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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
COMMISSION FILE NO.: 0-24215
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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)
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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, 2001, the aggregate value of the 19,270,413 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 $182.5 million. This figure is based on the last
known trade price of $9.47 per share of the Registrant's Common Stock on
March 7, 2001.
Number of shares of Common Stock outstanding as of March 7, 2001: 19,833,705
DOCUMENTS INCORPORATED BY REFERENCE
None
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PBOC HOLDINGS, INC.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS........................................... 3
General..................................... 3
Lending Activities.......................... 4
Asset Quality............................... 10
Investment Activities....................... 12
Sources of Funds............................ 14
Competition................................. 15
Bank Subsidiaries........................... 15
Regulation of Savings and Loan Holding
Companies................................. 16
Regulation of Federal Savings Banks......... 18
Taxation.................................... 21
ITEM 2. PROPERTIES......................................... 23
ITEM 3. LEGAL PROCEEDINGS.................................. 25
The Goodwill Litigation..................... 25
The Shareholder Rights Agreement............ 27
The Shareholder Litigation.................. 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................... 31
ITEM 6. SELECTED FINANCIAL DATA............................ 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......... 34
General..................................... 34
Financial Condition......................... 34
Results of Operations....................... 45
Average Balances, Net Interest Income,
Yields Earned and Rates Paid.............. 47
Rate /Volume Analysis....................... 48
Asset and Liability Management.............. 52
Liquidity and Capital Resources............. 56
Recent Accounting Pronouncements............ 58
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................... 58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 59
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................ 102
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT................................................ 102
ITEM 11. EXECUTIVE COMPENSATION............................. 105
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................. 112
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 113
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON
FORM 8-K.................................... 114
2
WHEN USED IN THIS FORM 10-K BY PBOC HOLDINGS, INC. (THE "COMPANY" OR "PBOC")
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 and PBOC Capital Trust I.)
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 26 full-service branch offices
located primarily in Los Angeles County as well as Orange and Ventura Counties
in Southern California. At December 31, 2000, the Company had total assets of
$3.3 billion, net loans receivable of $2.5 billion, total deposits of
$2.0 billion and total stockholders' equity of $214 million. In addition, the
Company owns 100% of the common stock of PBOC Capital Trust I (the "subsidiary
trust"). The subsidiary trust was organized in July 2000 under New York law and
was formed for the purpose of issuing $10,000,000 of 11.045% Trust Preferred
Securities (the "preferred securities") in a private placement transaction.
MERGER AGREEMENT WITH FBOP CORPORATION. On December 8, 2000, PBOC agreed to
merge with FBOP Corporation ("FBOP"), a closely held bank and savings
institution holding company that owns banks in California, Illinois and Texas.
The terms of the Agreement and Plan of Merger by and among PBOC, FBOP and FBOP
Acquisition Company ("Acquisition"), dated as of December 8, 2000, provide 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
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 consummation of the merger is subject to certain conditions, including
approval by the shareholders of PBOC and applicable regulatory approvals. PBOC
has scheduled a special meeting of its shareholders to vote on the merger on
April 19, 2001. The parties expect that the merger will be consummated in the
second quarter of 2001.
The description of the merger above does not purport to be complete and is
qualified in its entirety by reference to the text of the merger agreement. See
the Exhibit Index to this Form 10-K.
3
FOR INFORMATION RELATING TO LITIGATION ASSOCIATED WITH THE MERGER AGREEMENT
WITH FBOP, see "the Shareholder Litigation" under Item 3--Legal Proceedings.
MERGER AGREEMENT WITH BYL BANCORP. 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 33 branch offices and approximately $3.5 billion in total
assets, servicing Los Angeles, Orange, Ventura and Riverside counties. BYL
Bancorp also originates for sale, single-family residential loans. BYL Bancorp
had total assets of $284.9 million, total deposits of $254.4 million and
stockholders' equity of $29.2 million at December 31, 2000, the last date as to
which public financial information was available.
Under the terms of the merger 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 Bancorp 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
Bancorp's shareholders. BYL Bancorp has scheduled a special meeting of its
shareholders for March 21, 2001 to vote on the merger agreement and the
transactions contemplated thereunder. The description of the merger does not
purport to be complete and is qualified in its entirety by reference to the text
of the merger agreement. See the Exhibit Index included in this Form 10-K.
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.
The Bank implemented an asset/liability management strategy to limit its
exposure to earnings and asset valuation fluctuations resulting from interest
rate changes over time. The Bank reduced its 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.
At December 31, 1999 the Bank's one-year cumulative gap was (11.60%) compared to
0.06% at December 31, 2000.
