current market for new loans with similar risk, a reduction of the face amount
of the loan or a reduction of accrued interest. The Bank provides an allowance
for the loss of previously accrued but uncollected interest on TDR's, as well as
non-accrual loans. Currently, the Bank's TDR's consist of loans collateralized
by single- and multi-family residential properties. The majority of these
restructurings were entered into during the early 1990's when economic
conditions in California were severely depressed or in conjunction with damage
to the collateral properties caused by the Northridge earthquake.
11
Management's decision to provide such restructurings was based upon both an
internal assessment of the situation and a consensus of other lenders in
California who believed that this resolution would be the most effective
mitigating measure. Management considers all loans formerly treated as TDR's to
be impaired loans in the year of restructuring. Generally, such loans, as well
as those previously placed on non-accrual status, are returned to accrual status
when the borrower has had a period of repayment performance for twelve
consecutive months.
The Bank's management has aggressively focused on problem asset
rehabilitation, and has undertaken a number of initiatives in this area. The
Bank has established an Internal Asset Review Committee, which is comprised of
the Chief Executive Officer, the Chief Financial Officer, the Senior Lending
Officer and the Vice President and Loan Review Officer. The Committee meets at
least monthly and monitors the Bank's assets to ensure proper classification.
All multi-family commercial real estate and commercial assets in excess of
$500,000, regardless of performance, are reviewed at least once each year.
Assets that are classified as special mention are reviewed every six months and
those assets classified as substandard are reviewed every three months and, if
collateral dependent, a market value analysis is performed on the property to
determine whether valuation allowances are required. Loans that are
non-performing, subject to workout or forbearance or classified substandard are
monitored and managed by the Senior Lending Officer. Assets that are foreclosed
and become real estate owned continue to be managed by the Senior Lending
Officer through resolution.
Investment Activities
The Bank's securities portfolio is managed by the Senior Executive Vice
President and Chief Financial Officer in accordance with a comprehensive written
Investment Policy which addresses strategies, types and levels of allowable
investments and which is reviewed and approved annually by the Board of
Directors of the Bank. The management of the securities portfolio is set in
accordance with strategies developed by the Bank's Asset/Liability Management
Committee.
The Bank's Investment Policy authorizes the Bank to invest in U.S.
Treasury obligations (with a maturity of up to five years), U.S. agency
obligations (with a maturity of up to ten years), U.S. Government agency
mortgage-backed securities (limited to no more than 50% of the Bank's total
assets), bankers' acceptances (with a maturity of 180 days or less), FHLB
overnight deposits, investment-grade corporate trust preferred obligations,
investment-grade commercial paper (with a maturity of up to nine months),
federal funds (with a maturity of one month or less), certificates of deposit in
other financial institutions (with a maturity of one year or less), repurchase
agreements (with a maturity of six months or less), reverse repurchase
agreements (with a maturity of two years or less) and certain collateralized
mortgage obligations (with a weighted average life of less than ten years).
At December 31, 1999, the Bank's securities portfolio consisted of $425.8
million of mortgage-backed securities, $421.5 million of which were classified
as available-for-sale and $4.3 million of which were classified as
held-to-maturity, $34.2 million of U.S. Government agency obligations, $241.9
million of investment-grade trust preferred securities and $74.3 million of SBA
certificates and other asset backed securities. Of the Bank's total investment
in mortgage-backed securities at December 31, 1999, $26.7 million consisted of
Government National Mortgage Association ("GNMA") certificates, $240.9 million
consisted of FNMA certificates, $110.7 million consisted of non-agency
certificates and $47.5 million consisted of FHLMC certificates. Of the $425.8
million of mortgage-backed securities at December 31, 1999, $296 million
consisted of fixed-rate securities and $129.8 million consisted of
adjustable-rate securities. Of the Bank's $34.2 million of U.S. Government and
federal agency obligations at December 31, 1999, none were scheduled to mature
within one through five years thereof, $34.2 million were scheduled to mature
after five through ten years thereof and none were scheduled to mature after ten
years. Of the Bank's $742 million of mortgage-backed and other securities
available-for-sale as well as held-to-maturity at December 31, 1999, none were
scheduled to mature within one year thereof, $62.4 million were scheduled to
mature after one through five years thereof, $147.9 million were scheduled to
mature after five through ten years thereof and $531.7 million were scheduled to
mature after ten years. The Bank's aggregate securities portfolio, net of
repayments and prepayments and sales, increased by $430.4 million or 74.1%
between 1997 and 1998 and decreased by $235.0 million or 23.2% during 1999. At
December 31, 1999, such portfolio amounted to $776.2 million.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) represent a participation interest in
a pool of single-family or multi-family mortgages, the principal and
12
interest payments on which are passed from the mortgage originators, through
intermediaries (generally U.S. Government agencies and government sponsored
enterprises) that pool and repackage the participation interests in the form of
securities, to investors such as the Bank. Such U.S. Government agencies and
government sponsored enterprises, which guarantee the payment of principal and
interest to investors, primarily include the FHLMC, the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and federally insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal within one year. The FNMA is a private
corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for conventional mortgage loans. The FNMA guarantees the timely
payment of principal and interest on FNMA securities. FHLMC and FNMA securities
are not backed by the full faith and credit of the United States, but because
the FHLMC and the FNMA are U.S. Government-sponsored enterprises, these
securities are considered to be among the highest quality investments with
minimal credit risks. The GNMA is a government agency which is intended to help
finance government-assisted housing programs. GNMA securities are backed by
FHA-insured and VA-guaranteed loans, and the timely payment of principal and
interest on GNMA securities are guaranteed by the GNMA and backed by the full
faith and credit of the U.S. Government. Because the FHLMC, the FNMA and the
GNMA were established to provide support for low- and middle-income housing,
there are limits to the maximum size of loans that qualify for these programs.
For example, the FNMA and the FHLMC currently limit their loans secured by a
single-family, owner-occupied residence to $252,700. To accommodate larger-sized
loans, and loans that, for other reasons, do not conform to the agency programs,
a number of private institutions have established their own home-loan
origination and securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgage, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages.
Sources of Funds
General. The Bank will consider various sources of funds to fund its
investing and lending activities and evaluates the available sources of funds in
order to reduce the Bank's overall funding costs, subject to the Bank's asset
and liability management policies. Deposits, reverse repurchase agreements,
advances from the FHLB of San Francisco, and sales, maturities and principal
repayments on loans and securities have been the major sources of funds for use
in the Bank's lending and investing activities, and for other general business
purposes. Management of the Bank closely monitors rates and terms of competing
sources of funds on a daily basis and utilizes the source which it believes to
be the most cost effective, consistent with the Bank's asset and liability
management policies. Products are priced each week through the Bank's Asset
Liability Management Committee.
Deposits. The Bank attempts to price its deposits in order to promote
deposit growth and offers a wide array of deposit products in order to satisfy
its customers' needs. The Bank's current deposit products include passbook
accounts, checking accounts, money market deposit accounts, fixed-rate,
fixed-maturity retail certificates of deposit ranging in terms from 30 days to
five years, individual retirement accounts, and non-retail certificates of
deposit consisting of jumbo (generally greater than $100,000) certificates and
public deposits.
The Bank's retail deposits are generally obtained from residents in its
primary market area. The principal methods currently used by the Bank to attract
deposit accounts include offering a wide variety of products and services and
competitive interest rates. The Bank utilizes traditional marketing methods to
attract new customers and savings deposits, including various forms of
advertising. Although the Bank has in the past utilized the services of deposit
brokers to attract out-of-market, institutional certificates of deposit, the
Bank has allowed such brokered deposits to run off as they mature and is not
accepting any new brokered deposits.
13
The Bank currently operates a total of 44 ATMs. As of June 30, 1999, after
giving effect to the consolidation activity in California, the Bank ranked
seventh in terms of thrift deposit market share in Los Angeles, Orange and
Ventura Counties.
Borrowings. The Bank obtains both fixed and variable-rate long and
short-term advances from the FHLB of San Francisco upon the security of certain
of its residential first mortgage loans and other assets, provided certain
standards related to creditworthiness of the Bank have been met. FHLB of San
Francisco advances are available for general business purposes to expand lending
and investing activities. Borrowings have generally been used to fund the
purchase of mortgage-backed and investment securities or lending activities and
have been collateralized with a pledge of loans, securities in the Bank's
portfolio or any mortgage-backed or investment securities purchased.
Advances from the FHLB of San Francisco are made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. At December 31, 1999, the Bank had total FHLB of San Francisco
advances of $1.1 billion at a weighted average interest rate of 5.15%, $614
million of which matures in 2000, $200 million of which matures in 2003 and the
remaining $310 million of which matures in 2008. Certain of these advances from
the FHLB of San Francisco have call provisions. FHLB advances decreased by $74
million during 1999.
The Bank increasingly relies on obtaining funds from the sale of
securities to investment dealers under reverse repurchase agreements. At
December 31, 1999, reverse repurchase agreements amounted to $381 million, as
compared to $364 million and $341 million at December 31, 1998 and 1997,
respectively. As of December 31, 1999, the weighted average remaining term to
maturity of the Bank's reverse repurchase agreements was 2.4 years compared to
3.73 years at December 31, 1998 and 2.71 years at December 31, 1997, and such
reverse repurchase agreements had a weighted average interest rate of 5.85%
compared to 5.61% and 5.76% at December 31, 1999, 1998 and 1997, respectively.
Certain of the reverse repurchase agreements have call provisions. In a reverse
repurchase agreement transaction, the Bank will generally sell a mortgage-backed
security agreeing to repurchase either the same or a substantially identical
security on a specified later date (which range in maturity from overnight to
ten years) at a price greater than the original sales price. The difference in
the sale price and purchase price is the cost of the use of the proceeds. The
mortgage-backed securities underlying the agreements are delivered to the
dealers who arrange the transactions. For agreements in which the Bank has
agreed to repurchase substantially identical securities, the dealers may sell,
loan or otherwise dispose of the Bank's securities in the normal course of their
operations. However, such dealers or third party custodians safe-keep the
securities which are to be specifically repurchased by the Bank. Reverse
repurchase agreements represent a competitive cost short-term funding source for
the Bank. Nevertheless, the Bank is subject to the risk that the lender may
default at maturity and not return the collateral. The amount at risk is the
value of the collateral which exceeds the balance of the borrowing. In order to
minimize this potential risk, the Bank only deals with large, established U.S.
investment brokerage firms when entering into these transactions. Reverse
repurchase transactions are accounted for as financing arrangements rather than
sales of securities, and the obligation to repurchase such securities is
reflected as a liability in the Company's Consolidated Financial Statements.
In December, 1999, the Company secured a $10 million line of credit from a
third-party commercial bank for working capital purposes and to fund the
repurchase of the Company's outstanding stock to be effected from time to time
in open market or privately-negotiated transactions. As of December 31, 1999,
$4.7 million of the line of credit had been utilized.
Competition
The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate, commercial business and
consumer loans.
The Bank competes with other thrift institutions, commercial banks,
insurance companies, credit unions, thrift and loan associations, money market
mutual funds and brokerage firms in attracting and retaining deposits.
Competition for deposits from large commercial banks is particularly strong.
Many of the nation's thrift institutions and many large commercial banks have a
significant number of branch offices in the areas in which the Bank operates.
In addition, there is strong competition in originating and purchasing
real estate, commercial business and consumer loans, principally from other
savings and loan associations, commercial banks, mortgage banking companies,
14
insurance companies, consumer finance companies, pension funds and commercial
finance companies. The primary factors in competing for loans are the quality
and extent of service to borrowers and brokers, economic factors such as
interest rates, interest rate caps, rate adjustment provisions, loan maturities,
loan-to-value ("LTV") ratios, loan fees, and the amount of time it takes to
process a loan from receipt of the loan application to date of funding. The
Bank's future performance is dependent on its ability to originate a sufficient
volume of loans and attract deposits in its local market areas. There can be no
assurance that the Bank will be able to effect such actions on satisfactory
terms.
Subsidiaries
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
primarily for community development purposes. In addition, the Bank is permitted
to make an unlimited investment in one or more operating subsidiaries, which are
permitted to engage only in activities that the Bank may undertake directly.
PPCCP is such an operating subsidiary of the Bank. As of December 31, 1999, the
Bank maintained one operating subsidiary, four direct service corporations and
one indirect service corporation subsidiary consisting of SoCal Mortgage
Corporation ("SMC"), Direct Investment Company of Southern California ("DIC"),
SCP Investments, Inc. ("SCP"), Continental Development of California, Inc.
("CDC") and SCS Insurance Services, Inc. ("SCS"). At December 31, 1999, the
Bank's investment in its five service corporation subsidiaries amounted to $39.2
million in the aggregate.
PPCCP was established as an operating subsidiary of the Bank in 1997 to
acquire, hold and manage primarily mortgage assets and to operate in a manner so
as to quality as a REIT for federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year
ending December 31, 1997. In October 1997, PPCCP commenced its operations upon
consummation of a public offering of 1,426,000 shares of its 9.75% Noncumulative
Exchangeable Preferred Stock, Series A (the "Series A Preferred Shares"), at a
liquidation preference of $25.00 per share. The Series A Preferred Shares are
traded on the Nasdaq National Market under the symbol "PPCCP."
SMC is an inactive corporation which was formed in 1987 to originate
mortgage loans. However, SMC has never conducted any business since it was
organized. DIC was formed in 1987 to acquire, develop, construct and sell real
estate developments and is currently inactive. DIC owns 100% of the capital
stock of SCP which was formed in 1989 to invest in various real estate
development projects. In 1998, SCP sold the Bank's last remaining real estate
development project consisting of 62 acres of vacant land located in Corona,
California.
CDC was formed in 1969 for the purpose of acquiring, developing,
constructing and selling real estate developments. CDC does not currently hold
any real estate and CDC's sole operation consists of acting as trustee under the
Bank's deeds of trust with respect to its mortgage lending.
SCS was formed in 1984 in order to sell, through the Bank's branch
offices, annuities and various other investments as well as other insurance
products to the Bank's account holders and members of the general public. During
the years ended December 31, 1999, 1998 and 1997, SCS recognized net earnings of
$434,000, $434,000 and $362,000, respectively.
Regulation
The Bank is a federally chartered and insured stock savings bank subject
to extensive regulation and supervision by the OTS, as the primary federal
regulator of savings associations, and the FDIC, as the administrator of the
SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Company or the Bank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals. Certain federal banking laws have been recently amended. See
"Regulation of Savings and Loan Holding Companies-Financial Modernization."
15
Regulation of Savings and Loan Holding Companies
The Company is a registered savings and loan holding company. The Home
Owners' Loan Act, as amended ("HOLA"), and OTS regulations generally prohibit a
savings and loan holding company, without prior OTS approval, from acquiring,
directly or indirectly, the ownership or control of any other savings
association or savings and loan holding company, or all, or substantially all,
of the assets or more than 5% of the voting shares thereof. These provisions
also prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
Holding Company Activities. The Company currently operates as a unitary
savings and loan holding company. Generally, there are limited restrictions on
the activities of a unitary savings and loan holding company and its non-
savings association subsidiaries. If the Company ceases to be a unitary savings
and loan holding company, the activities of the Company and its non-savings
association subsidiaries would thereafter be subject to substantial
restrictions.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other non-
withdrawable stock, or else such dividend will be invalid, unless an application
is required. See "Regulation of Federal Savings Banks-Capital Distribution
Regulation."
Affiliate Restrictions. Transactions between a savings association and its
"affiliates" are subject to quantitative and qualitative restrictions under
Section 11 of the HOLA and Sections 23A and 23B of the Federal Reserve Act.
Affiliates of a savings association include, among other entities, the savings
association's holding company and companies that are under common control with
the savings association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not make
a loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings association
may not purchase or invest in securities of an affiliate other than shares of a
subsidiary; a savings association and its subsidiaries may not purchase a
low-quality asset from an affiliate; and covered transactions and certain other
transactions between a savings association or its subsidiaries and an affiliate
must be on terms and conditions that are consistent with safe and sound banking
practices. With certain exceptions, each loan or extension of credit by a
savings association to an affiliate must be secured by collateral with a market
value ranging from 100% to 130% (depending on the type of collateral) of the
amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of transactions with affiliates.
Financial Modernization. Under the Gramm-Leach-Bliley Act enacted into law
on November 12, 1999, no company may acquire control of a savings and loan
holding company after May 4, 1999, unless the company is engaged only in
activities traditionally permitted to a multiple savings and loan holding
company or newly permitted to a
16
financial holding company under Section 4(k) of the Bank Holding Company Act.
Existing savings and loan holding companies and those formed pursuant to an
application filed with the OTS before May 4, 1999, may engage in any activity
including non-financial or commercial activities provided such companies control
only one savings and loan association that meets the Qualified Thrift Lender
test. Corporate reorganizations are permitted, but the transfer of grandfathered
unitary thrift holding company status through acquisition is not permitted.
Regulation of Federal Savings Banks
As a federally insured savings bank, lending activities and other
investments of the Bank must comply with various statutory and regulatory
requirements. The Bank is regularly examined by the OTS and must file periodic
reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks. The Bank is a member of the FHLB System. Among
other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal at least 1% of its aggregate unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each calendar
year or 5% of its advances from the FHLB, whichever is greater.
Liquid Assets. Under OTS regulations, for each quarter, a savings bank is
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations and certain other investments) not less than a specified
percentage of the average daily balance of its net withdrawable deposit accounts
and borrowings payable in one year or less. This liquidity requirement, which is
currently at 4.0%, may be changed from time to time by the OTS to any amount
between 4.0% to 10.0%, depending upon certain factors. The Bank maintains liquid
assets in compliance with these regulations.
Regulatory Capital Requirements. OTS capital regulations require savings
banks to satisfy minimum capital standards: risk-based capital requirements, a
leverage requirement and a tangible capital requirement. Savings banks must meet
each of these standards in order to be deemed in compliance with OTS capital
requirements. In addition, the OTS may require a savings association to maintain
capital above the minimum capital levels.
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings bank is required to maintain
core capital equal to a minimum of 3% of adjusted total assets. (In addition,
under the prompt corrective action provisions of the OTS regulations, all but
the most highly-rated institutions must maintain a minimum leverage ratio of 4%
in order to be adequately capitalized.) A savings bank is also required to
maintain tangible capital in an amount at least equal to 1.5% of its adjusted
total assets.
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries or other persons or savings associations with
which it has significant business relationships. The Bank is not subject to any
such individual minimum regulatory capital requirement.
17
The Bank's Tier-1 risk-based capital ratio was 11.08%, its leverage
capital ratio was 6.78% and its total risk- based capital ratio was 11.96% at
December 31, 1999.
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements. A savings bank's failure to maintain capital at or above the
minimum capital requirements may be deemed an unsafe and unsound practice and
may subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is required
to submit a capital plan that addresses the bank's need for additional capital
and meets certain additional requirements. While the capital plan is being
reviewed by the OTS, the savings bank must certify, among other things, that it
will not, without the approval of its appropriate OTS Regional Director, grow
beyond net interest credited or make capital distributions. If a savings bank's
capital plan is not approved, the bank will become subject to additional growth
and other restrictions. In addition, the OTS, through a capital directive or
otherwise, may restrict the ability of a savings bank not in compliance with the
capital requirements to pay dividends and compensation, and may require such a
bank to take one or more of certain corrective actions, including, without
limitation: (i) increasing its capital to specified levels, (ii) reducing the
rate of interest that may be paid on savings accounts, (iii) limiting receipt of
deposits to those made to existing accounts, (iv) ceasing issuance of new
accounts of any or all classes or categories except in exchange for existing
accounts, (v) ceasing or limiting the purchase of loans or the making of other
specified investments, and (vi) limiting operational expenditures to specified
levels.
The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings bank still may be subject to
enforcement actions for other violations of law or unsafe or unsound practices
or conditions.
Prompt Corrective Action. The prompt corrective action regulation of the
OTS, promulgated under the Federal Deposit Insurance Corporation Improvement Act
of 1991, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that falls
within certain undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. At December 31, 1999, the Bank met the capital requirements of a
"well capitalized" institution under applicable OTS regulations.
Enforcement Powers. The OTS and, under certain circumstances, the FDIC,
have substantial enforcement authority with respect to savings associations,
including authority to bring various enforcement actions against a savings
association and any of its "institution-affiliated parties" (a term defined to
include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss restrict the growth of
the institution and rescind agreements and contracts.
Capital Distribution Regulation. In addition to the prompt corrective
action restriction on paying dividends, OTS regulations limit certain "capital
distributions" by OTS-regulated savings associations. Capital distributions
currently are defined to include, in part, dividends and payments for stock
repurchases and cash-out mergers. The current regulation requires savings
associations to file an application or notice with the OTS depending on whether
the association and the proposed dividend fall within certain criteria such as
the association's capital classification and the amount of the proposed
dividend. Since the Bank is a subsidiary of a savings and loan holding company,
the Bank is presently required to give the OTS at least 30 days notice prior to
distribution. The OTS may prohibit a proposed capital distribution that would
otherwise be permitted if the OTS determines that the distribution would
constitute an unsafe or unsound practice.
18
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties. A
savings association may qualify as a qualified thrift lender not only by
maintaining 65% of portfolio assets in qualified thrift investments (the "QTL
test") but also, in the alternative, by qualifying under the Code as a "domestic
building and loan association." The Bank is a domestic building and loan
association as defined in the Code. As of December 31, 1999 the Bank's QTL
percentage was 71.3%.
FDIC Assessments. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
Under FDIC regulations, institutions are assigned to one of three capital
groups for insurance premium purposes -- "well capitalized," "adequately
capitalized" and undercapitalized" -- which are defined in the same manner as
the regulations establishing the prompt corrective action system, as discussed
above. These three groups are then divided into subgroups which are based on
supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Effective January 1, 1997,
assessment rates for both SAIF-insured institutions and BIF-insured institutions
ranged from 0% of insured deposits for well-capitalized institutions with minor
supervisory concerns to .27% of insured deposits for undercapitalized
institutions with substantial supervisory concerns. In addition, an additional
assessment of 6.4 basis points and 1.3 basis points was added to the regular
SAIF-assessment and the regular BIF-assessment, respectively, in order to cover
Financing Corporation debt service payments.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF satisfied the
required reserve ratio prior to the SAIF, and as a result, the FDIC reduced the
average deposit insurance premium paid by BIF-insured banks to a level
substantially below the average premium previously paid by savings institutions.
Banking legislation was enacted on September 30, 1996 to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions. The
legislation provided that all insured depository institutions with
SAIF-assessable deposits as of March 31, 1995 pay a special one-time assessment
to recapitalize the SAIF. Pursuant to this legislation, the FDIC promulgated a
rule that established the special assessment necessary to recapitalize the SAIF
at 65.7 basis points of SAIF-assessable deposits held by affected institutions
as of March 31, 1995. However, as a result of the Bank's financial condition,
the Bank made application to the FDIC for an exemption from this one-time
special assessment, which exemption was approved on October 5, 1996. As a
result, the Bank was exempt from paying the special one-time assessment and
instead, paid subsequent assessments at the assessment rate schedule in effect
as of June 30, 1995. However, upon consummation of the IPO, the Bank used $4.5
million of the proceeds from the IPO to pay the FDIC the special assessment
which the Bank had previously received permission from the OTS to defer. As a
result, the Bank's assessment rate was reduced from 35.28 basis points to 9.1
basis points (which included in each are the Financing Corporation debt service
payments).
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. There are no pending proceedings to terminate the deposit insurance of
the Bank.
Community Reinvestment Act and the Fair Lending Laws. Savings institutions
have a responsibility under the CRA, and related regulations of the OTS to help
meet the credit needs of their communities, including low-and moderate-income
neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair
Housing Act (together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of CRA could, at a minimum, result
19
in regulatory restrictions on its activities, and failure to comply with the
Fair Lending Laws could result in enforcement actions by the OTS, as well as
other federal regulatory agencies and the Department of Justice.
New Safety and Soundness Guidelines. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
Change of Control. Subject to certain limited exceptions, no company can
acquire control of a savings association without the prior approval of the OTS,
and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Companies subject to the Bank Holding Company Act of 1956, as amended,
that acquire or own savings associations are no longer defined as savings and
loan holding companies under the HOLA and, therefore, are not generally subject
to supervision and regulation by the OTS. OTS approval is no longer required for
a bank holding company to acquire control of a savings association, although the
OTS has a consultative role with the FRB in examination, enforcement and
acquisition matters.
Taxation
Federal Taxation. The Company is subject to those rules of federal income
taxation generally applicable to corporations under the Code. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax
rules applicable to the Company and the Bank.
The Company reports its earnings on a consolidated basis with the Bank and
is subject to federal income taxation in the same general manner as other
corporations with some exceptions discussed below. The Bank has entered into an
agreement with the Company whereby the Bank computes and pays taxes based upon
the Bank's tax position assuming that a separate tax return was filed.
Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the
"1996 Act") eliminated the use of the reserve method of accounting for bad debt
reserves by savings institutions, effective for taxable years beginning after
1995 and provided for recapture of a portion of the reserves existing at the
close of the last taxable year beginning before January 1, 1996 for institutions
such as the Bank. Prior to the 1996 Act, the Bank was permitted to establish a
reserve for bad debts and to make annual additions to the reserve. These
additions could, within specified formula limits, be deducted in arriving at the
Bank's taxable income.
As a further result of the 1996 Act, the Bank must use the specific
chargeoff method in computing its bad debt deduction beginning with its 1996
Federal tax return. Under this method, deductions may be claimed only and to the
extent that loans become wholly or partially worthless.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. NOLs can offset no more
than 90% of AMTI. Certain
20
payments of alternative minimum tax may be used as credits against regular tax
liabilities in future years. As of December 31, 1999, the Bank had an
alternative minimum tax credit carryforward of approximately $1.7 million.
Net Operating Loss Carryforwards. The Code allows net operating losses
("NOLs") for tax years beginning before August 5, 1997 to be carried back and
deducted from taxable income for the three preceding taxable years and carried
forward and deducted from taxable income for the fifteen succeeding years
taxable years. For taxable years beginning after August 5, 1997, NOLs can be
carried back and deducted from taxable income for the two preceding taxable
years and carried forward and deducted from taxable income for the twenty
succeeding taxable years. The Company had federal tax NOLs of approximately
$153.4 million at December 31, 1999.
Impact of Ownership Change on Use of Net Operating Loss Carryforwards.
Section 382 of the Code imposes a limitation on the use of NOLs if there has
been an "ownership change." In general, an ownership change occurs if
immediately after any "owner shift involving a 5% stockholder" the percentage of
the stock of the corporation owned by one or more 5% stockholders has increased
by more than 50 percentage points over the lowest percentage of stock of the
corporation owned by such stockholders at any time during the testing period. An
"owner shift involving a 5% stockholder" is defined as any change in the stock
ownership of the corporation that affects the percentage of stock in the
corporation owned by any person who is a 5% stockholder before or after the
change. A 5% stockholder is any person (or group) holding 5% or more of the
corporation's stock at any time during the test period. It does not matter
whether that stockholder is a 5% stockholder before the change or after. As a
general rule, the ownership of owners of less than 5% is aggregated and treated
as the ownership percentage of a single 5% stockholder. The testing period for
an ownership change is the three-year period ending on the day of the owner
shift.