As part of the program to strengthen its lending infrastructure, the Company
has expanded and refined its loan underwriting and review policies and
procedures. In addition, during the year the Company added several experienced
commercial bankers to its senior management team.
In August 2000, the Company added two new directors to the Boards of the
Company and the Bank.
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, 2000, the Bank's total loans receivable net amounted to
$2.5 billion, which represented 74.8% of the Company's $3.3 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, 2000,
4
such loans constituted $1.4 billion and $300.0 million, or 52.9% and 11.7%,
respectively, of the total loan portfolio. Substantially all of the Bank's loan
portfolio consists of conventional loans, which are loans that are neither
insured by the Federal Housing Administration nor partially guaranteed by the
Department of Veterans Affairs. More recently, the Bank has increased its
emphasis on commercial and consumer lending. At December 31, 2000, commercial
real estate loans amounted to $477.3 million or 18.6% of the total loan
portfolio, while commercial business and consumer loans (including loans secured
by deposits) amounted to $160.9 million and $268.3 million or 6.3% and 10.5% of
the total loan portfolio, respectively. The Bank's total loan portfolio also
included a small amount of land loans, which amounted to $704,000 at
December 31, 2000.
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, Riverside, San Bernardino 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, ACQUISITION 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 of the Senior Credit Administrator, 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 Loan
Committee of 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 Credit Administrator 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 Small Business loans under $500,000, 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 Small Business Loan Center, who has authority to approve small business
loans up to $500,000.
During the year ended December 31, 2000, the Bank purchased $324,000 of
fixed-rate single family residential loans, $9.3 million of multi-family
residential loans and $14.4 million of commercial real estate loans.
Additionally, the Bank sold $3.8 million of long-term fixed-rate single family
residential
5
loans, $9.2 million of multi-family residential loans and $9.3 million of
commercial business 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, 2000, the Bank's regulatory limit
on loans-to-one borrower was $36.7 million and its five largest loans or groups
of loans-to-one borrower, including related entities, aggregated $25.1 million,
$24.8 million, $20.7 million $20.2 million and $15.9 million. All of the five
loans or loan concentrations were secured by commercial real estate or
multi-family residential properties. All of these loans or loan concentrations
were performing in accordance with their terms at December 31, 2000.
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, 2000,
$1.4 billion or 52.9% 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.
Currently, the Bank originates approximately 90% of its single-family
residential loans, with the balance originated by mortgage brokers with whom the
Bank is familiar, who 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.
Although the Bank had historically not been an active purchaser of
single-family residential loans, during 1997, the Bank established People's
Preferred Capital Corporation ("PPCC") as a real estate investment trust
("REIT") and leveraged the capital generated from its offering through wholesale
purchases of an aggregate of $408.8 million of single-family residential loans.
Such purchases significantly increased the size of the Bank's residential
mortgage portfolio. Similarly, in 1998, the Bank leveraged the proceeds raised
from the Company's public offering through wholesale purchases of $821.7 of
single-family residential loans. During 1999, the Bank purchased $180.9 million
of single-family residential loans and during 2000, the Bank purchased $324,000
of single-family residential loans. As the Bank has been able to increase its
loan originations, management has replaced its wholesale loan purchases with
loans which have been originated internally.
The Bank currently offers fixed-rate single-family residential loans with
terms of 15 or 30 years. Such loans are amortized on a monthly basis with
principal and interest due each month. At December 31, 2000, the Bank had
$782.7 billion or 57.7% 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
6
convertible into fixed-rate loans and do not contain prepayment penalties.
Approximately 42.3% of the single-family residential loans in the Bank's
single-family residential loan portfolio at December 31, 2000 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, 2000, 20% 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, 2000, approximately $27.3 million or 2.0% of the Bank's single-
family residential loans had loan-to-value ratios in excess of 80% and did not
have private mortgage insurance. In addition, as of such date, the Bank's
single-family residential loans had a weighted average loan-to-value ratio of
57.9%.
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 1997 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, 2000, the
Bank had an aggregate of $300.0 million and $477.3 million invested in
multi-family and commercial real estate loans, respectively, or 11.7% and 18.6%
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.
7
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 an adjustable-rate basis, based on the 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.
During 2000, the Bank originated and purchased $152.1 million in
multi-family residential and commercial real estate loans, compared to
$266.1 million during 1999. The decrease of $114.0 million was primarily due to
market conditions and competition. Non-performing multi-family residential and
commercial real estate loans at December 31, 2000 and 1999 were $4.5 million and
$577,000, respectively. The increase in 2000 was the result of a delinquency in
one commercial real estate loan totaling $4.0 million. As a result, the ratio of
non-performing multi-family residential and commercial real estate loans to
gross multi-family residential and commercial real estate loans increased to
0.58% at December 31, 2000, compared to 0.08% at December 31, 1999.
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.
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, 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, 2000, 1999 and 1998, the Bank
originated $268.6 million, $362.5 million and $94.0 million, respectively, of
commercial business and consumer loans including loans secured by deposits,
which amounted to 63.1%, 43.7% and 15.5% of total originations during such
respective periods. In addition, during January 2000, the Bank, through the Bank
of Hollywood acquisition, added $23.6 million of commercial business loans and
consumer loans to its loan portfolio. During 2000, the Bank originated,
purchased and acquired $292.3 million in commercial business and consumer loans,
compared to $362.7 million during 1999. The decrease of $70.4 million was
primarily due to market conditions and competition. The Bank's non-performing
commercial business and consumer loans at December 31, 2000 and 1999 were
$5.6 million and $270,000, respectively. The increase was primarily the result
of a delinquency in one participation in a syndicated loan totaling
$2.7 million. As a result, the ratio of non-performing commercial and consumer
loans to gross commercial and consumer loans increased to 1.31%, at
December 31, 2000, compared to 0.08% at December 31, 1999. In January 2000, the
Company chose to discontinue its participation in syndicated loans and to focus
solely on local originations.
8
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 ("WSJ") 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 WSJ prime rate, adjusted
quarterly, plus a margin, which depends on the term of the loan. The loans
generally have amortization schedules of seven to 25 years, depending on the
purpose of the loan. Each loan is reviewed by the SBA and, depending on the size
of the loan and the proposed use of proceeds, the SBA establishes what
percentage of the loan it will guarantee. The guarantee cannot exceed 80% of the
loan or $750,000, whichever is less. The guarantee applies not only to the
principal, but also covers accrued interest, foreclosure costs, legal fees and
other expenses. The Bank has obtained preferred lender status, which permits it
to underwrite and close such loans much more promptly. At December 31, 2000,
approximately $12.6 million of the Bank's $160.9 million in commercial business
loans were comprised of SBA loans. During November and December 2000, the Bank
sold $9.3 million of the guaranteed portion of its SBA loans recognizing a gain
of $418,000 during the fourth quarter 2000.
The Bank is authorized to make loans for a wide variety of personal or
consumer purposes. The Bank offers home equity loans and lines of credit and
automobile and also offers overdraft protection and unsecured lines of credit.
At December 31, 2000, home equity loans and lines amounted to $33.2 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 70% 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 Kelley Blue Book Value. The Bank requires
all borrowers to maintain automobile insurance with the Bank named as loss
payee. The Bank had $3.8 million and $2.6 million of direct automobile loans in
its loan portfolio at December 31, 2000 and December 31, 1999, respectively.
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. 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 had
$226.1 million and $178.0 million of indirect automobile loans in its loan
portfolio at December 31, 2000 and December 31, 1999, respectively. Indirect
automobile loans 30 days or more delinquent (net of repossessions) were 3.5% and
0.98%, at
9
December 31, 2000 and December 31, 1999, respectively. The 2.5% increase in
delinquencies is primarily due to the growth in the indirect auto loan portfolio
and the seasoning of the portfolio.
Commercial business and consumer loans generally have shorter terms and
higher interest rates than mortgage loans but generally involve more credit risk
than mortgage loans because of the type and nature of the collateral. In
addition, consumer-lending collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness and personal bankruptcy. The Bank
believes that the generally higher yields earned on commercial business and
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 Department 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 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. Residential mortgage loans are foreclosed upon or
otherwise the ownership of properties securing such residential mortgage loans
are comparably converted as they come into and continue in default and as to
which no satisfactory agreements can be made for collection of delinquent
payments.
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
10
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 Bank will review and recommend the selection and an
appointment of a receiver. The Bank's current policy is to have a receiver
appointed at the expiration of the Notice, which is 10 days after issuance,
unless some type of formal, written agreement with the borrower has been
arranged.
The receiver has specific criteria to fulfill with respect to the management
of the property on behalf of the Bank. The first responsibility is to gain
control of the cash generated from the property. The receiver is responsible for
all collection activity. In addition, the receiver is required to prepare
forward forecasting with respect to occupancy and potential rent collections.
Approximately 30 to 60 days after a receiver is appointed, the Bank will order a
third party appraisal report. The information pertaining to the property
operations will be supplied to the appraiser by the receiver. The 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. At acquisition, costs relating to
development, improvement and selling the property are charged against a real
estate owned allowance. 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.