Under Section 382 of the Code, if an ownership change of a corporation
with NOLs occurs, the amount of the taxable income for a post-change year that
may be offset by the NOLs arising before the ownership change is limited by an
amount known as the Section 382 limitation. The annual Section 382 limitation
for any post-change year is an amount equal to the value of the corporation
multiplied by the long-term tax-exempt rate that applies with respect to the
ownership change. The annual Section 382 limitation may be increased, however,
in a succeeding year by the amount of the limitation for the previous year that
was not used.
The Bank's 1992 recapitalization (the "1992 recapitalization") resulted in
an ownership change within the meaning of Section 382 of the Code (the "1992
Ownership Change"). The 1992 Ownership Change resulted in an annual Section 382
limitation on the Company's ability to utilize its NOLs in any one year of
approximately $7.7 million. At December 31, 1999, the Bank had $30.1 million of
NOLs which were created prior to the 1992 Ownership Change.
Similarly, the IPO resulted in a second ownership change within the
meaning of Section 382 of he Code (the "1998 Ownership Change"). The 1998
Ownership Change resulted in an annual Section 382 limitation on the Bank's
ability to utilize any NOLs created prior to the 1998 Ownership Change but after
the 1992 Ownership Change in any one year of approximately $21.3 million. At
December 31, 1999, the Bank had $111.2 million of NOLs which were created prior
to the 1998 Ownership Change but after the 1992 Ownership Change.
Treatment of Rights. KPMG LLP has issued an opinion to the Company and the
Bank to the effect that, for federal income tax purposes, the Rights (as defined
and described under Item 3. Legal Proceedings) evidenced by the terms of the
Shareholder Rights Agreement (as defined and described under Item 3. Legal
Proceedings) should be treated as stock of the Company for purposes of Sections
382(e), 311(a) and 305(a) of the Code. Thus, the Company should recognize no
gain or loss on the distribution of the Rights to the Material Stockholders with
respect to their ownership of Company common stock. In addition, the Bank should
not recognize gain or loss on the Company's distribution of the Rights to the
Material Stockholders. Finally, the amount of value taken into account for
purposes of determining the annual Section 382 limitation should include the
value of the Rights. Despite the Company's receipt of the foregoing opinion from
KPMG LLP, such opinion is not binding on the Internal Revenue Service ("IRS")
and no assurance can be made that the IRS will treat the Shareholder Rights
Agreement as stock of the Company for federal income tax purposes.
State Taxation. The California franchise tax rate applicable to the Bank
equals the franchise tax rate applicable to corporations generally plus an "in
lieu" rate approximately equal to personal property taxes and business license
taxes
21
paid by such corporation (but generally not paid by banks or financial
corporations such as the Bank); however, the total rate cannot exceed 10.84%.
Under California regulations, bad debt deductions are available in computing
California franchise taxes using a three or six year weighted average loss
experience method. The Bank had no state tax NOLs at December 31, 1999.
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
Company's offices at December 31, 1999.
Net Book Value of
Lease/Owned Property at Total Deposits at
Office Location Lease Expiration Date December 31, 1999 December 31, 1999
--------------- --------------------- ----------------- -----------------
(Dollars in Thousands)
Executive Office (and Branch):
Los Angeles
5900 Wilshire Blvd. Leased $2,098 $15,824
3rd, 15th and 16th Floors 04/2006
Los Angeles, CA 90036 Option: 1 - 5 years
Branch Offices:
North Hollywood
6350 Laurel Canyon Blvd. Leased 147 61,733
North Hollywood, CA 91606 09/2009
Option: 1 - 5 years
Long Beach
525 East Ocean Blvd. Leased 243 48,641
Long Beach, CA 90802 02/2010
Option: 1 - 10 years
Beverly Hills
9100 Wilshire Blvd. Leased 119 129,596
Beverly Hills, CA 90212 03/2010
Option: 1 - 5 years
Orange
216 E Chapman Avenue Leased 117 99,793
Orange, CA 92866-1506 01/2001
Option: 2 - 5 years
Pacific Palisades
15305 Sunset Blvd. Leased 211 74,691
Pacific Palisades, CA 90272 12/2006
Option: 1 - 10 years
Montebello
1300 W Beverly Blvd. Leased 192 99,694
Montebello, CA 90640 08/2003
Option: 1 - 10 years
Garden Grove
12112 Valley View Owned 141 80,937
Garden Grove, CA 92845
Simi Valley
1445 Los Angeles Ave. Leased 143 98,442
Simi Valley, CA 93065 01/2002
Option: 1 - 30 months
followed by 3 - 5 years
22
Net Book Value of
Lease/Owned Property at Total Deposits at
Office Location Lease Expiration Date December 31, 1999 December 31, 1999
--------------- --------------------- ----------------- -----------------
(Dollars in Thousands)
Sylmar
13831 Foothill Blvd. Leased 143 51,975
Sylmar, CA 91342 09/2002
Option: 2 - 10 years
Buena Park
5470 Beach Blvd. Leased 129 31,602
Buena Park, CA 90621 12/2004
Option: 3 - 5 years
North Hollywood
12848 Victory Blvd. Leased 79 89,790
North Hollywood, CA 91606 05/2000
Beverly/Serrano
4500 W. Beverly Blvd. Leased 154 42,415
Los Angeles, CA 90004 01/2006
Option: 2 - 5 years
Tarzana
19500 Ventura Blvd. Leased 202 81,311
Tarzana, CA 91356 10/2002
Burbank
240 North San Fernando Road Leased 360 160,836
Burbank, CA 91502 09/2000
Option: 2 - 5 years
No. Irvine
4860 Irvine Blvd. Leased 159 18,682
Irvine, CA 92620 12/2010
Option: 1 - 20 years
Santa Clarita
26425 Sierra Highway Owned 199 69,625
Santa Clarita, CA 91321
Ventura
996 South Seaward Ave. Leased 98 65,306
Ventura, CA 93001 10/2001
Option: 1 - 3 years
Calabasas
23642 Calabasas Road, Bldg 2 Leased 160 70,864
Calabasas, CA 91302 03/2007
Irvine
15475 Jeffrey Road Leased 218 58,025
Irvine, CA 92620-4102 10/2005
Fairfax
145 South Fairfax Avenue Leased 116 86,029
Los Angeles, CA 90036 01/2003
Option: 1 - 5 years
23
Net Book Value of
Lease/Owned Property at Total Deposits at
Office Location Lease Expiration Date December 31, 1999 December 31, 1999
--------------- --------------------- ----------------- -----------------
(Dollars in Thousands)
Westminster
15555 Brookhurst Street Leased 159 19,264
Westminster, CA 92683 09/2000
Option: 2 - 5 years
San Pedro
28110 South Western Avenue Owned 770 92,262
San Pedro, CA 90732 ------ ----------
$6,357 $1,647,337
====== =========
In addition to the foregoing branch office locations, the Bank currently
operates 44 ATMs.
ITEM 3. LEGAL PROCEEDINGS
Except with respect to the Goodwill Litigation and the Ancillary
Litigation, each of which is defined and discussed below, neither the Company
nor the Bank is involved in any legal proceedings which are material to the
Company. The Bank is involved in routine legal proceedings from time to time
which arise in the normal course of its business.
The Goodwill Litigation
General. On January 28, 1993, the Company, the Bank and certain current
and former stockholders of the Company (collectively, the "Plaintiffs") filed a
complaint against the United States in the United States Court of Federal Claims
("Court of Claims") seeking damages for breach of contract and for deprivation
of property without just compensation and without due process of law. The
Company's and Bank's allegations in the complaint arose out of the abrogation of
certain contractual promises made to the Company and to the Bank, by the Federal
Home Loan Bank Board (the predecessor to the OTS) and the Federal Savings and
Loan Insurance Corporation ("FSLIC") (the federal fund which previously insured
the deposits of savings institutions) in exchange for the Company's agreement to
acquire and to operate the Bank which was then a failed thrift institution. One
of the current stockholders of the Company, Arbur, Inc. ("Arbur") is also a
plaintiff in the case, which is entitled Southern California Federal Savings and
Loan Association, et al. v. United States, No. 93-52C (the "Goodwill
Litigation"). The Plaintiffs' claims arose from changes, mandated by the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"),
with respect to the rules for computing the Bank's regulatory capital. As
discussed below, the Goodwill Litigation was stayed pending the resolution on
appeal of several cases which present issues similar to those presented by the
Goodwill Litigation.
In connection with the Company's acquisition of the Bank in April 1987,
the Bank was permitted to include in its regulatory capital and recognize as
supervisory goodwill $217.5 million of cash assistance provided to the Bank by
the FSLIC (the "Capital Credit"), as well as $79.7 million of goodwill which was
recorded by the Bank under generally accepted accounting principles ("GAAP"). In
August 1989, Congress enacted FIRREA which provided, among other things, that
savings institutions such as the Bank were no longer permitted to include
goodwill in their regulatory capital (subject to a gradual phase out which
expired on December 31, 1994). Consequently, the Bank was required to write-off
its goodwill subject to a regulatory phase-out, which resulted in the Bank
failing to comply with its minimum regulatory capital requirements during 1990
and 1991. The balance of the Bank's GAAP goodwill was written off as
unrealizable in 1992.
The Plaintiffs allege that the enactment of FIRREA constituted a breach by
the United States of its contractual commitment regarding the treatment of the
Capital Credit and supervisory goodwill and an unlawful taking of the Bank's
property rights in the Capital Credit and supervisory goodwill. The Plaintiffs
seek damages and restitution of all benefits conferred on the United States by
the alleged contract. As discussed below, no conclusive determination has been
made as to the type or amount of damages sought.
24
Related Cases. On July 1, 1996, the United States Supreme Court issued its
opinion for United States v. Winstar Corporation, No. 95-865, which affirmed the
decisions of the United States Court of Appeals for the Fourth Circuit and the
United States Court of Federal Claims in various consolidated cases (the
"Winstar Cases") granting summary judgment to the plaintiff thrift institutions
on the liability portion of their breach of contract claims against the United
States. The Supreme Court held that the U.S. Government breached certain express
contracts when Congress enacted FIRREA, and the Supreme Court remanded the
proceedings for a determination of the appropriate measure and amount of
damages, which have not been finally litigated.
The Court of Claims issued a Case Management Order ("CMO") in all of the
Winstar Cases, including the Goodwill Litigation. The CMO sets forth procedures
for all of the plaintiffs and the defendant, the United States, to follow
relating to the exchange of documents, filing of partial summary judgment
motions with respect to liability only, discovery on damages issues and the
timing of all of the Winstar Cases being set for trial. Pursuant to the CMO, the
Company and the Bank filed a motion for partial summary judgment as to the
Government's liability to the them for breach of contract. The Government's
response thereto appears to concede that there was a contract allowing the Bank
to apply the Capital Credit to regulatory capital and that, by enacting FIRREA,
the Government acted inconsistently with that contract. The Government still
maintains that it does not have liability with respect to the Bank's $79.7
million of GAAP goodwill. Furthermore, the Government contends that only the
Bank and not the Company nor the other Plaintiffs have standing to pursue breach
of contract claims. The Court of Claims has not yet ruled on this motion for
partially summary judgement
Assuming a settlement is not reached and based upon the status of the
proceedings in the Winstar Cases and the CMO, the Goodwill Litigation is not
expected to be set for trial for at least another year. The amount of damages
the Plaintiffs have suffered as a result of the Government's breach of contract
has not yet been determined. In addition, although the decision of the Supreme
Court in the Winstar Cases has been rendered, there can be no assurance that the
court will not reach a different conclusion in the Goodwill Litigation. To date,
there have been no material substantive settlement discussions to resolve the
Goodwill Litigation by and among the Company, the Bank and the Government and no
trial date has been set.
Third Party Lawsuit Related to the Goodwill Litigation. In August 1997,
Ariadne Financial Services Pty. Ltd. and Memvale Pty Ltd. (collectively,
"Ariadne") filed a request with the Court of Claims in the Goodwill Litigation
for leave to file a motion to intervene as a plaintiff in the Goodwill
Litigation. The motion to intervene is based on Ariadne's claim as a former
stockholder of the Company that intervention is necessary to protect their
interests and alleged right to participate in any recovery against the
Government in the Goodwill Litigation. The Court has not yet ruled on Ariadne's
motion. Ariadne had previously filed its own action in the Court of Claims in
April 1996 against the Government which has been dismissed (and which dismissal
has been upheld on appeal) based on the statute of limitations. In February
1998, Ariadne petitioned the Circuit Court of Appeals for a rehearing, and in
March 1998, Ariadne's petition was denied.
In May 1997, Ariadne filed a lawsuit against the Company, the Bank, the
Company's former stockholders and Arbur seeking damages and a constructive trust
based upon causes of action for breach of contract; anticipatory breach of
contract; breach of fiduciary duty; fraud; negligent misrepresentation, and
mistake of fact. Ariadne was a preferred stockholder in the Company and the Bank
which subordinated its interest as part of the 1992 recapitalization of the
Company to the new investors, the Trustees of the Estate of Bernice Pauahi
Bishop (the "Bishop Estate"), BIL Securities (Offshore) Limited ("BIL
Securities") and Arbur (collectively, the "Material Stockholders"), and then
consented to the redemption of all of its stock for approximately $50,000 as
part of the 1995 recapitalization. Ariadne alleges that there was an oral and/or
implied in fact contract between Ariadne and the defendants that Ariadne would
have a right to a portion of any monetary damages awarded to the Company and the
other individual defendants (but not the Bank) in the Goodwill Litigation,
notwithstanding that Ariadne was not a named plaintiff in the action. Ariadne
further alleges that when it agreed to have its stock redeemed, it was misled as
to its right relating to participation in any recovery from the Goodwill
Litigation and the value of its stock and investment in the Company and the Bank
as a result of such Goodwill Litigation. In August 1998, Ariadne named the
Bishop Estate and BIL Securities and certain affiliates of BIL Securities as
defendants in this lawsuit. In June 1999, Ariadne amended its complaint to
include Ariadne's parent company as a plaintiff and to allege additional causes
of action against the defendants. Ariadne's amended complaint seeks damages in
an amount not specified but in excess of $63 million. The Company and the Bank
(by demurrer and summary judgement) successfully eliminated most of Ariadne's
causes of action against them.
25
However, these rulings are subject to appeal by Ariadne. The Company and the
Bank intend to continue to defend this action vigorously. For purposes of the
Shareholder Rights Agreement, discussed below, the Ariadne lawsuit against the
Company and the Bank, among others, is considered to be "Ancillary Litigation."
Damages. Although the Company and the Bank have conducted preliminary
reviews of the damages allegedly suffered by the Company and the Bank, no
conclusive determination has been made regarding the amount or type of such
damages. Moreover, the Company and the Bank believe that there are no finally
adjudicated precedents on how to assess damages in cases such as the Goodwill
Litigation. In addition, the Government may argue that some or all of the
damages proffered by the Plaintiffs are too speculative to permit a recovery.
Therefore, even if the Plaintiffs prevail in establishing the liability of the
United States, there can be no assurances as to the amount, if any, and type of
damages that they may recover. Without limiting the generality of the foregoing,
there can be no assurance that the Plaintiffs will obtain any cash recovery in
the Goodwill Litigation. Furthermore, assuming that there is a cash recovery, it
is impossible to predict the amount of the Litigation Recovery (as defined
below) because the fees, costs and taxes associated with the Litigation Recovery
cannot be estimated. To the extent that the Plaintiffs must engage in protracted
litigation, such fees and costs may increase significantly.
The Shareholder Rights Agreement
General. The Company, the Bank and each of the Material Stockholders
(i.e., the Bishop Estate, BIL Securities and Arbur) have entered into an
agreement (the "Shareholder Rights Agreement"), the effective date of which was
the commencement of the IPO, whereby each Material Stockholder received one
Contingent Goodwill Participation Right (each a "Right" and collectively, the
"Rights") for each share of Common Stock held by the Material Stockholder as of
the date of the Shareholder Rights Agreement.
Each Right entitles the Material Stockholders to receive 0.0009645% of the
Litigation Recovery, if any (as defined below) and all of the Rights to be owned
by the Material Stockholders will entitle the Material Stockholders to receive
in the aggregate 95% of the Litigation Recovery (such portion of the Litigation
Recovery, the "Recovery Payment"). The remaining 5.0% of the Litigation Recovery
will be retained by the Company and/or the Bank in consideration for the time
and effort incurred previously and hereafter by the Company, the Bank and
management of the Company and the Bank with respect to prosecuting the Goodwill
Litigation.
None of the Material Stockholders have paid any cash or other
consideration to the Company and/or the Bank in connection with their entering
into the Shareholder Rights Agreement. Any successor to the Company and/or the
Bank shall assume the rights and obligations of the Company and/or the Bank with
respect to the Shareholder Rights Agreement. In addition, to the extent that the
Company enters into a definitive agreement providing for the acquisition, merger
or consolidation of the Company or the Bank in which the Company or the Bank is
not the surviving entity, the Company (or any successor thereto) is required to
create a statutory business trust under Delaware law (the "Litigation Trust")
with five trustees (the "Litigation Trustees") designated by the Material
Stockholders. The Litigation Trustees shall have the same authority, identical
to and succeeding that of the Litigation Committee of the Board of Directors,
which has the responsibility to make all decisions on behalf of the Company and
the Bank with respect to the Goodwill Litigation and any claim by a party now
pending or hereafter brought seeking in whole or in part any amounts paid or to
be paid as part of the Litigation Recovery or a claim by a party other than the
Company or the Bank challenging the validity or binding effect of the
Shareholder Rights Agreement (the "Ancillary Litigation").
Litigation Recovery. The Litigation Recovery will equal the cash payment
(or any cash resulting from the liquidation of Non-Cash Proceeds (as defined
below)) (the "Cash Payment"), if any, actually received by the Company and/or
the Bank in the aggregate pursuant to a final, nonappealable judgment in or
final settlement of the Goodwill Litigation (including any post-judgment
interest actually received by the Company and/or the Bank with respect to any
Cash Payment) after deduction of (i) (A) the aggregate fees and expenses
incurred after the date of the Shareholder Rights Agreement by the Company and
the Bank in prosecuting the Goodwill Litigation and obtaining the Cash Payment
(including any costs and expenses incurred with respect to the monetization of
any marketable assets received and/or liquidation of Non-Cash Proceeds), and/or
(B) the aggregate liabilities, fees and expenses incurred after the date of the
Shareholder Rights Agreement by the Company and the Bank in any Ancillary
Litigation, and/or (C) the amount reimbursed to any Litigation Trustee; (ii) any
income tax liability of the Company and/or the Bank, computed on a pro forma
basis, as a result of the Company's and/or the Bank's receipt of the Cash
Payment (net of any income tax benefit
26
to the Company and/or the Bank from making the Recovery Payment to the Material
Stockholders, and disregarding for purposes of this clause (ii) the effect of
any NOLs or other tax attributes held by the Company and the Bank or any of
their respective subsidiaries or affiliated entities); (iii) any portion of the
Litigation Recovery (calculated for purposes of this clause (iii) before the
deduction of the amounts calculated pursuant to clauses (i) and (ii) above and
clause (iv) below) which is determined to be owing to one or more of the
Plaintiffs (other than the Company and the Bank) or to any other third parties;
and (iv) any portion of the Litigation Recovery (calculated for purposes of this
clause (iv) before the deduction of the amounts calculated pursuant to clauses
(i), (ii) and (iii))which Doreen J. Blauschild is entitled to receive as a
result of her employment agreement with the Bank, dated as of April 11, 1995
(which entitles Ms. Blauschild to 0.25% of the amount by which any net recovery
(i.e., gross amount less attorneys' fees incurred by the Bank) by and payable to
the Bank relating to the Goodwill Litigation, whether by judgment or settlement,
exceeds $150.0 million).
Conversion of Rights to Preferred Stock. In the event that applicable
laws, rules, regulations, directives or the terms of any judgment or settlement
limit or prevent the Bank from distributing any or all of the Litigation
Recovery and/or the Company from redeeming the Rights and distributing all or a
portion of the Recovery Payment, the Bank shall only distribute such portion of
the Litigation Recovery and the Company shall only redeem those Rights (on a pro
rata basis) and distribute such portion of the Recovery Payment (on a pro rata
basis), to the extent not otherwise restricted. While the Bank has a continuing
obligation to distribute the balance of any Litigation Recovery which it has
been precluded from paying as soon as permissible, and the Company has a
continuing obligation to redeem the balance of the Rights and distribute the
balance of any Recovery Payment which it has been precluded from paying as soon
as permissible, in no event, however, will the Company's redemption of the
Rights result in an aggregate distribution of an amount greater than the
Recovery Payment.
To the extent the Company is prohibited from distributing the Recovery
Payment, or any portion thereof, or cannot do so because the Bank is prohibited
from distributing the Litigation Recovery to the Company, the Company shall,
upon the written request of any Material Stockholder, issue to such Material
Stockholder preferred stock of the Company with an aggregate liquidation
preference equal in value to the Recovery Payment or portion thereof which the
Company shall have been prohibited from distributing or unable to distribute
(the "Recovery Payment Preferred"). The terms of the Recovery Payment Preferred
shall be set forth in Certificate of Designations and Preferences filed as a
supplement to the Company's Amended and Restated Certificate of Incorporation.
The Company shall issue the Recovery Payment Preferred upon surrender to the
Company of such Material Stockholder's Rights.
The stated value of each share of Recovery Payment Preferred shall be
$1,000. The holders of the Recovery Payment Preferred shall be entitled to
receive, when, as and if declared by the Board of Directors and out of the
assets of the Company which are by law available for the payment of dividends,
cumulative preferential cash dividends payable quarterly on the last day of each
calendar quarter commencing with the first full quarter following issuance
thereof at a fixed-rate per share of 9 3/4%. Each quarterly dividend shall be
fully cumulative and dividends shall accrue, whether or not earned, declared or
the Company shall have funds or assets available for the payment of dividends.
Reimbursement of Fees and Expenses and Indemnification. Under the terms of
the Shareholder Rights Agreement, the amount of the Recovery Payment which is to
be paid to the Material Stockholders in connection with a Litigation Recovery is
to be reduced by, among other things, the fees and expenses incurred in
connection with the Goodwill Litigation and any Ancillary Litigation. While such
agreement does not legally require reimbursement of such expenses in the event
there is no Litigation Recovery, the Material Stockholders have reimbursed the
Company and the Bank for their expenses to date and have advised the Board of
Directors of their willingness to reimburse the Company and/or the Bank for such
fees and expenses upon periodic request by the Company and/or the Bank. No
assurance can be made that the Material Stockholders will in fact continue to
reimburse the Company and the Bank for any fees and expenses incurred with
respect to the Goodwill Litigation and any Ancillary Litigation and the Material
Stockholders are not obligated to do so. The Shareholder Rights Agreement
provides that the Material Stockholders shall indemnify the Company and/or the
Bank for 95% of the liability incurred in any claim by a party now pending (such
as Ariadne) or hereafter brought, seeking in whole or in part any amounts paid
or to be paid as part of the Litigation Recovery, and 100% of the liability
incurred in any claim by a party, other than the Company or the Bank,
challenging the validity or binding effect of the Shareholders Rights Agreement.
27
Rights of the Material Stockholders. The Material Stockholders will not
have any rights to receive any payment pursuant to the Shareholder Rights
Agreement except in each case to the extent of the Recovery payment, if any and
except as described in the Shareholder Rights Agreement. The Rights (i) will be
junior to all debt obligations of the Company and the Bank existing at the time
of the redemption except as to an obligation that is expressly made junior to
the Rights, (ii) do not have a right to vote, and (iii) will be a senior claim
in relation to the right of the holders of any stock of Company, including the
Company Common Stock or other preferred stock, whether now existing or hereafter
created, as to dividends or as to the distribution of assets upon redemption,
liquidation, dissolution, or winding up with respect to a Recovery Payment
attributable to any Litigation Recovery (although the Material Stockholders will
continue to have such other rights on liquidation attributable to their status
as holders of Common Stock).
Tax Consequences. KPMG LLP has issued an opinion to the Company and the
Bank to the effect that, for federal income tax purposes, the Rights evidenced
by the terms of the Shareholder Rights Agreement should be treated as stock of
the Company for purposes of Sections 382(e), 311(a) and 305(a) of the Code.
Thus, the Company should recognize no gain or loss on the distribution of the
Rights to the Material Stockholders with respect to their ownership of Company
common stock. In addition, the Bank should not recognize gain or loss on the
Company's distribution of the Rights to the Material Stockholders. Furthermore,
the Material Stockholders should not be required to include the amount of the
Rights in income. Finally, the amount of value taken into account for purposes
of determining the annual Section 382 limitation in connection with the 1998
Ownership Change should include the value of the Rights.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "PBOC" since the Company's initial public offering in May 1998.
At March 7, 2000 the Company had approximately 34 stockholders of record (not
including the number of persons or entities holding stock in nominee or street
name through various brokerage firms) and 19,876,205 outstanding (excluding
treasury stock) shares of Common Stock. The following table sets forth for the
quarters indicated the range of high and low bid information per share of Common
Stock as reported by the Nasdaq National Market.
1998 High Low
------------------------ ------ ------
First Quarter........... $ -- $ --
Second Quarter.......... 14.50 13.62
Third Quarter........... 13.81 9.00
Fourth Quarter.......... 10.75 8.00
Year.................... 14.50 8.00
28
1998 High Low
------------------------ ------ ------
First Quarter........... 10.53 8.75
Second Quarter.......... 10.00 8.37
Third Quarter........... 10.87 7.90
Fourth Quarter.......... 9.87 7.66
Year.................... 10.87 7.66
The Company has never paid a cash dividend on the Common Stock and does
not expect to pay a cash dividend on its Common Stock for the foreseeable
future. Rather, the Company intends to retain earnings and increase capital in
furtherance of its overall business objectives. The Company will periodically
review its dividend policy in view of the operating performance of the Company,
and may declare dividends in the future if such payments are deemed appropriate
and in compliance with applicable law and regulations. Cash and stock dividends
are subject to determination and declaration by the Board of Directors, which
will take into account the Company's consolidated earnings, financial condition,
liquidity and capital requirements, applicable governmental regulations and
policies, and other factors deemed relevant by the Board of Directors.
29
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
(Dollars in thousands, except per share data)
The following selected historical consolidated financial and other data
for the five years ended December 31, 1999 is derived in part from the audited
consolidated financial statements of the Company. The selected historical
consolidated financial and other data set forth below should be read in
conjunction with, and is qualified in its entirety by, the historical
consolidated financial statements of the Company, including the related notes,
included elsewhere herein.
At or For The Year Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ------------ ----------- ------------
(Dollars in thousands, except per share data)
Selected Financial Condition Data:
Total assets................................... $ 3,398,228 $ 3,335,027 $ 2,213,054 $ 1,747,918 $ 1,579,760
Cash and cash equivalents...................... 19,582 22,401 14,113 14,720 7,258
Federal funds sold............................. 2,000 24,000 7,004 7,200 11,800
Securities purchased under agreements to resell -- -- -- -- 35,000
Securities available-for-sale.................. 771,864 1,004,937 571,160 502,301 241,645
Mortgage-backed securities held-to-maturity.... 4,326 6,282 9,671 10,971 --
Loans receivable, net.......................... 2,462,837 2,148,857 1,533,212 1,141,707 1,228,152
Real estate held for investment and sale, net.. 846 2,723 15,191 22,561 16,288
Deposits....................................... 1,647,337 1,542,162 1,266,615 1,371,243 1,473,318
Securities sold under agreements to repurchase. 381,109 364,000 340,788 192,433 --
FHLB advances.................................. 1,123,700 1,198,000 472,000 80,000 31,746
Senior debt(1)................................. -- -- 11,113 11,398 10,000
Other borrowings 4,621 -- -- -- --
Minority interest(2)........................... 33,250 33,250 33,250 -- --
Stockholders' equity(3)........................ 179,457 180,606 79,602 64,822 56,613
Selected Operating Data:
Interest, fees and dividend income............. $ 230,428 $ 180,873 $ 130,979 $ 122,896 $ 122,926
Interest expense............................... 161,677 140,358 97,205 90,791 97,977
----------- ----------- ------------ ----------- ------------
Net interest income............................ 68,751 40,515 33,774 32,105 24,949
Provision for loan losses...................... 4,747 2,000 2,046 2,884 8,823
----------- ----------- ------------ ----------- ------------
Net interest income after provision for loan losses 64,004 38,515 31,728 29,221 16,126
Gain (loss) on sale of mortgage-backed securities, net (3,217) 1,682 1,275 3,638 641
Gain (loss) on loan and servicing sales, net... 49 613 3,413 (53) (166)
Income (loss) from other real estate operations, net 513 1,479 (1,805) 1,946 (2,067)
Other noninterest income....................... 2,547 2,662 2,234 2,593 2,095
Operating expenses............................. 38,123 46,962 29,543 27,816 30,751
----------- ----------- ------------ ----------- ------------
Earnings (loss) before income tax benefit, minority
interest and extraordinary item............. 25,773 (2,011) 7,302 9,529 (14,122)
Income tax benefit............................. 4,500 16,390 4,499 3,015 2,644
----------- ----------- ------------ ----------- ------------
Earnings (loss) before minority interest and
extraordinary item ........................ 30,273 14,379 11,801 12,544 (11,478)
Minority interest.............................. 3,476 3,476 859 -- --
----------- ----------- ------------ ----------- ------------
Earnings (loss) before extraordinary item 26,797 10,903 10,942 12,544 (11,478)
Extraordinary item gain on sale of FHLB advances 6,678 -- -- -- --
----------- ----------- ------------ ----------- ------------
Net earnings (loss)......................... 33,475 10,903 10,942 12,544 (11,478)
Dividends on preferred stock -- 2,160 7,340 6,555 3,385
----------- ----------- ------------ ----------- ------------
Net earnings (loss) available to common stockholders $ 33,475 $ 8,743 $ 3,602 $ 5,989 $ (14,863)
=========== =========== ============ =========== ============
Earnings (loss) per share basic and diluted before
extraordinary item $ 1.31 $ 0.59 $ 1.14 $ 1.90 $ (3.41)
Earnings (loss) per share, basic and diluted(4) $ 1.63 $ 0.59 $ 1.14 $ 1.90 $ (3.41)
----------- ----------- ------------ ----------- ------------
Weighted average number of shares outstanding 20,487,111 14,793,644 3,152,064 3,152,064 4,361,280
----------- ----------- ------------ ----------- ------------
(Continued)
30
At or For The Year Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
Key Operating Ratios:(5)
Return on average assets .......................... 0.97% 0.39% 0.57% 0.72% (0.65)%
Return on average assets, as adjusted (6) ......... 0.87 0.72 0.57 0.72 (0.65)
Return on average equity .......................... 19.49 7.79 15.37 22.00 (38.21)
Return on average equity, as adjusted (6) ......... 17.59 14.37 15.37 22.00 (38.21)
Average equity to average assets .................. 4.96 4.98 3.72 3.29 1.70
Dividend payout ratio ............................. -- -- -- -- --
Average interest-earning assets to average
interest-bearing liabilities ............... 108.34 105.58 100.69 100.00 100.00
Interest rate spread(7) ........................... 1.62 1.20 1.80 1.91 1.46
Net interest margin(7) ............................ 2.01 1.49 1.84 1.92 1.45
Operating expenses to average assets .............. 1.10 1.67 1.55 1.60 1.74
Operating expenses to average assets, as
adjusted (6) .................................. 1.10 1.12 1.55 1.60 1.74
Efficiency ratio(8) ............................... 55.54 100.02 72.17 64.52 89.72
Efficiency ratio, as adjusted (6)(8) .............. 52.90 66.80 72.17 64.52 89.72
Asset Quality Data:
Total non-performing assets and troubled debt
restructurings(9) ............................. $ 10,494 $ 14,806 $ 33,123 $ 46,218 $ 52,640
Non-performing loans as a percent of loans, net ... 0.13% 0.40% 0.65% 1.60% 2.90%
Non-performing assets as a percent of total
assets (9) .................................... 0.12 0.34 1.05 2.21 2.94
Non-performing assets and troubled debt
restructurings as a percent of total assets (9) 0.31 0.44 1.50 2.64 3.33
Allowance for loan losses as a percent of loans,
gross ......................................... 0.81 0.86 1.15 1.99 2.50
Allowance for loan losses as a percent of non-
performing loans (9) .......................... 662.40 222.14 179.97 127.65 88.71
Allowance for loan losses as a percent of non-
performing loans and troubled debt
restructurings (9) ............................ 218.19 156.39 89.84 90.30 75.67
Net charge-offs to average loans, net ............. 0.11 0.05 0.63 0.95 0.55
Bank Regulatory Capital Ratios(10):
Tier 1 leverage ................................... 6.78% 6.30% 5.43% 4.57% 4.18%
Tier 1 risk-based ................................. 11.08 11.48 10.74 9.15 7.56
Total risk-based .................................. 11.96 12.36 11.99 10.38 8.43
- ----------
(1) The senior debt was repaid in connection with the IPO.
(2) Minority interest consists of the interest in PPCCP held by persons other
than the Bank. See "ITEM 1. BUSINESS--Subsidiaries."
(3) At December 31, 1999, 1998 and 1997, stockholders' equity is net of $38.7
million, $13.6 million and $2.0 million of unrealized losses on securities
available-for-sale, respectively.
(4) Based on a weighted average number of shares of Common Stock of
20,487,111, 14,793,644, 3,152,064, 3,152,064 and 4,361,280 for 1999, 1998,
1997, 1996 and 1995, respectively.
(5) With the exception of end of period ratios, all ratios are based on
average daily balances during the respective periods.
(6) For 1999, excludes effect of extraordinary item and loss on investment
securities sales. For 1998, excludes effect of one-time IPO-related
expenses.
(7) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities; net interest margin represents net interest
income as a percentage of average interest-earning assets.
(8) Efficiency ratio represents operating expenses as a percent of the
aggregate of net interest income and non-interest income.
(9) Non-performing assets consist of nonaccrual loans and real estate owned.
Nonaccrual loans are loans that the Company has removed from accrual
status because the loans are 90 or more days delinquent as to principal
and/or interest or, in management's opinion, full collectibility of the
loans is in doubt. Real estate owned consists of real estate acquired in
settlement of loans. A loan is considered a troubled debt restructuring
if, as a result of the borrower's financial condition, the Company has
agreed to modify the loan by accepting below market terms either by
granting an interest rate concession or by deferring principal or interest
payments. As used in this table, the term "troubled debt restructurings"
means a restructured loan on accrual status. Troubled debt restructurings
on nonaccrual status are reported in the nonaccrual loan category. See
"ITEM 1. BUSINESS--Asset Quality."
(10) For information on the Bank's regulatory capital requirements. See "ITEM
1. BUSINESS--Regulation of Federal Savings Banks--Regulatory Capital
Requirements."
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto included
in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" incorporated hereof.
General
The Bank is a community oriented savings bank which emphasizes customer
service and convenience. As a part of its overall business strategy, the Bank
has sought to develop a wide variety of products and services which meet the
needs of its retail and commercial customers. On the asset side of the Bank's
balance sheet, management is emphasizing commercial real estate, commercial
business and consumer lending which complements the Bank's residential lending
operations. In addition, the Bank has increased its investment in corporate
trust preferred obligations and U.S. Government agency mortgage-backed
securities, which investments enhance net interest income while limiting credit
and interest rate risk. On the liability side of the Bank's balance sheet, the
Bank has been accessing cost-efficient funding sources, including retail
deposits, FHLB advances and securities sold under agreements to repurchase.
The Bank's business strategy focuses on achieving attractive returns
consistent with the Company's risk management objectives. The Bank has
implemented this strategy by (i) significantly growing its loan portfolio, with
a particular emphasis on commercial and consumer lending; (ii) expanding the
Bank's branch network through the acquisition of branch offices and whole
institutions; (iii) reducing funding costs through the utilization of retail
deposits; (iv) improving operating efficiency by maintaining a low level of
operating expenses relative to interest-earning assets; (v) managing the Bank's
capital in order to support its growth strategy; (vi) taking advantage of recent
consolidation in its market area by promoting the Bank as a community banking
alternative to individuals and small-to-medium sized businesses in Southern
California.
Financial Condition
General. Total assets increased by $63.2 million or 1.9% to $3.4 billion
during the year ended December 31, 1999 and increased by $1.1 billion or 50.7%
during the year ended December 31, 1998. During 1998, the Bank took advantage of
the leverage opportunities presented as a result of the capital raised from the
IPO, originating $607.6 million of loans and purchasing $876.9 million of loans,
which were funded by intermediate-term FHLB advances. Total investments
increased by $430.4 million during 1998 and were the primary reason for the
increase in total assets in 1998. These assets were funded primarily through the
use of short- and intermediate-term borrowings, consisting of reverse repurchase
agreements and FHLB advances.
Cash, Cash Equivalents and Other Short-Term Investments. Cash, cash
equivalents and other short-term investments (consisting of cash, federal funds
sold and securities purchased under agreements to resell) amounted to $21.6
million and $46.4 million at December 31, 1999 and 1998, respectively. The Bank
manages its cash, cash equivalents and other short-term investments based upon
the Bank's operating, investing and financing activities. The Bank generally
attempts to invest its excess liquidity into higher yielding assets such as
loans or securities. At December 31, 1999, the Bank's regulatory liquidity
exceeded the minimum OTS requirements. See "Liquidity And Capital Resources."
Securities. At December 31, 1999, the Bank's securities portfolio (both
held-to-maturity and available-for-sale) amounted to $776.2 million or 22.8% of
the Company's total assets, as compared to $1.0 billion or 30.3% at December 31,
1998. At December 31, 1999 and 1998, $425.8 million and $590.8 million, or 54.9%
and 58.4% of the Bank's securities portfolio consisted of mortgage-backed
securities, $241.9 million and $325.0 million, or 31.1% and 32.1% of such
portfolio, consisted of investment-grade trust preferred obligations, and $34.2
million and $37.0 million, or 4.4% and 3.7% of such portfolio, consisted of U.S.
Government agency securities, respectively. Although mortgage-backed securities
often carry lower yields than traditional mortgage loans, such securities
generally increase the credit quality of the Bank's assets because they have
underlying insurance or guarantees, require less capital under risk-based
regulatory capital requirements than non-insured or non-guaranteed mortgage
loans, are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Bank. At December 31,
32
1999, $4.3 million of the Bank's securities portfolio was classified as
held-to-maturity and reported at historical cost and $771.9 million of such
portfolio was classified as available-for-sale and reported at fair value, with
unrealized gains and losses excluded from earnings and instead reported as a
separate component of stockholders' equity. Historically, the Bank has
classified substantially all of its securities purchases as available-for-sale
except for certain mortgage-backed securities which are qualifying for purposes
of the Community Reinvestment Act of 1978, as amended ("CRA"). At December 31,
1999, the Bank's securities classified as available-for-sale had in the
aggregate $38.7 million of unrealized losses, which represents a substantial
increase from the $13.6 million of unrealized losses at December 31, 1998.
During the fourth quarter of 1999 the Bank sold $200 million of its investment
securities in an effort to improve its regulatory capital ratios.
The following table sets forth information regarding the carrying and
market value of the Bank's securities at the dates indicated.
At December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Available-for-sale (at market):
U.S. Government and federal
agency obligations ........... $ 34,202 $ 34,202 $ 36,977 $ 36,977 $ 139,719 $ 139,719
Investment-grade trust preferred
obligations ................. 241,875 241,875 324,965 324,965 -- --
Mortgage-backed securities ..... 421,439 421,439 584,515 584,515 418,450 418,450
SBA and asset backed securities 74,348 74,348 58,480 58,480 12,991 12,991
---------- ---------- ---------- ---------- ---------- ----------
$ 771,864 $ 771,864 $1,004,937 $1,004,937 $ 571,160 $ 571,160
========== ========== ========== ========== ========== ==========
Held-to-maturity:
Mortgage-backed securities ..... $ 4,326 $ 4,274 $ 6,282 $ 6,372 $ 9,671 $ 9,743
========== ========== ========== ========== ========== ==========
The following table sets forth the activity in the Bank's aggregate
securities portfolio (both securities classified available-for-sale and
held-to-maturity) during the periods indicated.
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in Thousands)
Securities at beginning of period ...... $ 1,011,219 $ 580,831 $ 513,272
Purchases .............................. 270,731 1,134,026 408,729
Sales .................................. (322,040) (513,159) (234,339)
Repayments and prepayments,
amortization /accretion of
premiums/discounts .................. (158,625) (178,842) (110,941)
Decrease (increase) in unrealized losses
on available-for-sale securities(1) . (25,095) (11,637) 4,110
----------- ----------- -----------
Securities at end of period(2)(3)(4) ... $ 776,190 $ 1,011,219 $ 580,831
=========== =========== ===========
- ----------
(1) At December 31, 1999, the cumulative unrealized losses on securities
classified as available-for-sale amounted to $38.7 million, which reduces
stockholders' equity.
(2) At December 31, 1999, the book value and market value of the Bank's
securities (including held-to-maturity and available-for-sale securities)
amounted to $776.2 million and $776.1 million, respectively.
(3) At December 31, 1999, $389.9 million or 50.2% of the Bank's securities
portfolio consisted of adjustable-rate securities, compared to $501.1
million or 49.5% and $222.4 million or 43.3% at December 31, 1998 and
1997, respectively.
33
- ---------------------
(4) The decrease in securities during 1999 reflects the sale of $200 million
of investment securities by the Bank during the fourth quarter of 1999.
Such sales reflected management's strategy of replacing wholesale assets
with loan originations.
Loans Receivable. Net loans receivable increased by $314.0 million, or
14.6% during the year ended December 31, 1999, and by $615.6 million, or 40.2%,
during the year ended December 31, 1998. The increase during 1999 reflected the
increase in loan originations from $607.6 million in 1998 to $828.8 million in
1999. The significant increase during 1998 was directly attributable to
management's strategy of leveraging the capital generated from the IPO. The Bank
purchased $191.6 million and $821.7 million of single-family residential
mortgage loans in 1999 and 1998, respectively on a servicing retained basis. The
Bank also increased its loan originations to $607.6 million in 1998 compared to
$160.7 million in 1997.
34
Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loans at the dates indicated.
December 31,
------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------ -------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Mortgage loans:
Single-family residential ..... $ 1,475,151 57% $ 1,494,756 68% $ 953,701 61%
Multi-family residential ...... 327,252 13 366,625 17 426,254 27
Commercial real estate ........ 420,919 16 206,402 9 135,407 9
Land and other ................ 847 -- 880 -- 5,896 --
----------- ----------- ----------- ----------- ----------- -----------
Total mortgage loans ...... 2,224,169 86 2,068,663 94 1,521,258 97
----------- ----------- ----------- ----------- ----------- -----------
Other loans:
Commercial business ........... 159,740 6 62,665 3 22,484 2
Consumer ...................... 199,879 8 53,826 3 8,485 1
Secured by deposits ........... 1,918 -- 3,537 -- 2,287 --
----------- ----------- ----------- ----------- ----------- -----------
Total loans receivable .... 2,585,706 100% 2,188,691 100% 1,554,514 100%
----------- =========== ----------- =========== =========== ===========
Less:
Undistributed loan proceeds ... 95,683 17,152 6,206
Unamortized net loan discounts
and deferred origination fees 4,045 814 (6,859)
Deferred gain on servicing sold. 2,090 2,971 4,131
Allowance for loan losses....... 21,051 18,897 17,824
----------- ---------- -----------
Loans receivable, net........... $2,462,837 $2,148,857 $1,533,212
=========== =========== ===========
December 31,
------------------------------------------------------
1996 1995
------------------------- -------------------------
Percent of Percent of
Amount Total Amount Total
----------- ----------- ----------- -----------
(Dollars in Thousands)
Mortgage loans:
Single-family residential ..... $ 595,915 51% $ 658,412 52%
Multi-family residential ...... 453,064 39 479,100 38
Commercial real estate ........ 110,931 10 120,109 10
Land and other ................ 1,639 -- 3,176 --
----------- ----------- ----------- -----------
Total mortgage loans ...... 1,161,549 100 1,260,797 100
----------- ----------- ----------- -----------
Other loans:
Commercial business ........... 3,523 -- -- --
Consumer ...................... 988 -- -- --
Secured by deposits ........... 2,132 -- 1,976 --
----------- ----------- ----------- -----------
Total loans receivable .... 1,168,192 100% 1,262,773 100%
----------- =========== =========== ===========
Less:
Undistributed loan proceeds ... 473 28
Unamortized net loan discounts
and deferred origination fees 2,732 3,021
Deferred gain on servicing sold. -- --
Allowance for loan losses....... 23,280 31,572
----------- -----------
Loans receivable, net........... $1,141,707 $1,228,152
=========== ===========
35
Contractual Principal Repayments and Interest Rates. The following table
sets forth scheduled contractual amortization of the Bank's total loan portfolio
at December 31, 1999, as well as the dollar amount of such loans which are
scheduled to mature after one year which have fixed or adjustable interest
rates. Demand loans, loans having no schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less.
Principal Repayments Contractually Due or Repricing
in Year(s) Ended December 31,
-------------------------------------------------------------------------------------
Total at
December 31, 2003- 2005- 2011- There-
1999 2000 2001 2002 2004 2010 2016 after
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars In Thousands)
Mortgage loans:
Single-family residential . $1,475,151 $ 29,917 $ 29,946 $ 32,527 $ 33,996 $ 38,346 $ 37,959 $1,272,460
Multi-family residential .. 327,252 7,582 10,783 8,001 8,561 10,753 14,154 267,418
Commercial real estate .... 420,919 50,803 6,088 22,064 12,578 9,612 6,206 313,568
Land ...................... 847 144 10 693 -- -- -- --
Other loans:
Commercial business ....... 159,740 119,149 6,005 3,673 5,740 1,317 292 23,564
Consumer .................. 199,879 40,068 31,498 33,572 36,114 10,898 341 47,388
Secured by deposits ....... 1,918 1,918 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total (1) ............ $2,585,706 $ 249,581 $ 84,330 $ 100,530 $ 96,989 $ 70,926 $ 58,952 $1,924,398
========== ========== ========== ========== ========== ========== ========== ==========
- -------------------
(1) Of the $2.3 billion of loan principal repayments contractually due after
December 31, 2000, $1.4 billion have fixed-rates of interest and $888
million have adjustable-rates of interest.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the Bank
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to increase
when the current mortgage loan rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgages are substantially lower than current mortgage loan rates (due to
refinancings of adjustable-rate and fixed-rate loans at lower rates).
36
The following table shows the activity in the Bank's loans during the
periods indicated.
Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in Thousands)
Gross loans held at beginning of period . $ 2,188,691 $ 1,554,514 $ 1,168,192
Originations of loans:
Mortgage loans:
Single-family residential ............ 201,836 389,475 88,077
Multi-family residential ............. 11,003 7,847 15,806
Commercial real estate ............... 253,477 116,242 24,232
Other loans:
Commercial business .................. 166,140 57,492 20,869
Consumer ............................. 194,432 32,969 8,050
Secured by deposits .................. 1,918 3,537 3,664
----------- ----------- -----------
Total originations ................ 828,806 607,562 160,698
----------- ----------- -----------
Purchases of loans:
Single-family residential ............ 191,576 821,716 482,943
Multi-family residential ............. 1,579 13,302 4,834
Commercial real estate ............... -- 10,201 12,899
Land ................................. -- -- 5,000
Commercial business .................. 57 9,200 --
Consumer ............................. 183 22,479 5
----------- ----------- -----------
Total purchases ................... 193,395 876,898 505,681
----------- ----------- -----------
Total originations and purchases 1,022,201 1,484,460 666,379
----------- ----------- -----------
Loans sold:
Single-family residential ............ (92,492) (37,051) (85,241)
Commercial real estate ............... (1,563) (357) --
Commercial business .................. -- (5,000) --
Consumer ............................. (7) (13) --
----------- ----------- -----------
Total sold ........................ (94,062) (42,421) (85,241)
----------- ----------- -----------
Repayments .............................. (522,601) (794,127) (162,814)
Transfers to real estate owned .......... (6,384) (10,248) (31,349)
Principal charge-offs ................... (2,139) (3,487) (653)
----------- ----------- -----------
Net activity in loans ................... 397,015 634,177 386,322
----------- ----------- -----------
Gross loans held at end of period ....... $ 2,585,706 $ 2,188,691 $ 1,554,514
=========== =========== ===========
37
Non-Performing Loans and Troubled Debt Restructurings. The Bank's new
management has successfully taken steps to reduce the level of the Bank's
non-performing assets, which has resulted in a substantial decline in non-
performing loans and troubled debt restructurings (troubled debt restructurings
consist of loans with respect to which the Bank has agreed to grant an interest
rate concession or defer principal or interest payments) ("TDR's") from an
aggregate of $25.8 million at December 31, 1996 to an aggregate of $9.6 million
at December 31, 1999.
The following table sets forth information with respect to non-performing
assets identified by he Bank, including non-accrual loans, real estate owned and
TDR's at the dates indicated.
At December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in Thousands)
Non-performing loans, net:
Mortgage loans:
Single-family residential ........... $ 2,331 $ 3,959 $ 8,435 $ 7,947 $10,467
Multi-family residential ............ 557 428 405 9,198 16,840
Commercial real estate .............. 20 3,613 1,064 1,093 8,173
Land ................................ -- -- -- -- 112
Non-mortgage loans:
Commercial business ................. 163 99 -- -- --
Consumer ............................ 107 408 -- -- --
------- ------- ------- ------- -------
Total non-performing loans, net ... 3,178 8,507 9,904 18,238 35,592
------- ------- ------- ------- -------
Real estate owned, net:
Single-family residential ........... 846 2,723 678 3,268 6,387
Multi-family residential ............ -- -- 6,482 8,310 901
Commercial real estate .............. -- -- 5,921 8,614 3,506
Land ................................ -- -- 202 244 121
------- ------- ------- ------- -------
Total real estate owned, net ........... 846 2,723 13,283 20,436 10,915
------- ------- ------- ------- -------
Total non-performing assets ............ 4,024 11,230 23,187 38,674 46,507
Troubled debt restructurings ........... 6,470 3,576 9,936 7,544 6,133
------- ------- ------- ------- -------
Total non-performing assets and
troubled debt restructurings ........ $10,494 $14,806 $33,123 $46,218 $52,640
======= ======= ======= ======= =======
Non-performing loans to total loans, net 0.13% 0.40% 0.65% 1.60% 2.90%
Non-performing loans to total assets ... 0.09 0.26 0.45 1.04 2.25
Non-performing assets to total assets .. 0.12 0.34 1.05 2.21 2.94
Total non-performing assets and
troubled debt restructurings to total
assets ............................... 0.31 0.44 1.50 2.64 3.33
The interest income that would have been recorded during the years ended
December 31, 1999, 1998 and 1997 if the Bank's non-accrual loans at the end of
such periods had been current in accordance with their terms during such periods
was $372,000, $950,000, and $644,000, respectively.
As a result of the focus given by the Bank to rehabilitate or liquidate
the Bank's problem assets, nonperforming assets and TDR's have declined from
$14.8 million or 0.44% of total assets at December 31, 1998 to $10.5 million or
0.31% of total assets at December 31, 1999.
Management's actions to acquire non-performing assets, make necessary
improvements and list such properties for resale, coupled with improved real
estate market conditions in California, contributed to significant declines in
each of the major real estate owned property categories in 1999. In particular,
during 1999, the Company sold all multi- family, commercial real estate, and
79.8% of residential properties owned during the year. As a consequence of such
actions, at December 31, 1999, real estate owned totaled $846,000 compared to
$2.7 million as of December 31, 1998.
38
Of the Bank's $3.2 million of non-performing loans at December 31, 1999,
the largest loan was secured by an apartment complex, with a carrying value of
$556,900. This loan has been classified as collateral dependent, and as of
December 31, 1999 was carried at fair value. The Bank's $846,000 of real estate
owned at December 31, 1999 was comprised of two residential properties.
The decline in real estate owned in 1997 was due to a significant extent
to the Bank financing purchases of such real estate owned through loans to
facilitate (which loans generally carry more favorable terms to the borrower
than what is otherwise obtainable in the market). To the extent that current
management has financed the disposition of real estate owned, such loans have
been made consistent with market terms and conditions and cash down payments to
qualify the transaction as a sale under applicable accounting guidelines. During
1998 and 1997, the Bank extended an aggregate of $6.1 million and $16.1 million
to finance the disposition of real estate owned, respectively, which constituted
22.8% and 40.8% of total sales of real estate owned during such years,
respectively. During 1999, the Bank did not fund any loans to finance the
disposition of real estate owned.
With the downturn in the California economy experienced during the early
1990s and the problems associated with the Northridge earthquake in 1994, prior
management entered into a significant number of TDR's. Since the change in the
Bank's management in 1995, the Bank enters into TDR's only on a limited basis.
Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated loan losses based on a number of factors, including
economic trends, industry experience, estimated collateral values, past loss
experience, the Bank's underwriting practices, and management's ongoing
assessment of the credit risk inherent in its portfolio. Although management
believes that it uses the best information available to make such
determinations, future adjustments to the allowance may be necessary, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the initial determinations. The Bank's
Internal Asset Review Committee undertakes a quarterly evaluation of the
adequacy of the allowance for loan losses as well as the allowance with respect
to real estate owned. The Committee will provide allowances to absorb losses
that are both probable and reasonably quantifiable as well as for those that are
not specifically identified but can be reasonably estimated.
39
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in Thousands)
Allowance at beginning of period ...... $ 18,897 $ 17,824 $ 23,280 $ 31,572 $ 29,801
Provision for loan losses ............. 4,747 2,000 2,046 2,884 8,823
Charge-offs:
Mortgage loans:
Single-family residential ..... (303) (616) (1,967) (2,213) (3,416)
Multi-family residential ...... (131) (261) (5,599) (5,039) (1,854)
Commercial real estate ........ (820) -- (42) (3,371) (860)
Land .......................... -- -- -- (1,478) (956)
Non-mortgage loans:
Commercial business ........... (741) (16) -- -- --
Consumer ...................... (1,101) (119) -- -- --
-------- -------- -------- -------- --------
Total charge-offs ........... (3,096) (1,012) (7,608) (12,101) (7,086)
Recoveries:
Mortgage loans:
Single-family residential ..... 32 85 106 16 34
Multi-family residential ...... -- -- -- 22 --
Commercial real estate ........ 60 -- -- 2 --
Land .......................... -- -- -- 885 --
Non-mortgage loans:
Commercial business ........... 134 -- -- -- --
Consumer ...................... 277 -- -- -- --
-------- -------- -------- -------- --------
Total recoveries ............ 503 85 106 925 34
-------- -------- -------- -------- --------
Net charge-offs ....................... (2,593) (927) (7,502) (11,176) (7,052)
-------- -------- -------- -------- --------
Allowance at end of period ............ $ 21,051 $ 18,897 $ 17,824 $ 23,280 $ 31,572
======== ======== ======== ======== ========
Allowance for loan losses to total
nonperforming loans at end of
period ............................ 662.40% 222.14% 179.97% 127.65% 88.71%
======== ======== ======== ======== ========
Allowance for loan losses to total
nonperforming loans and troubled
debt restructurings at end of
period ............................ 218.19% 156.39% 89.84% 90.30% 75.67%
======== ======== ======== ======== ========
Allowance for loan losses to
total loans, gross at end of period 0.81% 0.86% 1.15% 1.99% 2.50%
======== ======== ======== ======== ========
As shown in the table above, loan charge-offs (net of recoveries) amounted
to $2.6 million, $927,000 and $7.5 million, during the years ended December 31,
1999, 1998 and 1997, respectively. The net charge-offs recognized by the Bank
during the years ended December 31, 1999, 1998 and 1997 primarily reflected the
transfer of loans (particularly multi-family residential loans) to real estate
owned, as shown in the preceding non-performing assets table. Such multi-family
loans had specific valuation allowances which had been established through
increased provisions for loan losses in prior periods. At the time of transfer
of the loans to real estate owned, such specific valuation allowances were
charged off. As a result of the transfer of such loans to real estate owned, the
Bank's non-performing loans have declined significantly since 1995, which has
contributed to the decrease in the Bank's provision for loan losses. The Bank
also experienced increased net charge-offs of $824,000 and $607,000 on its
consumer and commercial business portfolios in 1999 due to growth in such
portfolios. The increase in provision for loan losses in 1999 reflects the
Bank's increased volume of originations of commercial real estate, commercial
business and consumer loans. Management believes that its allowance for loan
losses at December 31, 1999 is adequate. Nevertheless, there can be no
assurances that additions to such allowance will not be necessary in future
periods, particularly if the growth in the Bank's commercial and consumer
lending continues.
40
The following table sets forth information concerning the allocation of
the Bank's allowance for loan losses by loan category at the dates indicated.
Year Ended December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------- ---------------------- --------------------- ----------------------
Percent to Percent to Percent to Percent to
Total Total Total Total
Amount Allowance Amount Allowance Amount Allowance Amount Allowance
------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
Residential real estate . $ 5,020 23.8% $ 5,636 29.8% $ 5,014 28.1% $ 4,051 17.4%
Multi-family
residential .......... 4,990 23.7 7,239 38.3 8,964 50.3 15,753 67.7
Commercial real estate .. 4,073 19.4 3,887 20.6 3,062 17.2 3,267 14.0
Land .................... 42 0.2 44 0.2 305 1.7 94 0.4
Commercial business ..... 3,959 18.8 1,160 6.1 352 2.0 102 0.5
Consumer ................ 243 1.2 160 0.9 127 0.7 13 --
Auto .................... 2,724 12.9 771 4.1 -- -- -- --
------- ----- ------- ----- ------- ----- ------- -----
Total ................ $21,051 100.0% $18,897 100.0% $17,824 100.0% $23,280 100.0%
======= ===== ======= ===== ======= ===== ======= =====
Deposits. Total deposits increased by $105.2 million or 6.8% during the
year ended December 31, 1999. The Bank's aggregate certificates of deposit
increased from $1.109 billion, or 71.9% of total deposits, at December 31, 1998
to $1.146 billion, or 69.6% of total deposits, at December 31, 1999. The Bank
has offered a wide array of deposit products through its branch system in order
to foster retail deposit growth. Transaction accounts (consisting of passbook,
checking and money market accounts) increased from $433.0 million, or 28.1% of
total deposits, at December 31, 1998 to $501.4 million, or 30.4% of total
deposits, at December 31, 1999.
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type of the Bank for the periods
indicated.
Year Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(Dollars in Thousands)
Checking accounts .......... $ 182,275 1.22% $ 120,632 1.75% $ 83,248 1.96%
Money market accounts ...... 141,149 4.13 96,422 4.71 21,938 2.94
Passbook accounts .......... 137,725 3.40 158,355 3.88 235,162 4.34
---------- ---------- ----------
Total transaction accounts . 461,149 375,409 340,348
Term certificates of deposit 1,145,621 5.22 1,010,307 5.71 966,863 5.66
---------- ---------- ----------
Total deposits .......... $1,606,770 4.51% $1,385,716 5.09% $1,307,211 5.14%
========== ========== ========== ========== ========== ==========
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
Beginning balance......................... $1,542,162 $1,266,615 $1,371,243
Net increase (decrease) before interest... 47,948 221,269 (157,599)
Interest credited......................... 57,227 54,278 52,971
---------- ---------- ----------
Net increase (decrease) in deposits....... 105,175 275,547 (104,628)
---------- ---------- ----------
Ending balance............................ $1,647,337 $1,542,162 $1,266,615
========== ========== ==========
41
The following table sets forth by various interest rate categories the
term certificates of deposit with the Bank at the dates indicated.
Year Ended December 31,
----------------------------------------------------------
1999 1998 1997
---------- ---------- ---------
(Dollars in Thousands)
0.00% to 2.99%.................. $ 3,869 $ 4,536 $ 4,071
3.00 to 3.99.................... 9,740 5,085 2,993
4.00 to 4.99.................... 207,756 107,373 5,700
5.00 to 6.99.................... 923,621 961,204 918,842
7.00 to 8.99.................... 962 30,961 1,219
---------- ---------- ---------
Total...................... $1,145,948(1) $1,109,159(1) $ 932,825(1)
========== ========== =========
- -----------
(1) At December 31, 1999, 1998 and 1997, certificates of deposit in amounts
greater than or equal to $100,000 amounted to $320.4 million, $316.3
million and $138.2 million, respectively.
The following table sets forth the amount and remaining maturities of the
Bank's term certificates of deposit at December 31, 1999.
Over Six Months Over One Over Two
Six Months Through Year Through Years Through Over
and Less One Year Two Years Three Years Three Years
- ----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
0.00% to 1.99% ..... $ 206 $ -- $ -- $ -- $ --
2.00 to 2.99 ....... 2,732 620 311 -- --
3.00 to 3.99 ....... 9,012 676 52 -- --
4.00 to 4.99 ....... 176,842 25,466 4,867 311 270
5.00 to 6.99 ....... 533,973 257,170 112,319 9,367 10,792
7.00 to 8.99 ....... 867 -- 95 -- --
-------- -------- -------- -------- --------
Total ......... $723,632 $283,932 $117,644 $ 9,678 $ 11,062
======== ======== ======== ======== ========
The following table presents the maturity of term certificates of deposit
in amounts greater than or equal to $100,000 at December 31, 1999.
At December 31, 1999
--------------------
(Dollars in Thousands)
3 months or less............................. $ 117,972
Over 3 months through 6 months............... 88,886
Over 6 months through 12 months.............. 79,776
Over 12 months............................... 33,799
-----------
Total..................................... $ 320,433
===========
42
Borrowings. The following table sets forth certain information regarding
the borrowings of the Bank at or for the dates indicated.
At or For the Year Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
(Dollars in Thousands)
FHLB of San Francisco advances:
Average balance outstanding ...................... $ 1,211,000 $ 902,083 $ 148,681
Maximum amount outstanding at any month-end
during the period ............................ 1,259,000 1,249,000 472,000
Balance outstanding at end of period ............. 1,123,700 1,198,000 472,000
Weighted average interest rate during the period . 5.39% 5.54% 5.91%
Weighted average interest rate at end of period .. 5.15% 5.38% 5.87%
Weighted average remaining term to maturity at end
of period (in years) ......................... 3.49 5.01 1.61
Securities sold under agreements to purchase:
Average balance outstanding ...................... $ 417,604 $ 385,451 $ 357,396
Maximum amount outstanding at any month-end
during the period ............................ 480,181 658,409 415,676
Balance outstanding at end of period ............. 381,109 364,000 340,788
Weighted average interest rate during the period . 5.60% 5.66% 5.49%
Weighted average interest rate at end of period .. 5.85% 5.61% 5.76%
Weighted average remaining term to maturity at end
of period (in years) ......................... 2.40 3.73 2.71
Other than deposits, the Bank's primary sources of funds consist of
reverse repurchase agreements and advances from the FHLB of San Francisco. At
December 31, 1999, reverse repurchase agreements amounted to $381.1 million,
compared to $364.0 million at December 31, 1998. The Bank has been utilizing
reverse repurchase agreements as part of its overall asset growth and leverage
strategy. As of December 31, 1999, the weighted average remaining term to
maturity of the Bank's reverse repurchase agreements decreased to 2.40 years,
compared to 3.73 years at December 31, 1998, and such reverse repurchase
agreements had a weighted average interest rate of 5.85% at December 31, 1999 as
compared to 5.61% at December 31, 1998. Certain of the reverse repurchase
agreements have call provisions.
Advances from the FHLB of San Francisco amounted to $1.1 billion and $1.2
billion at December 31, 1999 and 1998, respectively. Of the Bank's FHLB advances
outstanding as of December 31, 1999, $613.7 million is scheduled to mature
during 2000 and the remaining $510 million matures between years of 2003 and
2008. Certain of these advances from the FHLB of San Francisco have call
provisions. As of December 31, 1999, the weighted average remaining term to
maturity of the Bank's FHLB advances amounted to 3.49 years, compared to 5.01 at
December 31, 1998, and had a weighted average interest rate of 5.15% at December
31, 1999, compared to 5.38% at December 31, 1998. At December 31, 1999, the Bank
had a collateralized available line of credit of approximately $1.1 billion with
the FHLB of San Francisco.
During the fourth quarter of 1999 the Bank sold $199 million of FHLB
advances. The sales resulted in a gain of $6.7 million, which was reported as an
extraordinary item.
In 1999 the Company secured a $10 million line of credit with a third
party commercial bank for working capital as well as to fund the repurchase of
the Company's outstanding common stock. As of December 31, 1999, $4.7 million of
the line of credit had been utilized.
Stockholder's Equity. Stockholder's equity decreased from $180.6 million
at December 31, 1998 to $179.5 million at December 31, 1999. The Bank's 1999 net
earnings of $33.5 million, offset by a (loss) in market valuation of securities
for ($25.1) million and the purchase of treasury stock ($10.4) million, a
decrease in minimum pension liability of $820,000 resulted in decrease of $1.1
million in stockholders' equity.
43
Results of Operations
General. The Company's results of operations depend substantially on its
net interest income, which is the difference between interest income on
interest-earning assets (which consist primarily of loans receivable,
mortgage-backed and investment securities and various other short-term
investments) and interest expense on interest-bearing liabilities (which consist
primarily of deposits and borrowings). The Company's results of operations are
also significantly affected by the Bank's provisions for loan losses resulting
from the Bank's assessment of the adequacy of its allowance for loan losses, the
level of its other income, including loan service and related fees, net gains on
sales of securities, loans and loan servicing, and net earnings and losses from
real estate operations, the level of its operating expenses, such as personnel
and benefits expense, occupancy and other office related expense and FDIC
insurance premiums, and income taxes and benefits.
The Company reported net earnings before preferred dividends of $33.5
million, $10.9 million and $10.9 million during the years ended December 31,
1999, 1998 and 1997, respectively. During 1999, the Bank executed its strategy
to expand its franchise by purchasing three existing branches in Southern
California. Additionally, management focused on growing its commercial and
consumer loan portfolio in order to achieve a higher yielding loan portfolio,
while controlling expenses and increasing the number of lower-cost transaction
deposit accounts. The 1999 results were impacted by an extraordinary gain on
sale of FHLB advances of $6.7 million and an income tax benefit of $4.5 million.
The 1998 results were impacted by a one-time expense of $11.1 million ($6.5
million net of applicable tax benefits) for employment agreement benefits due to
certain senior executives officers of the Company in connection with the IPO. In
1998, the Company also paid a one-time special FDIC assessment, which it had
deferred from paying in prior years, of $4.5 million ($2.7 million net of
applicable tax benefits). Without the effect of such one-time payments, the
Company would have reported net earnings of $20.1 million for the year ended
December 31, 1998.
Net earnings, after extraordinary item, increased $22.6 million for the
year ended December 31, 1999, primarily due to the increase of the loan
portfolio reflecting an increased volume of originations and purchases.
Net Interest Income. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities.
Net interest income totaled $68.8 million, $40.5 million and $33.8 million
during the years ended December 31, 1999, 1998 and 1997, respectively. Net
interest income increased by $28.2 million or 70% for the year ended December
31, 1999, compared to the prior year, due to a $688.0 million or 25.2% increase
in the average balance of interest-earning assets (consisting primarily of a
$489.6 million increase in the average balance of loans receivable and a $141.4
million increase in the average balance of other interest earning assets and
FHLB stock), and an increase in the interest rate spread of 42 basis points. Net
interest income increased by $6.7 million, or 20%, during the year ended
December 31, 1998 compared to the year ended December 31, 1997 due a $888.5
million or 48.4% increase in the average balance of total interest earning
assets.
The Company's net interest margin for the year ended December 31, 1999 was
2.01% as compared to 1.49% and 1.84% for the years ended December 31, 1998 and
1997. The increase in net interest margin during 1999 compared to 1998 reflects
the increase in yields on earning assets consistent with management's strategy
of originating higher yielding loans and reducing lower yielding securities in
the investment portfolio. The decrease in net interest margin during the year
ended December 31, 1998 reflected the decrease in yields on earning assets,
primarily due to accelerated premium amortization on the Bank's purchased
adjustable-rate single family residential loan portfolio.
44
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.
Year Ended December 31,
---------------------------------------------------------------------------------
1999 1998
------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1).......... $2,304,450 $166,595 7.23% $1,814,855 $125,851 6.93%
Mortgage-backed securities (2) 614,019 34,535 5.62 557,038 32,439 5.82
Other interest-earning assets (3) 430,210 25,869 6.01 310,462 20,062 6.46
FHLB stock.................... 65,116 3,429 5.27 43,464 2,521 5.80
---------- ------- ---------- -------
Total interest-earning assets 3,413,795 230,428 6.75 2,725,819 180,873 6.64
Noninterest-earning assets....... 47,889 84,039
---------- ----------
Total assets................ $3,461,684 $2,809,858
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts (4).... $ 376,581 $ 12,520 3.32% $ 330,762 $ 12,786 3.87%
Term certificates of deposit 1,145,621 59,771 5.22 1,010,307 57,141 5.66
----------- -------- ---------- --------
Total deposits............ 1,522,202 72,291 4.75 1,341,069 69,927 5.21
Senior debt and other borrowings -- 19 -- 4,467 445 9.96
FHLB advances and repurchase
agreements.................. 1,628,656 89,221 5.48 1,236,120 69,772 5.64
Hedging costs................. -- 146 -- -- 214 --
----------- -------- ---------- --------
Total interest-bearing
liabilities .............. 3,150,858 161,677 5.13% 2,581,656 140,358 5.44%
------- --------
Noninterest-bearing liabilities 139,042 88,308
----------- ----------
Total liabilities........... 3,289,900 2,669,964
Stockholders' equity............. 171,784 139,894
----------- ----------
Total liabilities and
stockholders' equity.......... $3,461,684 $2,809,858
========== ==========
Net interest-earning assets...... $ 262,937 $ 144,163
========== ==========
Net interest income/interest
rate spread ................... $ 68,751 1.62% $ 40,515 1.20%
========== ==== ========== ====
Net interest margin.............. 2.01% 1.49%
==== ====
Ratio of average interest-earning
assets to average
interest-bearing liabilities 108.34% 105.58%
====== ======
Year Ended December 31,
-------------------------------------
1997
-------------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1).......... $1,200,137 $ 89,938 7.49%
Mortgage-backed securities (2) 501,261 32,672 6.52
Other interest-earning assets (3) 119,429 7,346 6.15
FHLB stock.................... 16,520 1,023 6.19
--------- --------
Total interest-earning assets 1,837,347 130,979 7.13
Noninterest-earning assets....... 74,487
----------
Total assets................ $1,911,834
==========
Interest-bearing liabilities:
Deposits:
Transaction accounts (4).... $ 340,348 12,476 3.67%
Term certificates of deposit 966,863 54,771 5.66
---------- ---------
Total deposits............ 1,307,211 67,247 5.14
Senior debt and other borrowings 11,404 1,271 11.15
FHLB advances and repurchase
agreements.................. 506,077 28,420 5.62
Hedging costs................. -- 267 --
---------- ---------
Total interest-bearing
liabilities .............. 1,824,692 97,205 5.33%
-------
Noninterest-bearing liabilities 15,957
----------
Total liabilities........... 1,840,649
Stockholders' equity............. 71,185
----------
Total liabilities and
stockholders' equity.......... $1,911,834
==========
Net interest-earning assets...... $ 12,655
==========
Net interest income/interest
rate spread ................... $ 33,774 1.80%
========== ====
Net interest margin.............. 1.84%
====
Ratio of average interest-earning
assets to average
interest-bearing liabilities 100.69%
======
- --------------------------
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(2) Includes mortgage-backed securities classified as held-to-maturity and
available-for-sale.
(3) Includes short-term investments, securities purchased under agreements to
resell and investment securities.
(4) Includes passbook checking and money market accounts.
45
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on net interest income of the Company. Information is provided with
respect to (i) effects on interest income attributable to changes in rate
(changes in rate multiplied by prior volume); (ii) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
Year Ended December 31, 1999 Compared Year Ended December 31, 1998 Compared
to Year Ended December 31, 1998 to Year Ended December 31, 1997
-------------------------------------------- -------------------------------------------
Increase (decrease) due to Total Net Increase (decrease) due to Total Net
------------------------------- Increase ------------------------------ Increase
Rate Volume Rate/Volume (Decrease) Rate Volume Rate/Volume (Decrease)
---- ------ ----------- ---------- ---- ------ ----------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable .............. $ 5,350 $ 33,951 $ 1,443 $ 40,744 $ (6,715) $ 46,067 $ (3,439) $ 35,913
Mortgage-backed securities .... (1,109) 3,318 (113) 2,096 (3,481) 3,636 (388) (233)
Other interest-earning assets . (1,394) 7,738 (537) 5,807 371 11,750 595 12,716
FHLB stock .................... (232) 1,256 (116) 908 (65) 1,669 (106) 1,498
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in income on
interest-earning assets .... 2,615 46,263 677 49,555 (9,890) 63,122 (3,338) 49,894
-------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts ....... (1,789) 1,771 (248) (266) 681 (351) (20) 310
Term certificates of deposit (4,430) 7,653 (593) 2,630 (87) 2,461 (4) 2,370
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits ........... (6,219) 9,424 (841) 2,364 594 2,110 (24) 2,680
Senior debt and other
borrowings ................. -- (445) 19 (426) (135) (773) 82 (826)
FHLB advances and
repurchase agreements ...... (2,055) 22,156 (652) 19,449 145 40,997 210 41,352
Hedging costs ................. -- -- (68) (68) -- -- (53) (53)
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in expense on
interest-bearing liabilities .. (8,274) 31,135 (1,542) 21,319 604 42,334 215 43,153
-------- -------- -------- -------- -------- -------- -------- --------
Change in net interest income .... $ 10,889 $ 15,128 $ 2,219 $ 28,236 $(10,494) $ 20,788 $ (3,553) $ 6,741
======== ======== ======== ======== ======== ======== ======== ========
46
Interest Income. Total interest income increased by $49.6 million or 27.4%
during the year ended December 31, 1999 and increased by $49.9 million or 38.1%
during the year ended December 31, 1998. These increases were primarily due to
the increase of the loan portfolio. Interest income on loans receivable, the
largest component of interest-earning assets, increased by $40.7 million or
32.4% during the year ended December 31, 1999 and increased by $35.9 million or
39.9% during the year ended December 31, 1998. The increase during 1999 was due
to loan growth and, to a lesser extent, a shift in the portfolio to a greater
proportion of commercial and consumer loans, which has resulted in an increase
in the weighted average yield earned on the loan portfolio. The increase in
interest income in 1998 was primarily due to loan growth and investment of funds
as a result of leverage of capital raised in the Company's IPO. Loan purchases
in 1998 were funded by FHLB advances with a weighted average rate of 5.38%. See
"ITEM 1. BUSINESS--Lending Activities--Origination, Purchase and Sale of Loans."
Interest income on mortgage-backed securities increased by $2.1 million or
6.5% during the year ended December 31, 1999 and decreased by $233,000 or 0.7%
during the year ended December 31, 1998. This increase in 1999 was mainly due to
an increase in the average balance of such securities. The small decrease in
interest income on mortgage-backed securities during the year ended December 31,
1998 was mainly due to sales and accelerated premium amortization due to
prepayments.
Interest income on other interest-earning assets (which consist of U.S.
Government agency securities, corporate trust preferred securities, FHLB stock,
securities purchased under agreements to resell and other short-term
investments) increased by $6.7 million or 29.7% during the year ended December
31, 1999 and increased by $14.2 million or 169.8% during the year ended December
31, 1998. The increase in such interest income during the year ended December
31, 1999 was primarily due to a $141.4 million increase in the average balance
of investments, which was partially offset by a 47 basis point decrease in the
weighted average yield earned therein. The increase in such interest income
during 1998 was due primarily to a $218.0 million increase in the average
balance of such investments and an increase in the weighted average yield earned
on such investments of 22 basis points.
Interest Expense. Total interest expense increased by $21.3 million or
15.2% during the year ended December 31, 1999 and increased by $43.2 million or
44.4% during the year ended December 31, 1998. The increase during 1999 was the
result of a $569.2 million or 22.1% increase in the average balance of
interest-bearing liabilities, reflecting the growth in the balance sheet. The
increase during 1998 was the result of an increase in the average balance of
interest-bearing liabilities (primarily borrowings), reflecting the Bank's
leveraging of it balance sheet. Interest expense on deposits, the largest
component of the Bank's interest-bearing liabilities, increased by $2.4 million
or 3.4% during the year ended December 31, 1999 and increased by $2.7 million or
4.0% during the year ended December 31, 1998. The increase in interest expense
on deposits during the year ended December 31, 1999 was primarily due to a
$181.1 million increase in the average balance of deposits. The increase in
interest expense on deposits during the year ended December 31, 1998 was
primarily due to a $33.9 million increase in the average balance of deposits.
Interest expense on borrowings consists primarily of reverse repurchase
agreements and FHLB advances. Interest expense on borrowings increased by $19.5
million or 27.9% during the year ended December 31, 1999 and increased by $41.4
million or 145.5% during the year ended December 31, 1998. Interest expense on
advances from the FHLB increased by $18.1 million or 38.1% during 1999 and $38.8
million or 442.0% during 1998. The Bank's new management has utilized FHLB
advances when the rates and other terms on such borrowings are favorable as
compared to its other funding sources. Interest expense on securities sold under
agreements to repurchase increased by $1.3 million or 6.0% during the year ended
December 31, 1999 and increased by $2.5 million or 12.9% during the year ended
December 31, 1998. The Bank has increased its use of FHLB balances and reverse
repurchase agreements in order to fund its leverage strategy.
The Bank's interest expense during the years ended December 31, 1999, 1998
and 1997 included the costs of hedging the Bank's interest rate exposure. Such
hedging costs amounted to $146,000, $214,000 and $267,000 during such respective
periods. The Bank in the past has utilized interest rate swaps, corridors, caps
and floors in order to manage its interest rate risk. However, since the change
in management, the Bank has not entered into any such interest
47
rate contracts and has allowed its remaining contracts to expire as they mature.
The Bank has instead focused on internal hedging through balance sheet
restructuring. At December 31, 1999, the Bank had no remaining interest rate
swap contracts and five remaining interest rate corridors with an aggregate
contract amount of $32 million.
Provision for Loan Losses. The Bank established provisions for loan losses
of $4.7 million, $2.0 million and $2.0 million during the years ended December
31, 1999, 1998 and 1997, respectively. Management has aggressively charged off
non-performing loans and taken possession of and sold a significant amount of
the assets which collateralized such loans. As a consequence of such actions,
the Bank's non-performing assets have been reduced over the periods presented
and the Bank's provision for loan losses have been reduced to more normalized
levels. The increase in provision for loan losses in 1999 reflects the Bank's
increased volume of originations of commercial real estate, commercial business
and consumer loans.
The allowance for loan losses is established through provisions based on
management's evaluation of the risks inherent in the Company's loan portfolio
and the local real estate economy. The allowance is maintained at amounts
management considers adequate to cover losses which are deemed probable and
calculable. The allowance is based upon a number of factors, including asset
classifications, collateral values, management's assessment of the credit risk
inherent in the portfolio, historical loan loss experience and the Company's
underwriting policies.
Management believes that its allowance for loan losses at December 31,
1999 is adequate. Nevertheless, there can be no assurance that additions to such
allowance will not be necessary in future periods, particularly if the growth in
the Bank's commercial and consumer lending continues. In addition, as a result
of continuing uncertainties in certain real estate markets, increases in the
valuation allowance may be required in future periods. Furthermore, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's valuation allowance. These agencies may
require increases to the allowance, based on their judgments of the information
available to them at the time of the examination.
Other Income (Loss). Total other income decreased by $6.5 million or
(101.7%) during the year ended December 31, 1999 and increased by $1.3 million
during the year ended December 31, 1998. Loan service and loan related fees
amounted to $219,000, $111,000 and $481,000 during the years ended December 31,
1999, 1998 and 1997, respectively. The decline in such fees from 1997 to 1998
primarily reflected the sale of residential loan servicing during 1998 and the
reduction in loan balances outstanding in the loan servicing portfolio due to
normal repayments and prepayments. See "ITEM 1. BUSINESS--Lending
Activities--Single-Family Residential Real Estate Loans."
The Bank recognized net gains (losses) on sales of mortgage-backed and
other securities of $(3.2) million, $1.7 million and $1.3 million during the
years ended December 31, 1999, 1998 and 1997, respectively. During such
respective periods, the Bank sold $203.7 million, $281.2 million and $234.3
million of mortgage-backed securities. The 1999 sales were completed in an
effort to improve regulatory capital ratios.
Net gains (losses) on the sale of loans and loan servicing amounted to
$49,000, $613,000 and $3.4 million during the years ended December 31, 1999,
1998 and 1997, respectively. The Bank sold $94.1 million, $42.4 million and
$85.2 of loans during the years ended December 31, 1999, 1998 and 1997,
respectively, and $868.4 million of loan servicing during the year ended
December 31, 1997. The Bank did not sell any loan servicing during the years
ended December 31, 1998 and 1999. In connection with the sale of loan servicing
during 1997, the Bank recognized a gain of $3.2 million during the year and an
additional $5.3 million was deferred and is being recognized over a period
corresponding with the estimated lives of the related loans. See "ITEM 1.
BUSINESS--Lending Activities--Single- Family Residential Real Estate Loans."
Income (loss) from real estate operations amounted to $513,000, $1.5
million and $(1.8) million during the years ended December 31, 1999, 1998 and
1997, respectively. Income (loss) from real estate operations consists of (i)
losses from real estate operations (rental income less operating expenses), (ii)
gains on sales of real estate owned and real estate held for investment, and
(iii) provisions for losses on real estate owned and real estate held for
investment.
48
During the years ended December 31, 1999, 1998 and 1997, losses from real estate
operations amounted to $(36,000), $(701,000) and $(1.3) million, respectively.
Gains on sales of real estate owned and real estate held for investment amounted
to $602,000, $2.2 million and $2.2 million for the years ended December 31,
1999, 1998 and 1997, respectively, and provisions for losses on real estate
owned and real estate held for investment amounted to $53,000, $0 and $2.8
million for the respective periods. The improving economy in Southern California
since 1996 has assisted in management's efforts to dispose of the Bank's real
estate holdings and has facilitated sales.
Miscellaneous other income, consisting primarily of bank service charges,
amounted to $2.3 million, $2.6 million and $1.8 million during the years ended
December 31, 1999, 1998 and 1997, respectively. The increase in 1998 was
primarily due to litigation settlements of $680,000 related to investment
securities and property damage recoveries. The decrease in 1999 was primarily
due to lack of such litigation settlements offset by increases in Bank service
charge income of $167,000 and increases in Bank subsidiary income of $209,000.
Operating Expenses. Total operating expenses decreased by $8.8 million or
18.8% during the year ended December 31, 1999 and increased by $17.4 million or
59.0% during the year ended December 31, 1998. The decrease in operating
expenses during 1999 and the increase in operating expenses during 1998 were
primarily attributable to one-time payments of $15.6 million ($9.2 million net
of applicable tax benefits) which were incurred in connection with the Company's
IPO. During the years ended December 31, 1999, 1998 and 1997, total operating
expenses as a percentage of average total assets amounted to 1.10%, 1.67% and
1.55%, respectively, and the Company's efficiency ratio amounted to 55.54%,
100.02% and 72.17%, respectively.
The principal category of the Company's operating expenses is personnel
and benefits expense of the Bank, which amounted to $15.8 million, $23.8 million
and $11.8 million during the years ended December 31, 1999, 1998 and 1997,
respectively. The decrease in 1999 and the increase in 1998 were primarily the
result of a one-time $11.1 million payment of benefits to certain senior
executives in connection with the Company's IPO in 1998, partially offset by
increases due to the expansion of the Bank's commercial business and consumer
lending activities in 1999.
Occupancy expense amounted to $10.1 million, $8.4 million and $7.1 million
during the years ended December 31, 1999, 1998 and 1997, respectively. The
increase in such expense during the year ended December 31, 1999 was primarily
due to the acquisition of three new branches. Management expects occupancy
expense to continue to increase over the next year as the Bank has begun to
operate additional branch offices.
FDIC insurance premiums totaled $1.4 million, $7.3 million and $4.9
million during the years ended December 31, 1999, 1998 and 1997, respectively.
The decrease in 1999 and the increase in 1998 was mainly due to the one-time
special FDIC assessment, which the Company deferred paying in prior years, of
$4.5 million. As a result of paying the one-time special assessment, the Bank
lowered its assessment rate from 35.28 basis points to 9.1 basis points which
includes the debt service paid to the Financing Corporation. The Financing
Corporation was established by the government in the early 1980's for the
purpose of liquidating troubled thrift institutions. FDIC insurance premiums are
a function of the size of the Bank's deposit base.
Professional services expense amounted to $1.5 million, $1.3 million and
$528,000 during the years ended December 31, 1999, 1998 and 1997, respectively.
These increases were primarily due to increases in other consulting expenses.
Office related expenses have increased over the periods presented and
amounted to $5.1 million, $4.4 million and $3.9 million during the years ended
December 31, 1999, 1998 and 1997, respectively. These increases were primarily
due to increases in data processing expenses reflecting increases in the number
of loan and deposit accounts.
Miscellaneous other expense amounted to $4.3 million, $1.8 million and
$1.3 million during the years ended December 31, 1999, 1998 and 1997,
respectively. The increase during 1999 was due primarily to increases in
customer
49
data processing charges of $956,000, goodwill amortization expense of $413,000,
regulatory assessments of $274,000 and Delaware franchise taxes of $144,000.
Goodwill expense amounted to $481,000, $68,000 and $0 during the years
ended December 31, 1999, 1998 and 1997, respectively. The increase during 1999
in goodwill reflects costs associated with management's execution of its
strategy to expand the Bank's franchise through the purchase of three existing
banking facilities.
Income Taxes. During the years ended December 31, 1999, 1998 and 1997, the
Company recognized $4.5 million, $16.4 million and $4.5 million, respectively,
in income tax benefits primarily as a result of offsetting available NOLs
against taxable income and projected future taxable income. At December 31,
1999, the Company had $153.4 million of federal NOLs which expire between 2001
and 2018.
The Company had Federal and California alternative minimum tax credit
carryforwards at December 31, 1999 and 1998 of approximately $1.7 million and
$1.4 million, respectively. These carryforwards are available to reduce future
regular federal income taxes and California franchise taxes, if any, over an
indefinite period.
The 1992 Ownership Change resulted in an annual Section 382 limitation on
the Bank's ability to utilize any NOLs created prior to the 1992 Ownership
Change in any one year of approximately $7.7 million. A December 31, 1999, the
Bank had $30.1 million of NOLs which were created prior to the 1992 Ownership
Change. Similarly, the 1998 Ownership Change resulted in an annual Section 382
limitation on the Bank's ability to utilize any NOLs created prior to the 1998
Ownership Change but after the 1992 Ownership Change in any one year of
approximately $21.3 million. At December 31, 1999, the Bank had $111.2 million
of NOLs which were created prior to the 1998 Ownership Change but after the 1992
Ownership Change.
Asset and Liability Management
Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. It is the objective of the Company
to attempt to control risks associated with interest rate movements. In general,
management's strategy is to match asset and liability balances within maturity
categories to limit the Bank's exposure to earnings variations and variations in
the value of assets and liabilities as interest rates change over time. The
Company's asset and liability management strategy is formulated and monitored by
the Bank's Asset/Liability Management Committee, which is comprised of senior
officers of the Bank, in accordance with policies approved by the Board of
Directors of the Bank. The Asset/Liability Management Committee meets weekly to
review, among other things, the sensitivity of the Bank's assets and liabilities
to interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and sale activity, and maturities of investments and
borrowings. The Asset/Liability Management Committee also approves and
establishes pricing and funding decisions with respect to overall asset and
liability composition and reports regularly to the Board of Directors.
One of the primary goals of the Bank's Asset/Liability Management
Committee is to effectively increase the duration of the Bank's liabilities
and/or effectively contract the duration of the Bank's assets so that the
respective durations are matched as closely as possible. This duration
adjustment can be accomplished either internally by restructuring the Bank's
balance sheet, or externally by adjusting the duration of the Bank's assets
and/or liabilities through the use of interest rate contracts, such as interest
rate swaps, corridors, caps and floors. Although the Bank has in the past hedged
its interest rate exposure externally through the use of various interest rate
contracts, the Bank's current strategy is to hedge internally through the use of
core transaction deposit accounts, which are not as rate sensitive as other
deposit instruments, FHLB advances and reverse repurchase agreements, together
with an emphasis on investing in and/or purchasing shorter-term or
adjustable-rate assets which are more responsive to changes in interest rates,
such as adjustable-rate U.S. Government agency mortgage-backed securities,
short-term U.S. Government agency securities and commercial business and
consumer loans.
50
Internal hedging through balance sheet restructuring generally involves
either the attraction of longer-term or less rate sensitive funds (i.e., core
transaction deposit accounts which are not as rate sensitive as other deposit
instruments or FHLB advances) or the investment in certain types of shorter-term
or adjustable-rate assets such as adjustable-rate mortgage-backed securities,
shorter-term U.S. Government agency securities and commercial business and
consumer loans. On the asset side of the balance sheet, since the change in the
Bank's management, the Bank has not originated any additional adjustable-rate
mortgage products tied to COFI, which tends to react more slowly to changes in
interest rates, and has emphasized loan products tied to a U.S. Treasury based
index (which reacts much more quickly to changes in interest rates). During the
year ended December 31, 1997, the Bank sold $85.2 million of such COFI-based
residential mortgage loans and used most of the sale proceeds to purchase $59.0
million of one-year adjustable-rate loans tied to the U.S. Treasury index of
comparable maturity. During the years ended December 31, 1999 and 1998, the Bank
sold loans totaling $94.1 million and $42.4 million, respectively, in order to
raise liquidity to support new loan originations. See"ITEM 1. BUSINESS--Lending
Activities--Origination, Purchase and Sale of Loans."
The Bank has been replacing wholesale earning assets with loan
originations. Purchases of adjustable-rate mortgage-backed securities have
consequently decreased and were $10.0 million, $105.7 million and $186.0 million
during the years ended December 31, 1999, 1998 and 1997, respectively. In
addition, during the fourth quarter of 1999, the Bank sold $200.9 million of
investment securities which include in part the 1999 purchases of
adjustable-rate mortgage-backed securities. At December 31, 1999, $129.8 million
or 30.5% of the Bank's mortgage-backed securities consisted of adjustable-rate
instruments. See "ITEM 1. BUSINESS-Investment Activities."
During the years ended December 31, 1999, 1998 and 1997, the Bank
originated in the aggregate $362.5 million, $94.0 million and $32.6 million,
respectively, of commercial business and consumer loans which amounted to 43.7%,
15.5% and 20.3% of total loan originations, respectively. The Bank intends to
increase its origination of commercial business and consumer loans which have
adjustable-rates of interest and shorter terms. "See ITEM 1. BUSINESS--Lending
Activities--Commercial Business and Consumer Loans."
On the liability side of the balance sheet, management has decreased the
Bank's reliance on shorter-term brokered deposits, which carry high interest
rates and are a volatile funding source, in favor of short- and
intermediate-term FHLB advances and reverse repurchase agreements and retail
certificates of deposit. As a result, out-of-market, institutional jumbo
certificates of deposit have declined from $103.4 million at December 31, 1997
to $0 at December 31, 1999 and FHLB advances and reverse repurchase agreements
have decreased from $1.6 billion in the aggregate at December 31, 1998 to $1.5
billion in the aggregate at December 31, 1999.
Consistent with management's strategy of reducing lower-yielding
securities in the portfolio, during the fourth quarter the Bank recognized a
$3.4 million loss on the sale of $200.9 million of investment securities. The
loss recognized from this sale was offset by the $6.7 million gain on sale of
$199 million of FHLB advances, which was reported as an extraordinary item. The
net effect of these transactions was a $3.3 million gain in the fourth quarter,
equaling $0.16 per share pre-tax. These transactions improved the Bank's capital
ratios as earnings were increased and the balance sheet was decreased by $200
million.
External hedging involves the use of interest rate swaps, collars,
corridors, caps and floors. The notional amount of interest rate contracts
represents the underlying amount on which periodic cash flows are calculated and
exchanged between counterparties. However, this notional amount does not
represent the principal amount of loans or securities which would effectively be
hedged by that interest rate contract. In selecting the type and amount of
interest rate contract to utilize, the Bank compares the duration of a
particular contract, or its change in value for a 100 basis point movement in
interest rates, to that of the loans or securities to be hedged. An interest
rate contract with the appropriate offsetting duration may have a notional
amount much greater than the face amount of the securities being hedged.
51
At December 31, 1999, the Bank was not a party to any interest rate swap
agreements. The net expense relating to the Bank's interest rate swap agreements
was $0, $0 and $2,000 during the years ended December 31, 1999, 1998 and 1997,
respectively.
At December 31, 1999, the Bank was also a party to five interest rate
corridor agreements, which agreements expire from 2000 through 2001 and cover an
aggregate contract amount of approximately $32.0 million. An interest rate
corridor consists of an agreement whereby the issuer agrees to pay the
purchaser, in exchange for the payment of a premium, the prevailing rate of
interest in the event interest rates rise above a specified rate on a specified
interest rate index and do not exceed a specified upper rate on the same index.
The Bank entered into interest rate corridors as a means to artificially raise
the interest rate cap on certain loans. As of December 31, 1999, the interest
rate corridors have an average strike price of 6.54% and an average limit rate
of 8.20% (the Bank's interest rate corridors are based on either three month
London Inter-Bank Offered Rate ("LIBOR") or COFI). The aggregate net expense
relating to the Bank's interest rate corridors and floors was $146,000, $214,000
and $265,000 during the years ended December 31, 1999, 1998, and 1997,
respectively. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" Note
(18)--Notes to Consolidated Financial Statements.
The Asset/Liability Management Committee's methods for evaluating interest
rate risk include an analysis of the Bank's interest rate sensitivity "gap,"
which is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities. A gap is considered
negative when the amount of interest-rate sensitive liabilities exceeds
interest-rate sensitive assets. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to affect net interest income adversely. Because
different types of assets and liabilities with the same or similar maturities
may react differently to changes in overall market rates or conditions, changes
in interest rates may affect net interest income positively or negatively even
if an institution were perfectly matched in each maturity category. FHLB
advances totaling $290 million were called in January 2000. The effect of those
called borrowings are incorporated as pro forma information into the following
table summarizing anticipated maturities and repricing of the Company's interest
earning assets and interest bearing liabilities.
52
The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1999, based on the information and assumptions set forth in the
notes below.
Three to More than One More Than
Within Three Twelve Year to Three Three Years Over Five
Months Months Years to Five Years Years Total
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Interest-earning assets (1):
Loans receivable (2):
Single-family residential loans:
Fixed ............................... $ 24,728 $ 117,280 $ 233,958 $ 185,987 $ 495,602 $ 1,057,555
Adjustable .......................... 141,296 123,229 67,510 83,230 -- 415,265
Multi-family residential:
Fixed ............................... 594 2,804 8,070 4,343 12,840 28,651
Adjustable .......................... 287,898 10,146 -- -- -- 298,044
Commercial, industrial and land:
Fixed ............................... 4,660 24,097 49,484 45,661 105,464 229,366
Adjustable .......................... 159,131 33,249 -- -- -- 192,380
Other loans (3) ........................ 113,696 101,543 77,363 58,633 10,032 361,267
Mortgage-backed and other securities(4) ...... 62,253 70,413 24,228 42,486 244,684 444,064
Other interest-earning assets(5) ............. 255,645 14,442 -- -- 169,388 439,475
----------- ----------- ----------- ----------- ----------- -----------
Total .................................. 1,049,901 497,203 460,613 420,340 1,038,010 3,466,067
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
Deposits:
Checking accounts ...................... 107,474 -- -- -- -- 107,474
Passbook accounts ...................... 134,377 -- -- -- -- 134,377
Money market accounts .................. 152,899 -- -- -- -- 152,899
Term certificates of deposit ........... 202,101 805,462 127,322 10,890 173 1,145,948
Other borrowings .......................... 668,700 289,621 71,109 480,000 -- 1,509,430
----------- ----------- ----------- ----------- ----------- -----------
Total ................................ 1,265,551 1,095,083 198,431 490,890 173 3,050,128
----------- ----------- ----------- ----------- ----------- -----------
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities ............................... $ (215,650) $ (597,880) $ 262,182 $ (70,550) $ 1,037,837 $ 415,939
=========== =========== =========== =========== =========== ===========
Excess (deficiency) of interest- earning
assets over interest- bearing liabilities
as a percent of total assets .............. (6.35%) (17.59%) 7.72% (2.08%) 30.54% 12.24%
=========== =========== =========== =========== =========== ===========
Cumulative excess(deficiency) of
interest-earning assets over interest-
bearing liabilities ....................... $ (215,650) $ (813,530) $ (551,348) $ (621,898) $ 415,939
=========== =========== =========== =========== ===========
Cumulative excess(deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets .................................... (6.35%) (23.94%) (16.22%) (18.30%) 12.24%
=========== =========== =========== =========== ==========
Pro forma cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets (6) ............ 9.13% (8.46%) (10.93%) (13.00%) 12.24%
=========== =========== =========== =========== ==========
- --------------------
(1) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due, and fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, in each case as
adjusted to take into account estimated prepayments based on assumptions
used by the OTS in assessing the interest rate sensitivity of savings
associations in the Company's region.
(2) Balances have been reduced for non-performing loans, which amounted to
$3.2 million at December 31, 1999.
(3) Comprised of commercial and consumer loans and loans secured by deposits.
(4) Does not include an unrealized loss on securities available for sale of
$38.7 million.
(5) Comprised of short-term investments, securities purchased under agreements
to resell, investment securities and FHLB stock.
(6) A call is a feature of a loan that retracts the terms of loan (maturity
date) at times pre-specified in the loan. $290 million in FHLB advances
were called and refinanced in January 2000. The effect of this transaction
is included in the pro forma cumulative excess (deficiency) information in
the table above.
53
Although the interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, the Asset/Liability Management Committee also regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and net portfolio value ("NPV"), which is defined as the net
present value of an institution's existing assets, liabilities and off-balance
sheet instruments, and evaluating such impacts against the maximum potential
changes in net interest income and NPV that is authorized by the Board of
Directors of the Bank.
The following table sets forth as of December 31, 1999 the Bank's
estimated net interest income over a two year period and NPV based on the
indicated changes in interest rates.
Change (in Basis Point) Net Interest Income
in Interest Rates(1) (next two years) NPV
-------------------- ---------------- ---
(Dollars in Thousands)
+300 $ 99,601 $ 35,407
+200 121,049 99,144
+100 140,346 156,574
0 156,873 208,839
-100 168,617 253,171
-200 170,123 244,500
-300 162,917 216,137
- -----------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
Management of the Bank believes that the assumptions used by it to
evaluate the vulnerability of the Bank's operations to changes in interest rates
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Bank's assets and liabilities and the estimated
effects of changes in interest rates on the Bank's net interest income and NPV
could vary substantially if different assumptions were used or actual experience
differs from the historical experience on which they are based. See "ITEM 1.
BUSINESS--Regulation of Federal Savings Banks--Regulatory Capital Requirements"
for a discussion of a proposed OTS regulation which would subject an institution
with a greater than "normal" level of interest rate exposure to a deduction of
an interest rate risk ("IRR") component in calculating its total capital for
risk-based capital purposes. Based on the OTS model, at December 31, 1999, the
Bank would not have been required to deduct an IRR component in calculating
total risk-based capital had the IRR component of the capital regulations been
in effect.
Liquidity and Capital Resources
Liquidity. Liquidity refers to a company's ability to generate sufficient
cash to meet the funding needs of current loan demand, savings deposit
withdrawals, principal and interest payments with respect to outstanding
borrowings and pay operating expenses. It is management's policy to maintain
greater liquidity than required by the OTS in order to be in a position to fund
loan originations, to meet withdrawals from deposit accounts, to make principal
and interest payments with respect to outstanding borrowings and to make
investments that take advantage of interest rate spreads. The Bank monitors its
liquidity in accordance with guidelines established by the Bank and applicable
regulatory requirements. The Bank's need for liquidity is affected by loan
demand, net changes in deposit levels and the scheduled maturities of its
borrowings. The Bank can minimize the cash required during the times of heavy
loan demand by modifying its credit policies or reducing its marketing effort.
Liquidity demand caused by net reductions
54
in deposits are usually caused by factors over which the Bank has limited
control. The Bank derives its liquidity from both its assets and liabilities.
Liquidity is derived from assets by receipt of interest and principal payments
and prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including deposits,
advances from the FHLB of San Francisco and other short and long-term
borrowings.
The Bank's liquidity management is both a daily and long-term function of
funds management. Liquid assets are generally invested in short-term investments
such as securities purchased under agreements to resell and federal funds sold.
If the Bank requires funds beyond its ability to generate them internally,
various forms of both short- and long-term borrowings provide an additional
source of funds. At December 31, 1999, the Bank had $1.1 billion in borrowing
capacity under a collateralized line of credit with the FHLB of San Francisco.
Although the Bank has in the past utilized brokered deposits as a source of
liquidity, the Bank does not currently rely upon brokered deposits as a source
of liquidity, and does not anticipate a change in this practice in the
foreseeable future.
In 1999 the Company secured a $10 million line of credit from a
third-party commercial bank for operations and the repurchase of the Company's
outstanding stock to be effected from time to time in open market or privately-
negotiated transactions. As of December 31, 1999, $4.7 million of the line of
credit had been utilized.
At December 31, 1999, the Bank had outstanding commitments (including
unused lines of credit) of $95.7 million, and commitments to originate mortgage
and non-mortgage loans of $50.9 million. Certificates of deposit which are
scheduled to mature within one year totaled $1.01 billion at December 31, 1999,
and borrowings that are scheduled to mature within the same period amounted to
$958.3 million. The Bank anticipates that it will have sufficient funds
available to meet its current loan commitments.
Capital Resources. Federally insured savings institutions such as the Bank
are required to maintain minimum levels of regulatory capital. See "ITEM 1.
BUSINESS--Regulation Of Federal Savings Banks--Regulatory Capital Requirements."
The following table reflects the Bank's actual levels of regulatory
capital and applicable regulatory capital requirements at December 31, 1999.
Required Actual Excess
--------------------- --------------------- ---------------------
Percent Amount Percent Amount Percent Amount
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
Tangible capital......... 1.50% $ 51,193 6.78% $231,374 5.28% $180,181
Tier 1 leverage capital.. 4.00 136,514 6.78 231,374 2.78 94,860
Tier 1 risk-based
capital (1)(2)........ 4.00 83,520 11.08 231,374 7.08 147,854
Risk-based capital (1)(2) 8.00 167,040 11.96 249,715 3.96 82,675
- -----------
(1) Does not reflect the interest-rate risk component to the risk-based
capital requirement, the effective date of which has been postponed.
(2) Tangible and Tier 1 leverage (or core) capital are computed as a
percentage of adjusted total assets of $3.4 billion. Risk-based capital is
computed as a percentage of adjusted risk-weighted assets of $2.1 billion.
55
Year 2000
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
To date, the Bank has not experienced any year 2000 issues with any of our
internal systems or our products, and we do not expect to experience any in the
future. To date, the Bank has not experienced any year 2000 issues related to
any of its key third party suppliers and customers nor do we expect to
experience any in the future. Costs associated with remediating our internal
systems were not material.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") as amended by SFAS 137. SFAS 133
establishes accounting and reporting standards for hedging and derivative
activities. Among other things, this statement requires that an entity recognize
all derivative instruments on the balance sheet as either an asset or liability,
and to account for these instruments at fair value. The adoption of SFAS 133 is
not expected to have a material impact on our results or operations or financial
position. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Asset and Liability Management."
56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PBOC HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report............................................ 58
Consolidated Statements of Financial Condition--December 31, 1999
and 1998....................................................... 59
Consolidated Statements of Operations--Years ended December 31,
1999, 1998 and 1997............................................ 60
Consolidated Statements of Comprehensive Earnings (Loss)--Years ended
December 31, 1999, 1998 and 1997............................... 61
Consolidated Statements of Changes in Stockholders' Equity--Years
ended December 31, 1999, 1998 and 1997......................... 62
Consolidated Statements of Cash Flows--Years ended December 31,
1999, 1998 and 1997............................................ 63
Notes to Consolidated Financial Statements.............................. 65
57
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PBOC Holdings, Inc.:
We have audited the accompanying consolidated statements of financial condition
of PBOC Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1999
and 1998 and the related consolidated statements of operations, comprehensive
earnings (loss), changes in stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PBOC Holdings, Inc.
and subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three- year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Los Angeles, California
January 31, 2000
58
PBOC HOLDINGS, INC.
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
(Dollars in thousands, except per share data)
1999 1998
----------- -----------
ASSETS
Cash and cash equivalents ..................................................... $ 19,582 $ 22,401
Federal funds sold ............................................................ 2,000 24,000
Securities available-for-sale, at estimated market values (notes 3, 11 and 12) 771,864 1,004,937
Mortgage-backed securities held-to-maturity, market values $4,274
and $6,372 at December 31, 1999 and 1998 (notes 5 and 12) ................ 4,326 6,282
Loans receivable, net (notes 6, 7 and 12) ..................................... 2,462,837 2,148,857
Real estate held for sale, net (note 8) ....................................... 846 2,723
Premises and equipment, net (note 9) .......................................... 7,105 7,212
Federal Home Loan Bank stock, at cost (note 12) ............................... 66,643 63,150
Accrued interest receivable ................................................... 16,863 17,607
Other assets .................................................................. 46,162 37,858
----------- -----------
Total assets ............................................................. $ 3,398,228 $ 3,335,027
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 10) ............................................................ $ 1,647,337 $ 1,542,162
Securities sold under agreements to repurchase (note 11) ...................... 381,109 364,000
Advances from Federal Home Loan Bank (note 12) ................................ 1,123,700 1,198,000
Accrued expenses and other liabilities ........................................ 28,754 17,009
Other borrowings (note 13) .................................................... 4,621 --
----------- -----------
Total liabilities ........................................................ 3,185,521 3,121,171
----------- -----------
Commitments and contingencies (notes 6, 9 and 20)
Minority interest (note 1) ............................................... 33,250 33,250
Stockholders' equity (notes 1, 15 and 22):
Preferred stock, $.01 par value. Authorized 25,000,000 shares;
none issued and outstanding .......................................... -- --
Common stock, par value $.01 per share. Authorized 75,000,000
and 500,000 shares; issued 21,876,205 shares;
and outstanding 19,941,005 and 21,041,205 shares ..................... 219 219
Additional paid-in capital ............................................... 259,260 259,207
Accumulated other comprehensive loss ..................................... (38,300) (14,025)
Accumulated deficit ...................................................... (23,012) (56,487)
Treasury stock, at cost (1,935,200 and 835,000 shares at December 31, 1999
and 1998, respectively) .............................................. (18,710) (8,308)
----------- -----------
Total stockholders' equity ....................................... 179,457 180,606
----------- -----------
Total liabilities and stockholders' equity ....................... $ 3,398,228 $ 3,335,027
=========== ===========
See accompanying notes to consolidated financial statements.
59
PBOC HOLDINGS, INC.
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
1999 1998 1997
------------ ------------ ------------
Interest, fees and dividend income:
Short term investments ................................... $ 1,289 $ 1,797 $ 1,038
Securities purchased under agreements to resell .......... 528 519 2,328
Investment securities available-for-sale ................. 24,052 17,746 3,980
Mortgage-backed securities ............................... 34,535 32,439 32,672
Loans receivable ......................................... 166,595 125,851 89,938
Federal Home Loan Bank stock ............................. 3,429 2,521 1,023
------------ ------------ ------------
Total interest, fees and dividend income ............. 230,428 180,873 130,979
------------ ------------ ------------
Interest expense:
Deposits (note 10) ....................................... 72,291 69,927 67,247
Advances from the Federal Home Loan Bank ................. 65,743 47,613 8,785
Securities sold under agreements to repurchase ........... 23,478 22,159 19,635
Other borrowings ......................................... 19 -- --
Senior debt .............................................. -- 445 1,271
Hedging costs, net (note 18) ............................. 146 214 267
------------ ------------ ------------
Total interest expense ............................... 161,677 140,358 97,205
------------ ------------ ------------
Net interest income ........................................... 68,751 40,515 33,774
Provision for loan losses (note 7) ............................ 4,747 2,000 2,046
------------ ------------ ------------
Net interest income after provision for loan losses ...... 64,004 38,515 31,728
------------ ------------ ------------
Other income:
Loan service and loan related fees ....................... 219 111 481
Gain (loss) on sale of mortgage-backed securities, net ... (3,217) 1,682 1,275
Gain on loan and loan servicing sales, net (note 4) ...... 49 613 3,413
Income (loss) from real estate operations, net (note 8) .. 513 1,479 (1,805)
Other income ............................................. 2,328 2,551 1,753
------------ ------------ ------------
Total other income (loss) ............................ (108) 6,436 5,117
------------ ------------ ------------
Operating expenses:
Personnel and benefits ................................... 15,719 23,814 11,787
Occupancy ................................................ 10,056 8,371 7,109
FDIC insurance ........................................... 1,408 7,316 4,899
Professional services .................................... 1,511 1,294 528
Office related expenses .................................. 5,142 4,393 3,913
Other .................................................... 4,287 1,774 1,307
------------ ------------ ------------
Total operating expenses ............................. 38,123 46,962 29,543
------------ ------------ ------------
Earnings (loss) before income tax benefit, minority interest
and extraordinary item .................................. 25,773 (2,011) 7,302
Income tax benefit (note 14) .................................. 4,500 16,390 4,499
------------ ------------ ------------
Earnings before minority interest and extraordinary item ...... 30,273 14,379 11,801
Minority interest ............................................. 3,476 3,476 859
------------ ------------ ------------
Earnings before extraordinary item ....................... 26,797 10,903 10,942
Extraordinary item - gain on sale of FHLB advances ............ 6,678 -- --
------------ ------------ ------------
Net earnings ............................................. 33,475 10,903 10,942
Preferred dividends ........................................... -- (2,160) (7,340)
------------ ------------ ------------
Net earnings available to common stockholders ............ $ 33,475 $ 8,743 $ 3,602
============ ============ ============
Earnings per share, basic and diluted before extraordinary item $ 1.31 $ 0.59 $ 1.14
Earnings per share, basic and diluted ......................... $ 1.63 $ 0.59 $ 1.14
Weighted average shares outstanding ........................... 20,487,111 14,793,644 3,152,064
See accompanying notes to consolidated financial statements.
60
PBOC HOLDINGS, INC.
Consolidated Statements of Comprehensive Earnings (Loss)
Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Net earnings ................................................. $ 33,475 $ 10,903 $ 10,942
Other comprehensive earnings (loss):
Unrealized gain (loss) on securities available-for-sale ...... (26,517) (11,190) 4,899
Reclassification of realized (gain) loss included in earnings 1,422 (447) (789)
Decrease (increase) in minimum pension liability, net of tax 820 (121) (293)
-------- -------- --------
Other comprehensive earnings (loss) .......................... (24,275) (11,758) 3,817
-------- -------- --------
Comprehensive earnings (loss) ............................... $ 9,200 $ (855) $ 14,759
======== ======== ========
See accompanying notes to consolidated financial statements.
61
PBOC HOLDINGS, INC.
Consolidated Statements Of Changes In Stockholders' Equity
For the Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share amounts)
Accumulated
Common Stock Other
-------------------------- Additional Comprehensive
Preferred Stock Number Amount Paid-in Capital Income (Loss)
--------------- ------ ------ --------------- -------------
Balance, December 31, 1996 ................... $ 5 98,502 $ 1 $ 129,793 $ (6,084)
Net earnings ............................ -- -- -- -- --
Change in unrealized losses on securities -- -- -- -- 4,110
Capital contributions, net .............. -- -- -- 21 --
Change in minimum pension liability ..... -- -- -- -- (293)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ................... 5 98,502 1 129,814 (2,267)
Net earnings ............................ -- -- -- -- --
Change in unrealized losses on securities -- -- -- -- (11,637)
Conversion of preferred stock to common . (5) 8,527,473 -- -- --
Split of common stock 32 for 1 ......... -- (98,502) -- -- --
Split of common stock 32 for 1 .......... -- 3,152,065 -- -- --
Issuance of common stock in initial
public offering ...................... -- 10,196,667 218 129,393 --
Preferred dividend paid ................. -- -- -- -- --
Change in minimum pension liability ..... -- -- -- -- (121)
Purchases of treasury stock ............. -- (835,000) -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 ................... -- 21,041,205 219 259,207 (14,025)
Net earnings ............................ -- -- -- -- --
Change in unrealized losses on securities -- -- -- -- (25,095)
Stock based compensation ................ -- -- -- 53 --
Change in minimum pension liability ..... -- -- -- -- 820
Purchases of treasury stock ............. -- (1,100,200) -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 ................... $ -- 19,941,005 $ 219 $ 259,260 $ (38,300)
=========== =========== =========== =========== ===========
Accumulated
Deficit Treasury Stock Total
------- -------------- -----
Balance, December 31, 1996 ................... $ (58,893) $ -- $ 64,822
Net earnings ............................ 10,942 -- 10,942
Change in unrealized losses on securities -- -- 4,110
Capital contributions, net .............. -- -- 21
Change in minimum pension liability ..... -- -- (293)
----------- ----------- -----------
Balance, December 31, 1997 ................... (47,951) -- 79,602
Net earnings ............................ 10,903 -- 10,903
Change in unrealized losses on securities -- -- (11,637)
Conversion of preferred stock to common . -- -- (5)
Split of common stock 32 for 1 ......... -- -- --
Split of common stock 32 for 1 .......... -- -- --
Issuance of common stock in initial
public offering ...................... -- -- 129,611
Preferred dividend paid ................. (19,439) -- (19,439)
Change in minimum pension liability ..... -- -- (121)
Purchases of treasury stock ............. -- (8,308) (8,308)
----------- ----------- -----------
Balance, December 31, 1998 ................... (56,487) (8,308) 180,606
Net earnings ............................ 33,475 -- 33,475
Change in unrealized losses on securities -- -- (25,095)
Stock based compensation ................ -- -- 53
Change in minimum pension liability ..... -- -- 820
Purchases of treasury stock ............. -- (10,402) (10,402)
----------- ----------- -----------
Balance, December 31, 1999 ................... $ (23,012) $ (18,710) $ 179,457
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
62
PBOC HOLDINGS, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net earnings .................................................. $ 33,475 $ 10,903 $ 10,942
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization ............................. 1,844 1,221 1,234
Provision for loan and real estate losses ................. 4,747 2,000 4,800
Decrease in valuation allowance on net deferred tax asset 18,178 15,569 7,006
(Amortization) write-down for discontinued lease operations 51 55 (265)
Increase (decrease) in net deferred tax asset ............. (13,417) 1,024 (2,281)
Amortization and accretion of premiums, discounts and
deferred fees ........................................ 7,786 11,524 7,288
Amortization of purchase accounting intangible assets,
premiums and discounts, net .......................... 184 180 (90)
(Gain) loss on sale of mortgage-backed securities ......... 3,217 (1,682) (1,275)
Gain on sale of FHLB advances ............................. 6,678 -- --
(Gain) loss on sale of loans and loan servicing ........... (49) (613) (3,413)
(Gain) on real estate sales ............................... (602) (2,180) (2,214)
Federal Home Loan Bank stock dividend ..................... (3,421) (1,640) (952)
Increase in accrued interest receivable ................... 744 (4,391) (1,605)
Increase (decrease) in accrued interest payable ........... (1,898) 5,974 (1,000)
Decrease in other assets .................................. (12,726) (35,261) (8,697)
Increase (decrease) in accrued expenses ................... 13,645 1,349 (17,364)
Amortization of Goodwill .................................. 481 68 --
----------- ----------- -----------
Net cash provided by (used in) operating activities .. 58,917 4,100 (7,886)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of investment and mortgage-backed
securities available-for-sale ............................. 318,823 514,841 235,612
Proceeds from sale of loans and servicing rights .............. 94,111 43,034 88,654
Investment and mortgage-backed security principal repayments
and maturities ............................................ 153,189 173,830 108,022
Loan originations, net of repayments .......................... (228,128) 206,219 7,644
Purchases of investments and mortgage-backed securities
available-for-sale ........................................ (270,731) (1,134,026) (408,780)
Purchases of loans ............................................ (193,395) (876,898) (505,681)
Costs capitalized on real estate .............................. 40 (174) (1,424)
Proceeds from sale of real estate ............................. 8,823 18,923 23,458
Additions to premises and equipment ........................... (1,921) (1,937) (1,833)
Sales of premises and equipment ............................... -- -- --
Purchase of FHLB stock ........................................ (72) (37,876) (8,475)
Redemption of FHLB stock ...................................... -- -- 1,173
----------- ----------- -----------
Net cash used in investing activities ................ (119,261) (1,094,064) (461,630)
----------- ----------- -----------
(Continued)
63
PBOC HOLDINGS, INC.
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
1999 1998 1997
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from subsidiary preferred stock offering ................ $ -- $ -- $ 33,250
Proceeds from capital infusion, net .............................. -- 129,611 21
Repayment on senior debt ......................................... -- (11,370) (285)
Preferred dividend paid .......................................... -- (19,439) --
Redemption of preferred stock .................................... -- (5) --
Purchases of treasury stock ..................................... (10,402) (8,308) --
Net increase (decrease) in deposits .............................. 105,175 275,547 (104,628)
Net increase in securities sold under agreements to repurchase ... 17,109 23,212 148,355
Proceeds from FHLB advances ..................................... 3,344,743 4,360,900 1,137,684
Repayment of FHLB advances ....................................... (3,425,721) (3,634,900) (745,684)
Net change in other borrowings ................................... 4,621 -- --
----------- ----------- -----------
Net cash provided by financing activities .............. 35,525 1,115,248 468,713
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents .................. (24,819) 25,284 (803)
Cash and cash equivalents at beginning of year ........................ 46,401 21,117 21,920
----------- ----------- -----------
Cash and cash equivalents at end of year .............................. $ 21,582 $ 46,401 $ 21,117
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest ..................................................... $ 163,575 $ 134,632 $ 96,667
Income taxes ................................................. 300 120 200
Supplemental schedule of non cash investing and financing activities:
Foreclosed real estate ........................................... $ 6,384 $ 10,248 $ 31,349
Loans originated in connection with sale of foreclosed real estate -- 6,147 16,145
Transfer of loans held for investment to loans held for sale ..... 94,062 42,421 85,241
See accompanying notes to consolidated financial statements.
64
PBOC HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
General
On May 15, 1998, the Company completed an Offering of its Common Stock. An
aggregate of 14.6 million shares of Common Stock were sold to the public at an
Offering price of $13.75 per share, of which 10.2 million shares were issued and
sold by the Company and 4.4 million shares were sold by the existing
stockholders of the Company.
The following is a description of significant accounting and reporting
policies which the Company follows in preparing and presenting its consolidated
financial statements.
Basis of Accounting
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles which conform to general practice
within the banking industry. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reported periods. Actual
results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned, except for PPCCP in which
the Bank owns all of the common stock. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Fees on Loans and Mortgage-Backed and Investment Securities
The Company defers origination and related fees on loans and certain
direct loan origination costs. These deferred fees, net of any deferred costs,
are amortized as an adjustment to the yield on the loans over their lives using
the interest method.
The Company may purchase whole loans at a premium or discount which is
amortized over the life of the loans as an adjustment to yield using the
interest method. The premium or discount amortization percentage is determined
by adjusting the yield for estimated prepayments when prepayments are probable
and the timing and amount of prepayments can be reasonably estimated based on
market consensus prepayment rates. Calculation of the yield is done on the
aggregate method where there are a large number of similar loans, otherwise, a
loan by loan approach is used. The yield on adjustable-rate loans is calculated
based upon the fully adjusted rate in effect when the loan or security is
originated or purchased. Initial estimates of prepayment rates are evaluated
periodically against actual prepayment experience and current market consensus
prepayment forecasts and if significantly different from the original estimate,
the yield is recalculated.
The Company purchases mortgage-backed and investment securities at a
premium or discount which is amortized over the life of the security as an
adjustment to the yield using the interest method. The premium or discount
percentage is determined by adjusting the securities' yields for estimated
prepayments when prepayments are probable and the timing and amount of
prepayments can be reasonably estimated based on market consensus prepayment
rates.
65
Commitment Fees
Commitment fees received in connection with the origination or purchase of
loans are deferred and recognized over the life of the resulting loans using the
interest method as an adjustment of yield. If the commitment, or a portion
thereof, expires unexercised, deferred commitment fees are recognized in income
upon expiration of the commitment. There were no expired commitment fees
recognized during the years ended December 31, 1999, 1998 and 1997. Direct
costs, if any, to originate a commitment are expensed as incurred.
Commitment fees paid to an investor in connection with the sale of loans
are expensed and reduce the net sales proceeds at the time of sale.
Investment Securities
Management determines the appropriate classification of its securities
(mortgage-backed and investment securities) at the time of purchase or
origination.
Securities available-for-sale -- Securities to be held for indefinite
periods of time and not intended to be held-to-maturity are classified as
available-for-sale. Assets included in this category are those assets that
management intends to use as part of its asset/liability management strategy and
that may be sold in response to changes in interest rates, resultant prepayment
risk and other factors related to interest rate and resultant prepayment risk
changes. Securities available-for-sale are recorded at fair value. Both
unrealized gains and losses on securities available-for-sale are included in
other comprehensive income in the consolidated statements of financial condition
until these gains or losses are realized. Gains or losses on sales of securities
available-for-sale are based on the specific-identification method. If a
security has a decline in fair value that is other than temporary, then the
security will be written down to its fair value by recording a loss in the
consolidated statements of operations. Premiums and discounts are accreted or
amortized using the interest method over the estimated life of the securities.
Securities held-to-maturity -- Securities that management has the intent
and the Bank has the ability at the time of purchase or origination to hold
until maturity are classified as securities held-to-maturity. Securities in this
category are carried at amortized cost adjusted for accretion of discounts and
amortization of premiums using the interest method over the estimated life of
the securities. If a security has a decline in fair value below its amortized
cost that is other than temporary, then the security will be written down to its
new cost basis by recording a loss in the consolidated statements of operations.
FHLB stock -- This asset is owned due to regulatory requirements and is
carried at cost. This stock is pledged as collateral to secure FHLB advances.
Impaired Loans
A loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. The measurement of impairment may be
based on (1) the present value of the expected future cash flows of the impaired
loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized by
recording a valuation allowance.
Interest income on impaired loans is recognized on a cash basis if it is
determined that collection of principal is probable. Loans that are 90 days or
more past due, or when full collection of principal and interest is not
probable, are placed on nonaccrual status and interest income that has been
earned but not collected is reversed. Loans are returned to accrual status when
the borrower has had a period of sustained repayment performance. Management
considers all loans formally treated as troubled debt restructurings to be
impaired loans in the year of restructuring.
66
Allowance for Loan Losses
Valuation allowances for losses on loans and real estate are provided on
both a specific and general basis. Specific and general valuation allowances are
increased by provisions charged to expense and decreased by charge-offs of loans
net of recoveries. Specific allowances are provided for impaired loans for which
the expected loss is measurable. General valuation allowances are provided based
on a formula which incorporates a number of factors, including economic trends,
industry experience, estimated collateral values, past loss experience, the
Bank's underwriting practices, and management's ongoing assessment of the credit
risk inherent in the asset portfolio. The Bank periodically reviews the
assumptions and formula by which additions are made to the specific and general
valuation allowances for losses in an effort to refine such allowance in light
of the current status of the factors described above.
While management uses the best information available to make the periodic
evaluations of specific and general valuation allowances, adjustments to both
allowances may be necessary if actual future economic conditions differ
substantially from the assumptions used in making such periodic evaluations.
Regulatory examiners may require the Company to recognize additions to the
allowance based upon their judgments about information available to them at the
time of their examination.
Real Estate Held for Sale
Real estate acquired in settlement of loans is recorded at the date of
acquisition at fair value, less estimated disposition costs. Fair value is
determined based on recent appraisals or discounted cash flow calculations. The
excess of the loan balance over fair value of the asset acquired, if any, is
charged to the allowance for loan losses upon foreclosure. Subsequent to
foreclosure, additional decreases in the carrying value of foreclosed properties
are recognized through a provision charged to operations. An allowance for
losses equal to the excess of the book value over the fair value of the
property, less estimated selling costs is maintained. The allowance for losses
is increased or decreased for subsequent changes in estimated fair market value.
Costs of developing and improving such property to facilitate sale are
capitalized. Expenses related to holding such real estate, net of rental and
other income, are charged against operations as incurred.
Mortgage Banking Activities
Loans held for sale are carried at the lower of cost or market on an
aggregate basis. Gains or losses on sales of loans are recognized at the time of
sale and are determined by the difference between the net sales proceeds and the
allocated basis of the loans sold. The Company adopted effective January 1,
1997, Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
(SFAS 125). In accordance with SFAS 125, the Company capitalizes mortgage
servicing rights (MSRs) acquired through either the purchase or origination of
mortgage loans for sale or securitization with servicing rights retained. The
total costs of the mortgage loans designated for sale is allocated to the MSRs
and the mortgage loans without the MSRs based on their relative fair values. The
MSRs are included in other assets and as a component of gain on sale of loans.
The MSRs are amortized in proportion to and over the estimated period of net
servicing income. Such amortization is reflected as a component of loan
servicing fees.
The MSRs are periodically reviewed for impairment based on their fair
value. The fair value of the MSRs for the purpose of impairment, is measured
using a discounted cash flow analysis based on the Company's estimated net
servicing income, market prepayments rates and market-adjusted discount rates.
Impairment is measured on a disaggregated basis based on predominant risk
characteristics of the underlying mortgage loans. The risk characteristics used
by the Company for the purpose of capitalization and impairment evaluation
include loan type, interest rate tranches, loan term and collateral type.
Impairment losses are recognized through a valuation allowance, with any
associated provision recorded as a component of loan servicing fees.
Gains or losses on sales of servicing assets for which the Company owns
the underlying loans are deferred and amortized over the estimated loan lives
using the interest method.
67
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which ranges from 3 to 25 years. Leasehold
improvements are amortized using the straight-line method over the lives of the
assets or term of the lease, whichever is shorter. Maintenance and repairs are
expensed as incurred.
Taxes on Income
The Company uses the asset and liability method for measurement and
recognition of income taxes. The statements of financial condition amounts of
net deferred tax assets or liabilities are recognized on the temporary
differences between the basis of assets and liabilities as measured by tax laws
and their financial statement basis, plus available tax operating loss
carryforwards and tax credit carryforwards, reduced by a valuation allowance for
that portion of tax assets not considered more likely than not to be realized.
Deferred income tax benefit is recognized for the change in net deferred tax
assets or liabilities, plus the valuation allowance change. Current income tax
(benefit) is the amount of total taxes currently payable (receivable).
Derivative and Hedging Activities
The Company uses interest rate swap (swaps), interest rate cap (caps),
interest rate floor (floors), and interest rate corridor (corridors) contracts
in the management of its interest rate risk. The objective of these financial
instruments is to more closely match the estimated repricing duration and/or
repricing characteristics of specifically identified interest-sensitive assets
and liabilities to reduce interest rate exposure. Such contracts are used to
reduce interest rate risk and are not used for speculative purposes, and
therefore are not marked-to-market. The net interest income or expense, net of
amortization of premiums, discounts and fees, from these contracts is recognized
currently on an accrual basis over their term in interest expense in "hedging
costs, net" in the consolidated statements of operations.
Premiums paid for and discounts associated with, and costs and fees of
interest rate swap, cap, floor and corridor contracts are amortized or
accredited into interest expense on a straight-line basis over the life of the
contracts.
Earnings per Share
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted from
issuance of common stock that then shared in earnings.
Stock Option Plan
During 1999, the Company granted stock options and adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based compensation on the
date of grant. Alternatively, SFAS No. 123 allows entities to apply the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), and related interpretations, and provide pro
forma net earnings and pro forma earnings per share disclosures for stock option
grants made in 1999 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. The Company has elected to apply the
provisions of APB 25 and provide the pro forma disclosure provisions of SFAS No.
123.
68
Goodwill
Goodwill, which represents the excess of purchase price over the fair
value of the net assets acquired, is amortized straight-line over its estimated
useful life of generally eight to fifteen years. On a periodic basis, the
Company reviews its goodwill for events or changes in circumstances that may
indicate that the estimated undiscounted future cash flows from these
acquisitions will be less than the carrying amount of the goodwill. If it
becomes probable that impairment exists, a reduction in the carrying amount is
recognized. Management does not believe that an impairment of its goodwill has
occurred. Goodwill, which is included in other assets was $7.2 million and
$774,000 at December 31, 1999 and 1998, respectively. Goodwill amortization
expense was $481,000, $68,000 and $0 for the years ended December 31, 1999, 1998
and 1997, respectively.
Cash and Cash Equivalents
For the purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments (investments) purchased with an
original maturity of three months or less to be cash equivalents. This currently
includes cash and amounts due from banks and Federal funds sold.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued statement of
Financing Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") as amended by SFAS 137. SFAS 133
establishes accounting and reporting standards for hedging and derivative
activities. Among other things, this statement requires that an entity recognize
all derivative instruments on the balance sheet as either an asset or liability,
and to account for these instruments at fair value. The adoption of SFAS 133 is
not expected to have a material impact on our results or operations or financial
position. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
Initial Public Offering
On May 15, 1998, the Company completed its Offering of its Common Stock.
An aggregate of 12,666,667 shares of Common Stock were sold to the public at an
Offering price of $13.75 per share, of which 8,866,667 shares were issued and
sold by the Company and 3,800,000 shares were sold by the existing stockholders
of the Company. In connection with the underwriting agreement executed by the
Company with the underwriters of the Offering, the Company granted the
underwriters an option to purchase up to an additional 1,900,000 shares of
Common Stock, on the same terms and conditions as in the Offering, solely to
cover over-allotments, if any. Such over-allotment option was exercised in full,
and on May 21, 1998, the Company and the original stockholders sold an
additional 1,330,000 shares and 570,000 shares, respectively. The Company did
not receive any proceeds from the sale of shares by the existing stockholders.
Reclassification
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to the current financial statement presentation.
(2) Securities Purchased under Agreements to Resell
The Bank purchases securities under agreements to resell at a later date
at set prices, generally collateralized by AA or higher rated mortgage-backed
securities. The average outstanding balance was approximately $10,449,000 and
$10,175,000 during each of the years ended December 31, 1999 and 1998,
respectively. The maximum outstanding balance at any month-end was $78,000,000
and $90,000,000 during 1999 and 1998, respectively. The weighted average
interest rate on such agreements was approximately 4.97%, 5.61% and 5.65% during
the years ended December 31, 1999, 1998 and 1997, respectively. The securities
pledged are held by a third-party institution.
69
(3) Securities Available-for-Sale
The Bank holds certain securities available-for-sale. The amortized cost,
unrealized gains and losses, and estimated fair value of securities
available-for-sale at December 31, 1999 and 1998 were as follows (dollars in
thousands):
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
1999
--------------------------------------------------
Debt securities issued by government agencies:
Due after five years to ten years ............................. $ 37,000 $ -- $ (2,798) $ 34,202
Corporate trust preferred:
Due after ten years ........................................... 259,177 -- (17,302) 241,875
Mortgage-backed securities ....................................... 439,739 237 (18,537) 421,439
SBA certificates ................................................. 64,747 257 (450) 64,554
Asset based securities ........................................... 9,907 -- (113) 9,794
---------- ---------- ---------- ----------
Total securities available-for-sale ........................ $ 810,570 $ 494 $ (39,200) $ 771,864
========== ========== ========== ==========
1998
--------------------------------------------------
Debt securities issued by government agencies:
Due after five years to ten years ............................. $ 37,000 $ -- $ (23) $ 36,977
Corporate trust preferred:
Due after ten years ........................................... 334,814 -- (9,849) 324,965
Mortgage-backed securities ....................................... 588,081 35 (3,601) 584,515
SBA certificates ................................................. 46,345 33 (160) 46,218
Asset based securities ........................................... 12,308 -- (46) 12,262
---------- ---------- ---------- ----------
Total securities available-for-sale ........................ $1,018,548 $ 68 $ (13,679) $1,004,937
========== ========== ========== ==========
Proceeds from sales of investments and mortgage-backed securities
available-for-sale were approximately $318,823,000, $514,841,000 and
$235,612,000 in each of the years ended December 31, 1999, 1998 and 1997,
respectively, and resulted in gross realized gains of approximately $204,000,
$1,847,000 and $1,714,000, respectively, and gross realized losses of
approximately $3,421,000, $165,000 and $439,000 in the years ended December 31,
1999, 1998 and 1997, respectively.
At December 31, 1999 and 1998, the amortized cost and estimated fair value
of mortgage-backed securities available-for-sale pledged to secure borrowings
and swap agreements are as follows:
1999 1998
--------------------------- ---------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(Dollars in Thousands)
Pledged against:
Securities sold under agreements to repurchase $420,531 $399,973 $397,488 $395,720
Advances from Federal Home Loan Bank ......... 68,896 67,779 178,797 177,434
Swap and corridor agreements ................. 65 65 142 139
Treasury tax and loan account ................ 13,698 12,840 804 820
-------- -------- -------- --------
$503,190 $480,657 $577,231 $574,113
======== ======== ======== ========
70
(4) Loans Held-for-Sale
Proceeds from sales of loans held-for-sale were approximately $94.1
million, $43.0 million and $88.7 million in each of the years ended December 31,
1999, 1998 and 1997, respectively. The sales resulted in gross realized gains of
approximately $49,000, $613,000 and $165,000 and no gross realized losses in
each of the years ended December 31, 1999, 1998 and 1997, respectively. Gains
from sales of servicing rights, including flow through and bulk sales of
servicing, were $3.2 million for the year ended December 31, 1997. In 1997 the
Company deferred gains totaling $5.3 million on the sales of servicing rights
for loans owned by the Bank. The unamortized balance of the deferred gain was
$2.1 million and $3.0 million at December 31, 1999 and 1998, respectively.
(5) Mortgage-Backed Securities Held-to-Maturity
The amortized cost, unrealized gains and losses, and estimated fair value
of mortgage-backed securities held-to- maturity at December 31, 1999 and 1998
are as follows (dollars in thousands):
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ----------- -------- ----------
1999........................ $ 4,326 $ 4 $ (56) $ 4,274
========== =========== ======== =========
1998........................ $ 6,282 $ 90 $ -- $ 6,372
========== =========== ======== =========
Substantially all mortgage-backed securities are collateralized by
single-family residence secured loans. There were no sales of mortgage-backed
securities held-to-maturity in 1999 and 1998.
(6) Loans Receivable
A summary of loans receivable at December 31, 1999 and 1998 is as follows
(dollars in thousands):
1999 1998
---------- ----------
Real estate loans
Single-family residential:
Fixed-rate .................................. $1,057,956 $1,150,414
Variable-rate ............................... 417,195 344,342
Multifamily, primarily variable-rate ............ 327,252 366,625
Commercial and industrial, primary variable-rate 420,919 206,402
Land, primarily fixed-rate ...................... 847 880
---------- ----------
Real estate loans ............................... 2,224,169 2,068,663
---------- ----------
Commercial business loans ....................... 159,740 62,665
Consumer loans .................................. 199,879 53,826
Secured by deposits ............................. 1,918 3,537
---------- ----------
All loans ................................... 2,585,706 2,188,691
Less:
Undistributed loan proceeds ................. 95,683 17,152
Unamortized net loan (premiums)/discounts and
deferred origination fees ................ 4,045 814
Deferred gain on servicing sold ............. 2,090 2,971
Allowance for loan losses (note 7) .......... 21,051 18,897
---------- ----------
$2,462,837 $2,148,857
========== ==========
Nonaccrual loans were $3.2 million, $8.5 million and $9.9 million at
December 31, 1999, 1998 and 1997, respectively. If loans which were on
nonaccrual at December 31, 1999, 1998 and 1997 had performed in accordance with
their terms for the year or since origination, if shorter, interest income from
these loans would have been $372,000,
71
$950,000 and $644,000, respectively. Interest collected on these loans for these
years was $140,000, $364,000 and $67,000, respectively.
The Company's variable-rate loans are indexed primarily to the COFI and
U.S. Treasury one-year and ten year CMT.
Substantially all real estate collateralized loans are secured by first
trust deeds. The Bank's loan portfolio is concentrated primarily in the state of
California. The commercial real estate secured portfolio is diversified with no
significant industry concentrations of credit risk. Single-family residence,
multifamily, and commercial real estate secured loans are diversified
geographically across the state and by size.
At December 31, 1999, the Company had loan applications pending to
originate loans of approximately $50,907,000. Other than pending loan
applications at year-end, the Bank had no additional outstanding commitments to
originate or purchase loans.
(7) Allowance for Loan Losses and Provision for Loan Losses
An analysis of the activity in the allowance for loan losses for each of
the years ended December 31, 1999, 1998 and 1997 is as follows (dollars in
thousands):
1999 1998 1997
-------- -------- --------
Balance at beginning of year ....... $ 18,897 $ 17,824 $ 23,280
Provision for loan losses .......... 4,747 2,000 2,046
Recoveries credited to the allowance 503 85 106
-------- -------- --------
24,147 19,909 25,432
Losses charged to the allowance .... (3,096) (1,012) (7,608)
-------- -------- --------
Balance at end of year ............. $ 21,051 $ 18,897 $ 17,824
======== ======== ========
The Bank's gross impaired loans were $7.2 million and $10.2 million as of
December 31, 1999 and 1998, respectively. The average impaired loans for the
years ended 1999, 1998 and 1997 were $9.6 million, $9.6 million, and $20.6
million, respectively. Gross impaired loans with a valuation allowance totaled
$2.8 million and gross impaired loans without a valuation allowance totaled $4.3
million at December 31, 1999. Interest income recognized related to these loans
was $465,000, $552,000 and $67,000 for 1999, 1998 and 1997, respectively.
The valuation allowance related to impaired loans was $969,000 and $1.6
million at December 31, 1999 and 1998, respectively, and is included in the
schedule of the allowance for loan losses described above.
Troubled debt restructurings totaled $6.5 million and $4.5 million as of
December 31, 1999 and 1998, respectively. The Bank has no commitments to lend
additional funds to borrowers whose loans were classified as troubled debt
restructurings at December 31, 1999.
72
(8) Real Estate Held for Sale
Real estate at December 31, 1999 and 1998, consisted of the following
(dollars in thousands):
1999 1998
------- -------
Acquired in settlement of loans:
Single-family residential ................ $ 883 $ 2,723
Less allowance for losses ............. (37) --
------- -------
Acquired in settlement of loans .... $ 846 $ 2,723
======= =======
A summary of the components of the income from real estate operations in
each of the years ended December 31, 1999, 1998 and 1997 is as follows (dollars
in thousands):
1999 1998 1997
------- ------- -------
Gross income from real estate operations .......... $ 338 $ 1,147 $ 3,372
Operating expenses ................................ 374 1,848 4,637
------- ------- -------
Loss from operations .......................... (36) (701) (1,265)
Gain on real estate sales ......................... 602 2,180 2,214
------- ------- -------
Gain from real estate operations .............. 566 1,479 949
Provisions for losses ............................. (53) -- (2,754)
------- ------- -------
Total income (loss) from real estate operations $ 513 $ 1,479 $(1,805)
======= ======= =======
An analysis of the activity in the allowance for losses for real estate
acquired and direct real estate investments for each of the years ended December
31, 1999, 1998 and 1997, respectively, is as follows (dollars in thousands):
Direct Real
Real Estate Estate
Acquired Investments Total
-------- ----------- -----
Balance, December 31, 1996 .............. $ 72 $ 6,516 $ 6,588
Provision for losses .................... 2,754 -- 2,754
Charge-offs ............................. (1,408) (370) (1,778)
------- ------- -------
Balance, December 31, 1997 .............. 1,418 6,146 7,564
Charge-offs ............................. (1,418) (6,146) (7,564)
------- ------- -------
Balance, December 31, 1998 ............. -- -- --
Provision for losses .................... 53 -- 53
Charge-offs ............................. (16) -- (16)
------- ------- -------
Balance, December 31, 1999 ............. $ 37 $ -- $ 37
======= ======= =======
73
(9) Premises and Equipment
Premises and equipment at December 31, 1999 and 1998, consisted of the
following (dollars in thousands):
1999 1998
-------- --------
Land ............................................... $ 521 $ 521
Buildings .......................................... 999 967
Furniture, fixtures and equipment .................. 16,125 13,969
Leasehold improvements ............................. 5,857 6,308
-------- --------
23,502 21,765
Less accumulated depreciation and amortization ..... (16,397) (14,553)
-------- --------
$ 7,105 $ 7,212
======== ========
The Bank is committed to operating leases on certain premises. Certain of
these leases require the Bank to pay property taxes and insurance. Some are
subject to annual inflation adjustments, and have renewal options of various
periods at various rates. Lease expense on all property totaled approximately
$3.0 million, $2.6 million and $2.2 million, net of sublease income of
approximately $164,000, $166,000 and $353,000, in each of the years ended
December 31, 1999, 1998 and 1997, respectively.
Approximate minimum lease commitments under noncancellable operating
leases at December 31, 1999 are as follows (dollars in thousands): `
Year Gross Sublease Net
- ------------------ -------- -------- --------
2000.............. $ 3,596 $ 152 $ 3,444
2001.............. 3,242 76 3,166
2002.............. 2,892 -- 2,892
2003.............. 2,340 -- 2,340
2004.............. 2,295 -- 2,295
Thereafter........ 6,961 -- 6,961
-------- ------- --------
$ 21,326 $ 228 $ 21,098
======== ======= ========
74
(10) Deposits
Deposits at December 31, 1999 and 1998 consisted of the following (dollars
in thousands):
1999 1998
------------------------------ -------------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
---------- ------------ ----------- ------------
Transaction accounts:
Checking accounts......................... $ 214,113 1.08% $ 166,807 1.26%
Passbook accounts......................... 134,377 3.33 139,800 3.60
Money market accounts..................... 152,899 4.37 126,396 4.20
---------- ----------
Transaction accounts.................... 501,389 2.69 433,003 2.88
---------- ----------
Term certificates:
3-month................................... 6,857 3.71 6,951 3.83
6-month................................... 52,922 4.47 60,323 4.86
12-month.................................. 627,514 5.21 594,717 5.46
18-month.................................. 35,897 5.13 44,502 5.43
24-month.................................. 72,003 5.30 57,988 6.28
36-month.................................. 11,580 5.64 11,079 5.71
48-month.................................. 775 5.54 1,176 5.93
60-month.................................. 17,967 5.84 16,145 5.88
$100,000 and over......................... 320,433 5.27 316,278 5.54
---------- ----------
Term certificates....................... 1,145,948 5.19 1,109,159 5.49
---------- ----------
$1,647,337 4.43% $1,542,162 4.76%
========== ==== ========== ====
Term certificates of deposit outstanding by scheduled maturity date at
December 31, 1999 are as follows (dollars in thousands):
Weighted
Amount Average Rate
------ ------------
Due within 3 months............... $ 405,847 5.00%
Due within 3 to 6 months.......... 317,785 5.03
Due within 6 to 9 months.......... 129,261 5.16
Due within 9 to 12 months......... 154,671 5.61
Due within 12 to 24 months........ 117,644 5.70
Due within 24 to 36 months....... 9,678 5.78
Due after 36 months............... 11,062 5.64
----------
Total............................. $1,145,948 5.19%
========== =====
The components of deposit interest expense in each of the years ended
December 31, 1999, 1998 and 1997 are as follows (dollars in thousands):
1999 1998 1997
-------- -------- --------
Checking accounts .......................... $ 2,218 $ 2,107 $ 1,635
Passbook and money market accounts ......... 10,516 10,679 10,841
Term certificates -- under $100,000 ........ 47,347 45,217 44,852
Term certificates -- $100,000 and over ..... 12,415 12,132 10,124
-------- -------- --------
72,496 70,135 67,452
Interest forfeitures on early withdrawals .. (205) (208) (205)
-------- -------- --------
$ 72,291 $ 69,927 $ 67,247
======== ======== ========
75
(11) Securities Sold under Agreements to Repurchase
The Bank enters into sales of agency and AA-rated mortgage-backed
securities under agreements to repurchase (reverse repurchase agreements) which
obligate the Bank to repurchase the identical securities as those which were
sold. Such transactions are treated as a financing, with the obligations to
repurchase securities sold reflected as a liability and the carrying amount of
securities collateralizing the liability included in mortgage-backed securities
in the consolidated statements of financial condition. There were $381.1 million
and $364.0 million outstanding reverse repurchase agreements at December 31,
1999 and 1998, respectively.
The maximum repurchase liability balances outstanding at any month-end
during the years ended December 31, 1999 and 1998 were approximately $480.2
million and $658.4 million, respectively. The average balances outstanding
during each of the years ended December 31, 1999 and 1998 were approximately
$417.6 million and $385.5 million, respectively.
The securities sold under agreements to repurchase identical securities
are held in safekeeping by broker/dealers. It is management's policy to enter
into repurchase agreements only with broker/dealers who are regarded as primary
dealers in these securities and meet satisfactory standards of capitalization
and creditworthiness.
The scheduled maturities and weighted average interest rates of securities
sold under agreements to repurchase at December 31, 1999 and 1998 are as follows
(dollars in thousands):
1999 1998
----------------------------- -----------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
--------- ------------ --------- ------------
Year of maturity:
2000..................................... $ 150,000 5.94% $ 129,000 5.71%
2001..................................... 71,109 6.57 -- --
2002..................................... 60,000 5.83 135,000 5.79
2003..................................... 50,000 5.34 50,000 5.34
2008..................................... 50,000 5.10 50,000 5.10
--------- ---------
$ 381,109 5.85% $ 364,000 5.61%
========= ==== ========= ====
Certain of these borrowings are subject to call provisions.
(12) Advances from the FHLB
Advances from the FHLB at December 31, 1999 and 1998 were collateralized
by mortgage-backed agency securities and mortgage loans with a current principal
balance of approximately $1.7 billion and $1.9 billion, respectively, and by the
required investment in the stock of the FHLB with a carrying value at December
31, 1999 and 1998 of approximately $66.6 million and $63.2 million,
respectively.
At December 31, 1999, the Bank had an available total collateralized line
of credit of approximately $1.1 billion with the FHLB. Based on current
securities and loans pledged, the Company had $14 million of unused line of
credit as of December 31, 1999 with the FHLB.
76
The scheduled maturities and weighted average interest rates of advances
at December 31, 1999 and 1998 are as follows (dollars in thousands):
1999 1998
------------------------------- ----------------------------
Weighted Weighted
Year of Maturity Amount Average Rate Amount Average Rate
---------------- ---------- ------------ ---------- ------------
1999......... $ -- --% $ 14,000 4.77%
2000......... 613,700 4.98 185,000 5.69
2001......... -- -- 25,000 5.68
2002......... -- -- 139,000 5.44
2003......... 200,000 5.08 525,000 5.17
2008 310,000 5.53 310,000 5.53
---------- ----------
$1,123,700 5.15% $1,198,000 5.38%
========== ==== ========== ====
During the fourth quarter of 1999 the Bank sold $199 million of FHLB
advances. The sales resulted in a gain of $6.7 million, which was reported as an
extraordinary item. Certain of these FHLB advances are subject to call
provisions. FHLB advances totaling $290 million were called and refinanced in
January 2000.
(13) Other Borrowings
On June 1, 1995, the Company issued $10,000,000 par of unsecured Senior
Notes (the "Notes") in conjunction with a reorganization of the Company. The
Notes contained an initial pay rate and accrual rate of 7% and 10.75%,
respectively, and the accrual rate increased to 11.15% on June 30, 1997. The
difference between the pay rate and accrual rate was deferred and compounded
annually at the accrual rate commencing on June 30, 1996. Included in the
balance of the senior note was $1,113,000 of accrued interest, as of December
31, 1997. Interest of approximately $1.8 million, calculated at the pay rate of
7%, was paid September 30, 1997 for the period from issuance of the Notes to
that date. Quarterly interest of approximately $192,000, at the pay rate, was
paid on December 31, 1997.
The Company used $11.4 million of public offering proceeds to prepay the
$10.0 million of senior notes (plus accrued interest through May 15, 1998).
In 1999 the Company secured a $10 million line of credit from a third
party commercial Bank for operations and the repurchase of the Company's
outstanding stock to be effected from time to time in open market or privately-
negotiated transactions. As of December 31, 1999, $4.7 million of the line of
credit had been utilized. The average interest rate for the loan was 9.5%. A
commitment fee of $50,000 was paid for the loan, of $5,000 of which was
amortized as of December 31, 1999.
(14) Income Taxes
The Company, including the Bank and its subsidiaries (except for PPCCP),
file a federal consolidated tax return. The Company entered into a tax sharing
agreement with the Bank, whereby the Bank computes and pays taxes based upon the
Bank's tax position assuming that a separate tax return was filed. While the
senior debt was outstanding at the Company, the payment by the Bank was limited
to the amount of the consolidated tax liability.
PPCCP has elected to be treated as a REIT for Federal income tax purposes
and intends to comply with the provisions of the Code, as amended. Accordingly,
PPCCP is not subject to Federal income tax to the extent it distributes its
income to shareholders (other than Bank) and as long as certain asset, income
and stock ownership tests are met in accordance with the Code. As PPCCP
qualifies as a REIT for Federal income tax purposes, no provision for income
taxes is included for the earnings of PPCCP that were distributed to outside
stockholders.
77
The income tax (benefit) for the years ended December 31, 1999, 1998, and
1997 consist of the following (dollars in thousands):
1999 1998 1997
-------- -------- --------
Current:
Federal ...................... $ 244 $ -- $ 154
State ........................ 17 8 62
-------- -------- --------
Total current ............ 261 8 216
-------- -------- --------
Deferred:
Federal ...................... (4,761) (16,398) (4,715)
-------- -------- --------
Total tax benefit ........ $ (4,500) $(16,390) $ (4,499)
======== ======== ========
Deferred tax assets are initially recognized for NOLs and tax credit
carryforwards and differences between the financial statement carrying amount
and the tax bases of assets and liabilities which will result in future
deductible amounts. A valuation allowance is then established to reduce that
deferred tax asset to the level at which "it is more likely than not" that the
tax benefits will be realized. A taxpayer's ability to realize the tax benefits
of deductible temporary differences and operating loss or credit carryforwards
depends on having sufficient taxable income of an appropriate character within
the carryback and carryforward periods. Sources of taxable income that may allow
for the realization of tax benefits include (i) taxable income in the current
year or prior years that is available through carryback, (ii) future taxable
income that will result from the reversal of existing taxable temporary
differences, and (iii) future taxable income generated by future operations.
Based on the Company's projected taxable earnings, management believes it is
more likely than not that the Company will realize the benefit of the existing
net deferred tax asset at December 31, 1999.
Below is a reconciliation of the expected federal income taxes (benefit)
to the consolidated effective income taxes (benefit) for the noted periods:
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
Statutory federal income tax rate ............ 35% 35% 35%
======== ======== ========
Expected federal income taxes (benefit) ..... $ 9,021 $ (783) $ 2,556
Increases (reductions) in income taxes
resulting from:
State franchise tax, net of federal benefit 11 4 40
Adjustments to deferred taxes
fully offset by valuation allowance ... 4,645 -- --
Change in the valuation allowance ......... (18,178) (15,569) (7,006)
PPCCP nontaxable earnings ................. 8 (79) (301)
Other ..................................... (7) 37 212
-------- -------- --------
$ (4,500) $(16,390) $ (4,499)
======== ======== ========
78
The Company had the following total Federal and State deferred tax assets
and liabilities computed at the Federal statutory income tax rate and the
California statutory franchise tax rate for the noted periods:
1999 1998
-------- --------
(Dollars in Thousands)
Deferred Tax Assets:
Provision for losses on loans and
real estate ........................................ $ 9,926 $ 12,417
Tax gains on sales of loans, net of deferred gains ..... 2,017 1,989
Recognition of interest on nonperforming loans for tax . 6,644 6,355
Accrued interest on deposits recognized for book
but deferred for tax ............................... 949 1,187
REMIC Income ........................................... 6,660 5,973
Miscellaneous temporary deductible differences ......... 1,558 940
Available NOL carryforwards ............................ 53,693 58,176
AMT tax credit carryforwards ........................... 1,693 1,432
-------- --------
Total deferred tax assets .......................... 83,140 88,469
-------- --------
Deferred tax liabilities:
Mark to market as adjusted ............................. (13,056) (5,399)
Stock dividends from FHLB .............................. (6,000) (4,429)
Miscellaneous temporary taxable differences ............ (247) (247)
Federal tax effect of state temporary differences ...... (2,470) (3,610)
-------- --------
Total deferred tax liabilities ...................... (21,773) (13,685)
-------- --------
Deferred tax assets, net of deferred tax liabilities ... 61,367 74,784
Less deferred tax asset valuation allowance ........ (30,001) (48,179)
-------- --------
Net deferred tax assets ................................ $ 31,366 $ 26,605
======== ========
The Federal NOL carryforwards expire as follows (dollars in thousands):
Year Total
------------------------------------------------- --------
2001............................................. $ 5,635
2002............................................. 2
2003............................................. 24,444
2004............................................. 26
--------
Pre-1992 originated net operating losses......... 30,107
2008............................................. 5,917
2009............................................. 14,706
2010............................................. 78,436
2011............................................. 5,061
2013............................................. 7,097
--------
Post - 1992 originated net operating losses...... 111,217
2018............................................. 12,086
--------
Post-May, 1998 originated net operating losses... 12,086
--------
Total............................ $153,410
========
The Company had Federal and California AMT credit carryforwards of
approximately $1.7 million as of December 31, 1999 and $1.4 million as of
December 31, 1998. These carryforwards are available to reduce future regular
federal income taxes and California franchise taxes, if any, over an indefinite
period.
In 1992, issuance of preferred stock resulted in a change in control as
defined under Section 382 of the Code. As a result, any usage of NOL
carryforwards created in 1992 and prior years is limited to approximately $7.7
million
79
per year. The total NOL carryforwards created in 1992 and prior years is
approximately $30.1 million. Any unused limitation is available in subsequent
years until expiration. The amount of the unused limitation carryover available
from the 1992 change in control in 2000 and thereafter is approximately $30.1
million.
During May of 1998, the Offering resulted in a second change in control as
defined under Section 382 of the Code. As a result, any usage of NOL
carryforwards created prior to May, 1998 (but post 1992) is limited to
approximately $21.3 million per year. The total NOL carryforwards created prior
to May, 1998 (but post 1992) is approximately $111.2 million. Any unused
limitation is available in subsequent years until expiration. The amount of the
unused limitation carryover available from the May, 1998 change in control in
2000 is approximately $33 million.
The Company is subject to examination by Federal and State taxing
authorities for tax returns filed in previous periods. The results and effects
of these examinations on individual assets and liabilities may require
adjustment to the tax assets and liabilities based on the results of their
examinations. Management does not anticipate that the examinations will result
in any material adverse effect on its financial condition or results of
operations.
(15) Stockholder's Equity and Earnings Per Share
Prior to consummation of the Offering and the exchange of preferred stock
for Common Stock, there were outstanding 85,000 shares of Series C Preferred
Stock, 68,000 shares of Series D Preferred Stock and 332,000 shares of Series E
Preferred Stock, all of which were owned by the Material Stockholders (the
"Bishop Estate", BIL Securities" and "Arbur"). In connection with the Offering,
the Outstanding Preferred Stock was exchanged for shares of Common Stock. An
aggregate of 3,152,064 shares of Common Stock was outstanding prior to
consummation of the Offering, which gives effect to the conversion of the
Outstanding Preferred Stock into Common Stock and the 32:1 stock split.
Dividends are payable if and when the Board of Directors of the Company declare
such dividends out of the assets of the Company, which by law are available. No
dividends have been declared or paid on Common Stock. In 1998, the Company paid
a $19.4 million preferred stock dividend in connection with the Offering.
(16) Stock Options
In April 1999, the stockholders of the Company approved the 1999 Stock
Option Plan (the "1999 Plan"), which authorized for granting up to 985,500
options to officers and key employees of the Company. Options under the 1999
Plan have a life of 10 years and vest over three years. All 985,500 options were
granted in January 1999.
In September 1999, the Board of Directors of the Company approved the 2000
Stock Incentive Plan (the "2000 Plan"), which authorized for granting up to
991,822 shares of options to officers, directors, and key employees of the
Company. In September 1999, 479,250 options were granted. The 2000 Plan is
subject to stockholder approval, and accordingly is accounted for as a variable
plan until such approval is obtained. Options under the 2000 Plan have a life of
10 years and vest over 1 year.
80
The following is a summary of transactions in 1999:
Number of Weighted Average
Shares Option Price
------ ------------
Options outstanding, January 1, 1999 .............. -- --
Options granted ................................... 1,465,000 $12.20
Options exercised ................................. -- --
Options canceled .................................. -- --
--------- ------
Options outstanding, December 31, 1999 ............ 1,465,000 $12.20
========= ======
Weighted-
average
Number Remaining Number of
Outstanding Contractual Life Weighted Exercisable Weighted
Exercise December 31, Options Average December 31, Average
Price 1999 Outstanding Exercise Price 1999 Exercise Price
----- ---- ----------- -------------- ---- --------------
$9.00 479,250 9.8 $9.00 -- $9.00
$13.75 985,500 9.1 $13.75 -- $13.75
Had compensation cost for the Company's Stock Option program been
determined based on the fair value at the grant dates for awards under both
Plans consistent with the method of Statement of Financial Standards No. 123,
Accounting for Stock Based Compensation, the Company's net earnings and earnings
per share would have been reduced to the pro forma amounts indicated below.
(Dollars in thousands, except per share amounts).
1999
----
Net earnings:
As reported ......................................... $ 33,475
Pro forma ........................................... $ 32,393
Earnings per share basic & diluted:
As reported ......................................... $ 1.63
Pro forma ........................................... $ 1.58
The fair value of each option granted in 1999 was estimated on December
31, 1999 using the Black-Scholes option-pricing model, and was computed based on
the following weighted average assumptions.
1999 Plan 2000 Plan
--------- ---------
Dividend yield............................................ 0.00% 0.00%
Expected volatility....................................... 39.0% 39.0%
Risk-free interest rate................................... 6.435% 6.435%
Expected life at December 31, 1999........................ 5 years 5 years
Remaining contractual life at December 31, 1999........... 9.1 years 9.8 years
Number of options outstanding at December 31, 1999........ 985,500 479,250
81
(17) Other Capital Transactions
On September 2, 1998, the Company announced an initial stock repurchase
program of up to 1 million shares, or approximately five percent, of the
Company's outstanding Common Stock, to be effected from time to time in open-
market or privately-negotiated transactions. The repurchased shares are held as
treasury stock and may be used for general corporate purposes. Through December
31, 1998, the Company repurchased 835,000 shares pursuant to this program for a
total purchase price of $8.3 million. On January 4, 1999, the Company's Board of
Directors authorized an additional repurchase of up to 1 million shares, or
approximately five percent, of the Company's outstanding Common Stock. For the
year ended December 31, 1999 the Company purchased an additional 1,100,200
shares pursuant to the previous authorizations for a total purchase price of
$10.4 million. The additional repurchased shares will also be held as treasury
stock and used for general corporate purposes.
(18) Derivatives and Hedging Activities
Hedging costs, net, for each of the years ended December 31, 1999, 1998
and 1997 consists of the following (dollars in thousands):
1999 1998 1997
---- ---- ----
Interest paid on swaps, net of interest received ....... $ -- $ -- $ 2
Amortization of cost of caps, floors and
corridors, net of interest received ................. 146 214 265
---- ---- ----
$146 $214 $267
==== ==== ====
Interest rate swaps are contracts where the parties agree to exchange
fixed-rate for floating rate interest payments, or to exchange floating rate
interest payments upon two different rate indices (basis swap), for a specified
period of time on a specified (notional) amount. The notional amount is used
only to calculate the amount of interest payments to be exchanged and does not
represent credit risk. The notional amount and weighted average pay and receive
rates are shown below in accordance with their contractual dates. The variable
repricing indexes associated with the contracts are three-month LIBOR, one-month
LIBOR and COFI which were 6.00%, 5.82% and 4.85%, respectively, at December 31,
1999.
The Bank has only limited involvement in derivative financial instruments
and does not use them for trading purposes. The instruments are used to manage
interest rate risk. The Bank has entered into corridor contracts to artificially
raise the interest rate cap on certain loans. The corridor contracts provide for
the payment of interest on the outstanding principal contract amount. Under such
contracts, the Bank receives interest if an interest rate that varies according
to a specified index exceeds a pre-set level (the strike rate) up to an upper
limit (the limit) beyond which additional interest is not received if the rate
increases. The index on the Bank's corridors is COFI or three-month LIBOR. A
summary of corridor contracts and average interest rate ranges at December 31,
1999 is as follows (dollars in thousands):
Contract Amount Average Strike Price Average Limit Rate
--------------- -------------------- ------------------
2000.................... $ 12,000 6.38% 8.13%
2001.................... 20,000 6.64 8.24
----------
$ 32,000 6.54% 8.20%
========= ===== ====
(19) Benefit Plans
The Bank has had a noncontributory defined benefit pension plan covering
substantially all of its employees (the "Plan") hired before 1990. The benefits
are based on years of service and the employee's highest compensation during the
last five consecutive years of employment prior to 1991. The Plan was frozen
effective December 31, 1990, and consequently, employees will no longer earn
additional defined benefits for future services; however, future service
82
may be counted toward vesting of benefits accumulated based on past service. The
Bank's funding policy has been to contribute annually the minimum amount that
can be deducted for Federal income tax purposes.
The following table sets forth the funded status of the Plan and amounts
recognized in the Bank's consolidated statements of financial condition at
December 31, 1999 and 1998 (dollars in thousands):
1999 1998
------- -------
Change in benefit obligation:
Projected benefit obligation, beginning of year .... $ 6,248 $ 5,727
Interest cost ...................................... 419 397
Amendments ......................................... (246) --
Benefits paid ...................................... (120) (106)
Actuarial loss (gain) .............................. (879) 230
------- -------
Projected benefit obligation, end of year .......... 5,422 6,248
------- -------
Change in plan assets:
Plan assets, beginning of year ..................... 5,716 5,082
Actual return on plan assets ....................... 618 715
Employer contribution .............................. -- 25
Benefits paid ...................................... (120) (106)
------- -------
Plan assets, end of year ........................... 6,214 5,716
------- -------
Funded status ...................................... 793 (531)
Unrecognized prior service costs ................... (246) --
Unrecognized (gain) loss ........................... 131 1,157
------- -------
Net amount recognized .............................. 678 626
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost (accrued benefit liability) ... 678 (531)
Accumulated comprehensive income ................... -- 1,157
------- -------
Net amount recognized .............................. 678 626
------- -------
Components of net periodic benefit cost:
Interest cost on projected benefit obligation ...... 419 396
Expected return on Plan assets ..................... (505) (456)
Amortization of unrecognized (gain) / loss ......... 34 35
------- -------
Pension income ..................................... $ (52) $ (25)
======= =======
The assumptions used in the accounting were:
Discount rate ...................................... 8.00% 6.75%
Expected long-term rate of return on assets ........ 9.00% 9.00%
Pension income was approximately $52,000, $25,000 and $2,000 for the
year's ended December 31,1999, 1998 and 1997, respectively. The Company adopted
a 401(k) plan effective January 1, 1991. The 401(k) plan covers employees with
one year or more of service, and allows participants to contribute a portion of
their covered compensation, which amount is 100% vested at the time of
contribution. The Bank shall contribute an amount equal to 50% of the
participant's contribution up to 6% of the participant's covered compensation,
which amount vests over a period of five years. The Bank may elect to make
additional contributions on a discretionary basis. The contributions as directed
by the participants are invested by the 401(k) plan's trustee in one or more of
five investment alternatives in trust for the benefit of the participants. The
Bank incurred approximately $191,000, $76,000 and $144,000 of expense
83
related to the 401(k) plan, with no discretionary contributions in each of the
years ended December 31, 1999, 1998 and 1997, respectively.
(20) Commitments and Contingencies
The Company is involved in litigation arising in the normal course of
business. Based on information from internal and external legal counsel, and
review of the facts and circumstances of such litigation, management is of the
opinion that the ultimate resolution of all pending litigation proceedings will
not have an adverse material effect on the Company. See Note 26 for a discussion
of litigation related to the Company's goodwill litigation.
(21) Fair Value of Assets and Liabilities
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statements of financial condition, for which it
is practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent market and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non- financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The carrying amounts and fair values of the Bank's financial instruments
consisted of the following at December 31, 1999 and 1998 (dollars in thousands):
1999 1998
------------------------- -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
Financial assets:
Cash and cash equivalents ...... $ 21,582 $ 21,582 $ 46,401 $ 46,401
Securities available-for-sale .. 771,864 771,864 1,004,937 1,004,937
Mortgage-backed securities
held-to-maturity ............ 4,326 4,274 6,282 6,372
Loans receivable ............ 2,462,837 2,407,999 2,148,857 2,160,238
FHLB stock .................. 66,643 66,643 63,150 63,150
Financial liabilities:
Deposits ....................... 1,647,337 1,643,102 1,542,162 1,539,645
Securities sold under agreements
to repurchase ............... 381,109 380,641 364,000 373,402
Advances from the FHLB ...... 1,123,700 1,107,045 1,198,000 1,219,404
Other borrowings ............... 4,621 4,621 -- --
Financial instruments:
Interest rate corridors ........ 120 (72) 266 (236)
The following methods and assumptions were used to estimate the fair value
of each type of financial instrument:
o Cash and Cash Equivalents - The carrying amount approximates
the fair value for cash and short-term investments.
o Securities Available-for-Sale - Fair value is based on quoted
market prices or dealer quotes.
84
o Mortgage-Backed Securities - Fair value is based on quoted
market prices or dealer quotes.
o Loans Receivable - For residential real estate loans, fair
value is estimated by discounting projected future cash flows
at the current market interest rates for mortgage-backed
securities collateralized by loans of similar coupon, duration
and credit risk, adjusted for differences in market interest
rates between loans and securities. The fair value of
multifamily and commercial real estate loans is estimated by
discounting the future cash flows using the current interest
rates at which loans with similar terms would be made on
property and to borrowers with similar credit and other
characteristics and with similar remaining terms to maturity.
Impaired loans are valued based upon the fair value of
underlying collateral, if collateral dependent or
alternatively, the present value of expected cash flows using
the loan's original implicit loan interest rate.
o FHLB Stock - The carrying amount of FHLB Stock approximates
its fair value.
o Deposit - The fair values of Checking accounts, passbook
accounts and money market accounts withdrawable on demand
without penalty are, by definition, equal to the amount
withdrawable on demand at the reporting date, which is their
carrying amount. The fair value of term certificates of
deposit, all of which are fixed maturity bearing a fixed-rate
of interest, is estimated by discounting future projected cash
flows at interest rates approximating interest rates currently
offered by the Bank for similar types of certificates of
deposit for similar remaining terms to maturity.
o Securities Sold under Agreements to Repurchase - The fair
value is estimated by discounting projected future cash flows
at the current interest rates available to the Bank for
Securities Sold Under Agreements to Repurchase with similar
terms for similar remaining terms to maturity.
o Other Borrowings - The carrying amount of other borrowings
approximates its fair value.
o Advances from the FHLB - The fair value is estimated by
discounting projected future cash flows at the current advance
interest rates available to the Bank for FHLB advances with
similar terms for similar remaining terms to maturity.
o Interest Rate Corridors - The fair values of interest rate
corridors are based upon dealer quotes or estimated using
option pricing models utilizing current market consensus
assumptions for interest rate caps and corridors of similar
terms and strike or floor prices for the same remaining term
to maturity.
(22) Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and tangible capital (as defined in the regulations) to adjusted
tangible assets (as defined) and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as
85
defined), and of Tier 1 leverage capital (as defined) to adjusted tangible
assets (as defined). Management believes, as of December 31, 1999, that the Bank
met all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain a minimum total risk-based ratio of 10%, Tier 1 risk-based ratio of 6%
and Tier 1 leverage ratio of 5%. There are no conditions or events since that
notification that management believes have changed the institution's category.
While all insured institutions are required by OTS regulations to meet
these minimum regulatory capital requirements, the Bank has regulatory
Assistance Agreements which were entered into with the FSLIC as part of the
Company's purchase of the Bank in 1987, and which provides for an additional
$118.9 million of regulatory capital at December 31, 1999. Until the passage of
FIRREA, the Bank met all capital requirements by including the additional
Assistance Agreement capital amount in regulatory capital.
The position of the OTS was and continues to be that under FIRREA,
Assistance Agreements which provide additional regulatory capital, and/or
capital forbearances are no longer in effect as of December 7, 1989. The OTS
notified the Bank in 1990 that the additional Assistance Agreement capital
amounts cannot be included in meeting the FIRREA capital requirements, and as a
result thereof the OTS believed the Bank did not meet minimum FIRREA capital
requirements. Management disagreed, and still disagrees, with the OTS, and
attempted to preserve all of its rights and remedies under the Assistance
Agreements. At December 31, 1999, the Bank met all minimum FIRREA regulatory
capital requirements without inclusion of the additional Assistance Agreement
capital amounts.
To preserve its rights under the Assistance Agreement, in 1993 the Company
and the Bank commenced a lawsuit against the United States Government for breach
of contract and deprivation of property without just compensation or due process
of law. The lawsuit seeks unspecified monetary compensation for damages
sustained in meeting FIRREA mandated capital requirements and for the fair value
of property taken, but does not seek reinstatement of the Assistance Agreement
capital forbearance. While the outcome of the lawsuit cannot be determined at
this time, it is management's opinion, based on the advice of external legal
counsel, that the Bank's position has substantial legal merit.
The ability of the Company to pay dividends will depend primarily upon the
receipt of dividends from the Bank. The Bank's ability to pay these dividends is
dependent upon its earnings from operations and the adequacy of its regulatory
capital. As a well capitalized institution, the maximum dividend allowable under
statute is the higher of (i) 100% of the Bank's net earnings to date during the
calendar year plus the amount that would reduce by one-half its capital surplus
ratio at the beginning of the year or (ii) 75% of the previous four quarters of
net earnings less dividends paid in such quarters. The OTS director must be
notified of the proposed distribution.
86
At December 31, 1999 and 1998, the Bank's regulatory capital calculations,
computed by management both with and without inclusion of the additional capital
provided for in the Bank's Assistance Agreements were as follows (dollars in
thousands):
Regulatory Capital/Standard as of December 31, 1999
--------------------------------------------------------------
Tangible Tier 1 Tier 1 Risk- Total Risk-
Without Additional Assistance Agreement Capital Capital Leverage Based Based Capital
- ----------------------------------------------- --------- --------- --------- -------------
Stockholders' equity/GAAP capital .......... $ 184,108 $ 184,108 $ 184,108 $ 184,108
Adjustment for unrealized losses on
securities available-for-sale .......... 38,706 38,706 38,706 38,706
Deduction for disallowed deferred
tax assets ............................. (17,285) (17,285) (17,285) (17,285)
Deduction for intangible assets ............ (7,405) (7,405) (7,405) (7,405)
Minority interest in subsidiary ............ 33,250 33,250 33,250 33,250
--------- --------- --------- ---------
Total Tier 1 capital ....................... 231,374 231,374 231,374 231,374
Includable allowance for loan losses ....... -- -- -- 18,341
--------- --------- --------- ---------
Total capital .......................... 231,374 231,374 231,374 249,715
Minimum capital requirement ................ 51,193 136,514 83,520 167,040
--------- --------- --------- ---------
Regulatory capital excess .................. $ 180,181 $ 94,860 $ 147,854 $ 82,675
========= ========= ========= =========
Capital ratios:
Regulatory as reported ................... 6.78% 6.78% 11.08% 11.96%
Minimum capital ratio .................... 1.50 4.00 4.00 8.00
--------- --------- --------- ---------
Regulatory capital excess ................ 5.28% 2.78% 7.08% 3.96%
========= ========= ========= =========
With Additional Assistance Agreement Capital
Regulatory capital as adjusted ........... $ 350,274 $ 350,274 $ 350,274 $ 368,615
Minimum capital requirement (per above) .. 51,193 136,514 83,520 167,040
--------- --------- --------- ---------
Regulatory capital excess ................ $ 299,081 $ 213,760 $ 266,754 $ 201,575
========= ========= ========= =========
Regulatory Capital/Standard as of December 31, 1998
--------------------------------------------------------------
Tangible Tier 1 Tier 1 Risk- Total Risk-
Without Additional Assistance Agreement Capital Capital Leverage Based Based Capital
- ----------------------------------------------- --------- --------- --------- -------------
Stockholders' equity/GAAP capital .......... $ 179,357 $ 179,357 $ 179,357 $ 179,357
Adjustment for unrealized losses on
securities available-for-sale ............ 13,609 13,609 13,609 13,609
Deduction for disallowed deferred
tax assets ............................... (15,024) (15,024) (15,024) (15,024)
Deduction for intangible assets ............ (1,119) (1,119) (1,119) (1,119)
Minority interest in subsidiary ............ 33,250 33,250 33,250 33,250
--------- --------- --------- ---------
Total Tier 1 capital ....................... 210,073 210,073 210,073 210,073
Includable allowance for loan losses ....... -- -- -- 16,143
--------- --------- --------- ---------
Total capital ............................ 210,073 210,073 210,073 226,216
Minimum capital requirement ................ 49,983 133,288 73,189 146,378
--------- --------- --------- ---------
Regulatory capital excess .................. $ 160,090 $ 76,785 $ 136,884 $ 79,838
========= ========= ========= =========
Capital ratios:
Regulatory as reported ................... 6.30% 6.30% 11.48% 12.36%
Minimum capital ratio .................... 1.50 4.00 4.00 8.00
--------- --------- --------- ---------
Regulatory capital excess ................ 4.80% 2.30% 7.48% 4.36%
========= ========= ========= =========
With Additional Assistance Agreement Capital
Regulatory capital as adjusted ............. $ 331,873 $ 331,873 $ 331,873 $ 348,017
Minimum capital requirement (per above) .... 49,983 133,288 73,189 146,378
--------- --------- --------- ---------
Regulatory capital excess .................. $ 281,890 $ 198,585 $ 258,684 $ 201,639
========= ========= ========= =========
87
(23) Condensed Financial Information of PBOC Holdings, Inc.:
The condensed unconsolidated balance sheets of the Company at December 31,
1999 and 1998, were as follows:
1999 1998
-------- --------
(Dollars in Thousands)
Assets
Cash ......................................... $ 148 $ 1,804
Investment in subsidiary ..................... 184,108 179,357
Other assets ................................. 2 --
-------- --------
Total assets ............................. $184,258 $181,161
======== ========
Liabilities and Stockholder's Equity
Liabilities:
Accrued expenses and other liabilities ... $ 180 $ 555
Other borrowings - line of credit ........ 4,621 --
-------- --------
Total liabilities .................... 4,801 555
Total stockholders' equity ................... 179,457 180,606
-------- --------
Total liabilities and stockholder's equity $184,258 $181,161
======== ========
The condensed unconsolidated statements of operations of the Company for
the years ended December 31, 1999, 1998 and 1997, are as follows:
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
Income:
Cash dividends from subsidiary ................ $ 5,000 $ 200 $ 2,100
Interest income ............................... 11 259 --
-------- -------- --------
5,011 459 2,100
Expense:
Interest on other borrowings .................. 19 445 1,272
General and administrative expenses ........... 537 284 30
Other expense ................................. 6 64 --
-------- -------- --------
562 793 1,302
-------- -------- --------
Earnings (loss) before undistributed earnings
of subsidiary .............................. 4,449 (334) 798
Equity in undistributed earnings of subsidiary 29,026 11,237 10,144
-------- -------- --------
Net earnings .................................. $ 33,475 $ 10,903 $ 10,942
======== ======== ========
The Company relies upon the Bank for dividends to support its operations.
Absent these dividends, the Company must rely upon its stockholders to support
its activities. The ability of the Bank to pay dividends is dependent upon its
ability to maintain minimum capital requirements and profitability.
88
The condensed unconsolidated statements of cash flows of the Company for
the years ended December 31, 1999, 1998 and 1997 are as follows (dollars in
thousands):
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
Cash flows from operations activities:
Net earnings ......................................... $ 33,475 $ 10,903 $ 10,942
Adjustment to reconcile net loss to net cash
used in operating activities:
(Decrease) increase in accrued expenses .............. (325) 544 (33)
Increase (decrease) in accrued interest payable ...... 3 257 (393)
Increase in other assets ............................. (2) -- --
Equity in undistributed (earnings) of subsidiary ..... (29,026) (11,237) (10,144)
--------- --------- ---------
Net cash provided by operating
activities ..................................... 4,125 467 372
Cash flows from financing activities:
Proceeds from Offering ............................... -- 129,611 --
Net change in other borrowings ....................... 4,621 (11,370) --
Capital investment in subsidiary ..................... -- (89,307) --
Purchases of treasury stock .......................... (10,402) (8,308) --
Retirement of preferred stock ........................ -- (5) --
Dividends paid ....................................... -- (19,439) --
Cash contributions to additional paid-in capital ..... -- -- 21
Payment on senior debt ............................... -- -- (285)
--------- --------- ---------
Net cash provided by (used in) financing activities (5,781) 1,182 (264)
--------- --------- ---------
Net decrease (increase) in cash and cash equivalents . (1,656) 1,649 108
Cash and cash equivalents at beginning of year ....... 1,804 155 47
--------- --------- ---------
Cash and cash equivalents at end of year ............. $ 148 $ 1,804 $ 155
========= ========= =========
89
(24) Quarterly Results of Operations - Unaudited
The following table presents the unaudited results of operations by
quarter for 1999 and 1998:
Quarters Ended
-------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In thousands, except per share data)
1999
Total interest income ........................ $ 53,783 $ 55,793 $ 59,558 $ 61,294
Total interest expense ....................... 39,001 39,770 41,634 41,272
-------- -------- -------- --------
Net interest income .......................... 14,782 16,023 17,924 20,022
Provision for loan losses .................... 1,050 1,050 1,200 1,447
-------- -------- -------- --------
Net interest income after provision for
loan losses ............................. 13,732 14,973 16,724 18,575
Gain (loss) on sale of investment securities . 121 76 3 (3,417)
Other income ................................. 820 631 1,113 545
Operating expenses ........................... 8,476 8,865 10,023 10,759
-------- -------- -------- --------
Earnings (loss) before income tax benefit .... 6,197 6,815 7,817 4,944
Income tax benefit ........................... 1,000 1,000 1,500 1,000
-------- -------- -------- --------
Earnings before minority interest and
extraordinary item ...................... 7,197 7,815 9,317 5,944
Minority interest ....................... (869) (869) (869) (869)
-------- -------- -------- --------
Earnings before extraordinary item ........... 6,328 6,946 8,448 5,075
Extraordinary item -gain on sale of
FHLB advances ........................... -- -- -- 6,678
-------- -------- -------- --------
Net earnings available to common
stockholders ............................ $ 6,328 $ 6,946 $ 8,448 $ 11,753
======== ======== ======== ========
Earnings per common share, basic and
diluted, before extraordinary item ...... $ 0.30 $ 0.34 $ 0.41 $ 0.26
======== ======== ======== ========
Earnings per common share, basic and diluted . $ 0.30 $ 0.34 $ 0.41 $ 0.58
======== ======== ======== ========
1998
Total interest income ........................ $ 38,944 $ 37,149 $ 51,979 $ 52,801
Total interest expense ....................... 28,771 30,787 40,647 40,153
-------- -------- -------- --------
Net interest income .......................... 10,173 6,362 11,332 12,648
Provision for loan losses .................... 450 450 450 650
-------- -------- -------- --------
Net interest income after provision for
loan losses ............................. 9,723 5,912 10,882 11,998
Gain on sale of mortgage-backed
securities .............................. 323 -- 937 422
Other income ................................. 535 2,411 851 957
Operating expenses ........................... 7,680 23,240 6,999 9,043
-------- -------- -------- --------
Earnings (loss) before income taxes benefit .. 2,901 (14,917) 5,671 4,334
Income tax benefit ........................... -- 9,390 -- 7,000
-------- -------- -------- --------
Earnings before minority interest ............ 2,901 (5,527) 5,671 11,334
Minority interest ............................ (869) (869) (869) (869)
-------- -------- -------- --------
Net earnings (loss) .......................... 2,032 (6,396) 4,802 10,465
Dividends on preferred stock ................. 1,451 709 -- --
-------- -------- -------- --------
Earnings (loss) available to common
stockholders ............................ $ 581 $ (7,105) $ 4,802 $ 10,465
======== ======== ======== ========
Earnings (loss) per common share,
basic and diluted ....................... $ 0.18 $ (0.57) $ 0.22 $ 0.50
======== ======== ======== ========
90
(25) Goodwill Litigation and Shareholder Rights Agreement
As discussed in Note (22) above, the Company and the Bank have filed a
lawsuit against the United States Government with regard to supervisory and
accounting goodwill which were eliminated by FIRREA. To date, there have been no
material settlement discussions to resolve the litigation and no trial date has
been set. While the outcome of the lawsuit cannot be determined at this time,
management believes that, based on the advice of outside legal counsel, that the
Company's and the Bank's positions have substantial merit.
In May, 1998, a former preferred stockholder of the Company and the Bank
filed a lawsuit against the Company, the Bank and certain other parties seeking
to participate in any recovery against the government in the goodwill
litigation. The Company intends to defend this action vigorously.
In connection with the IPO, the Company, the Bank and each of the Material
Stockholders (i.e., the Bishop Estate, BIL Securities and Arbur) entered into a
Shareholder Rights Agreement (the "Agreement") which entitles the Material
Stockholders to 95% of any recovery against the government in the goodwill
litigation. The remaining 5% will be retained by the Company and/or the Bank. As
defined in the Agreement, the litigation recovery to be distributed will equal
cash payments received by the Company and/or Bank in the litigation, after
deduction of legal and other expenses incurred in the litigation and any income
tax liability of the Company or Bank incurred as a result of the recovery.
The Agreement provides that the Material Stockholder's claim to 95% of any
litigation recovery by the Company or Bank is documented in the form of goodwill
participation rights. To the extent the Company is prohibited from distributing
a recovery payment, or any portion thereof, or cannot do so because the Bank is
prohibited from making a distribution to the Company, the Company shall, upon
the written request of any Material Stockholder, issue to such Material
Stockholder preferred stock of the Company with an aggregate liquidation
preference equal in value to the recovery payment or portion thereof which the
Company shall have been prohibited from distributing (the "Recovery Payment
Preferred"). The Company shall issue the Recovery Payment Preferred upon
surrender to the Company of such Material Stockholder's rights. The stated value
of each share of Recovery Payment Preferred shall be $1,000. The holders of the
Recovery Payment Preferred shall be entitled to receive cumulative preferential
cash dividends payable quarterly at a fixed-rate per share of 9 3/4% per annum.
As long as any Recovery Payment Preferred remains outstanding, no dividend
shall be declared or paid on the Company's Common Stock and no shares of Common
Stock shall be redeemed or purchased by the Company unless all cumulative
dividends on all outstanding shares of Recovery Payment Preferred have been
paid. In the event of any dissolution, liquidation or winding up of the affairs
of the Company, after payment or provision for payment of the debts and other
liabilities of the Company, the holders of the Recovery Payment Preferred shall
be entitled to receive, out of the net assets of the Company available for
distribution to its stockholders and before any distribution shall be made to
the holders of Common Stock, an amount equal to $1,000 per share, plus an amount
equal to all dividends accrued and unpaid on each share of Recovery Payment
Preferred.
The Company shall have the right, at its option, to redeem at any time the
Recovery Payment Preferred Stock, in whole or in part, upon payment in cash with
respect to each share of Recovery Payment Preferred redeemed at $1,000 per
share, plus an amount equal to all dividends accrued and unpaid thereon to the
date fixed for redemption.
The Agreement also established a Litigation Committee of the Company's
Board of Directors which will oversee the goodwill litigation and related
litigation with the former preferred stockholder and make final decisions
relating to any dismissal, settlement or termination of the litigation. The
Agreement further provides that the Material Stockholders shall indemnify the
Company and/or the Bank for 95% of the liability incurred by the Company or Bank
in any claim by the former preferred stockholder or other parties which seeks in
whole or in part any amounts recovered by the Company and/or the Bank in the
goodwill litigation and for 100% of the liability incurred by the Company or the
Bank in any claim by a party other then the Company or the Bank that challenges
the validity or binding effect of the Agreement.
91
(26) Subsequent Event
On January 31, 2000, the Bank acquired The Bank of Hollywood. The
acquisition will be treated as a purchase for accounting purposes. The purchase
of the Bank of Hollywood will increase the Bank's total assets by $157.4
million, including $64.4 million of net loans and $145.1 million of deposits.
The Bank will also record an addition to it's goodwill account of $15.3 million
for the purchase of the Bank of Hollywood to be amortized on a straight-line
basis over 15 years.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 24, 2000
from pages two to eight, and 13 and 14. Such Proxy Statement was filed with the
SEC on March 23, 2000 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information relating to Directors and Executive Compensation is
incorporated herein by reference to the Registrant's Proxy Statement from pages
five to 13, and 17.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement from pages 15 and 16.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement from
page 18.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Document filed as part of this Report.
(1) The Consolidated Financial Statements are contained herein as listed
on the "Index" on page 57 hereof.
(2) All schedules for which provision is made in the applicable accounting
regulation of the SEC are omitted because they are not applicable or the
required information is included in the Consolidated Financial Statements or
notes thereto.
92
(3) (a) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
No. Description
- --- -----------
3.1 Amended and Restated Certificate of Incorporation of PBOC Holdings,
Inc.1/
3.2 Bylaws of PBOC Holdings, Inc. 1/
4 Stock Certificate of PBOC Holdings, Inc.2/
10.1 Employment Agreement between PBOC Holdings, Inc., People's Bank of
California and Rudolf P. Guenzel1/
10.2 Employment Agreement between PBOC Holdings, Inc., People's Bank of
California and J. Michael Holmes1/
10.3 Employment Agreement between PBOC Holdings, Inc., People's Bank of
California and William W. Flader1/
10.4 Employment Agreement between the People's Bank of California and
Doreen J. Blauschild2/
10.5 Deferred Compensation Plan1/
10.6 Grantor Trust1/
10.7 Shareholder Rights Agreement1/
10.8 Stockholders' Agreement1/
10.9 1999 Stock Option Plan3/
21 Subsidiaries of the Registrant - Reference is made to "ITEM 1.
BUSINESS" for the Required information
23.1 Consent of KPMG LLP
27 Financial Data Schedule
- ----------
1/ Incorporated by reference from the Registrant's Form 10-K for the fiscal
year ended December 31, 1998 as filed on March 22, 1999 (File No.
000-24215).
2/ Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-48397) filed by the Registrant with the SEC on March
20, 1998, as amended.
3/ Incorporated by reference from the Registrant's Proxy Statement on
Schedule 14A as filed on March 22, 1999 (File No. 000-24215).
(3)(b) Reports filed on Form 8-K.
None.
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By: /s/ Rudolf P. Guenzel
---------------------------------------
Rudolf P. Guenzel
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Rudolf P. Guenzel
- ---------------------------------------------------
Rudolf P. Guenzel,
President and Chief Executive Officer and Director
(Principal Executive Officer) March 20, 2000
/s/ J. Michael Holmes
- ---------------------------------------------------
J. Michael Holmes
Senior Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer) and Director March 20, 2000
/s/ Murray Kalis
- ---------------------------------------------------
Murray Kalis
Director March 20, 2000
/s/ Randall O. Chang
- ---------------------------------------------------
Randall O. Chang
Director March 20, 2000
/s/ Robert W. MacDonald
- ---------------------------------------------------
Robert W. MacDonald
Director, Chairman of the Board March 20, 2000
/s/ John F. Davis
- ---------------------------------------------------
John F. Davis
Director March 20, 2000
94
REVOCABLE PROXY
PBOC HOLDINGS, INC.
5900 WILSHIRE BLVD.,
16TH FLOOR
LOS ANGELES, CA 90036-5013>
/X/ PLEASE MARK VOTES
AS IN THIS EXAMPLE
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints _______ and _______ and each of them, as
proxies, each with the power to appoint his substitute, and hereby authorizes
each of them to represent and vote, as designated below, all of the shares of
the common stock of PBOC Holdings, Inc. held of record by the undersigned on
_____, 2001, at the Special Meeting of Shareholders to be held on _____,
2001, or any adjournment(s) therefore.
----------------------------------------------
FOR AGAINST ABSTAIN
1. Proposal to approve and adopt the Agreement and Plan of Merger by and
between PBOC Holdings, Inc., FBOP Corporation and FBOP Acquisition
Company, dated as of December 8, 2000, pursuant to which:
- - FBOP Acquisition Company, a Delaware corporation and a wholly-owned
subsidiary of FBOP Corporation, will merge with and into
PBOC Holdings, Inc., with PBOC Holdings, Inc. continuing as the
surviving corporation and a wholly-owned subsidiary of
FBOP Corporation; and
- - Each outstanding share of the common stock of PBOC Holdings, Inc.
will be converted into the right to receive an amount of cash
equal to $10.00.
2. Proposal to adjourn the Special Meeting, if necessary, to solicit / / / / / /
additional proxies.
3. In their discretion, the proxies are authorized to vote upon such other / / / / / /
business matters as may properly come before the meeting.
- THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE APPROVAL
AND ADOPTION OF THE AGREEMENT AND PLAN OF MERGER AND THE OTHER
MATTERS SET FORTH ABOVE.
--------------------------------
Dated: ___________________, 2001
- ----------------------------------- --------------------------------
SIGNATURE OF STOCKHOLDER SIGNATURE OF STOCKHOLDER
- ----------------------------------- --------------------------------
PRINT NAME OF STOCKHOLDER PRINT NAME OF STOCKHOLDER
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
Please execute this proxy as your name appears hereon. When shares are held
by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by the president or other
authorized officer. If a partnership, please sign in partnership name by
authorized persons. Please mark, sign, date and return this proxy promptly
using the enclosed envelope.
PLEASE COMPLETE, DATE, SIGN, AND MAIL THIS PROXY PROMPTLY IN THE
ENCLOSED POSTAGE-PREPAID ENVELOPE.