11
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-family and multi-family residential properties. The majority of these
restructurings were entered into during the early 1990's when economic
conditions in California were severely depressed or in conjunction with damage
to the collateral properties caused by the Northridge earthquake. Management's
decision to provide such restructurings was based upon both an internal
assessment of the situation and a consensus of other lenders in California who
believed that this resolution would be the most effective mitigating measure.
Management considers all loans formerly treated as 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 Chief Operations
Officer, the Senior Credit Administration Officer and the 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 Credit Administration Officer. Assets that
are foreclosed and become real estate owned continue to be managed by the Senior
Credit Administrator 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, 2000, the Bank's securities portfolio consisted of
$185.2 million of mortgage-backed securities, $181.4 million of which were
classified as available-for-sale and $3.8 million of which were classified as
held-to-maturity, $36.0 million of U.S. Government agency obligations,
$216.8 million
12
of investment-grade trust preferred securities (BBB or higher), $56.7 million of
SBA certificates and other asset backed securities and $11.7 million of
non-investment-grade trust preferred securities (BB or under). Of the Bank's
total investment in mortgage-backed securities at December 31, 2000,
$16.2 million consisted of Government National Mortgage Association ("GNMA")
certificates, $24.1 million consisted of FNMA certificates, $128.6 million
consisted of non-agency certificates and $16.3 million consisted of FHLMC
certificates. Of the $185.2 million of mortgage-backed securities at
December 31, 2000, $88.5 million consisted of fixed-rate securities and
$96.7 million consisted of adjustable-rate securities. Of the Bank's
$36.0 million of U.S. Government and federal agency obligations at December 31,
2000, none were scheduled to mature within one through five years thereof,
$36.0 million were scheduled to mature after five through ten years thereof and
none were scheduled to mature after ten years. Of the Bank's $185.2 million of
mortgage-backed securities available-for-sale as well as held-to-maturity at
December 31, 2000, none were scheduled to mature within one year thereof,
$63.4 million were scheduled to mature after one through five years thereof,
$27.2 million were scheduled to mature after five through ten years thereof and
$94.6 million were scheduled to mature after ten years. The Bank's aggregate
securities portfolio decreased by $269.9 or 34.8% during 2000 and decreased by
$235.0 or 23.2% between 1998 and 1999. At December 31, 2000 the aggregate
securities portfolio amounted to $506.4 million.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) represent a participation interest in
a pool of single-family or multi-family mortgages, the principal and interest
payments on which are passed from the mortgage originators, through
intermediaries (generally U.S. Government agencies and government sponsored
enterprises) that pool and repackage the participation interests in the form of
securities, to investors such as the Bank. Such U.S. Government agencies and
government-sponsored enterprises, which guarantee the payment of principal and
interest to investors, primarily include the FHLMC, the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and owned
by the 12 Federal Home Loan Banks and federally insured savings institutions.
The FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal within one year. The FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for conventional mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency which is intended to help finance
government-assisted housing programs. GNMA securities are backed by FHA-insured
and VA-guaranteed loans, and the timely payment of principal and interest on
GNMA securities are guaranteed by the GNMA and backed by the full faith and
credit of the U.S. Government. Because the FHLMC, the FNMA and the GNMA were
established to provide support for low- and middle-income housing, there are
limits to the maximum size of loans that qualify for these programs. For
example, the FNMA and the FHLMC currently limit their loans secured by a
single-family, owner-occupied residence to $275,000. To accommodate larger-sized
loans, and loans that, for other reasons, do not conform to the agency programs,
a number of private institutions have established their own home-loan
origination and securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgage, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages.
13
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 and individual retirement accounts.
The Bank's 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.
BORROWINGS. The Bank obtains fixed 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, 2000, the Bank had total FHLB of San Francisco
advances of $871.0 million at a weighted average interest rate of 6.19%, all of
which matures between years 2002 and 2008. FHLB advances decreased by
$252.7 million during 2000. Certain of these advances have call provisions.
The Bank has relied less on obtaining funds from the sale of securities to
investment dealers under reverse repurchase agreements. At December 31, 2000,
reverse repurchase agreements amounted to $133.1 million, as compared to
$381 million and $364 million at December 31, 1999 and 1998, respectively. As of
December 31, 2000, the weighted average remaining term to maturity of the Bank's
reverse repurchase agreements was 1.5 years compared to 2.4 years at
December 31, 1999 and 3.73 years at December 31, 1998, and such reverse
repurchase agreements had a weighted average interest rate of 7.02% compared to
5.85% and 5.61% at December 31, 2000, 1999 and 1998, respectively. In a reverse
repurchase agreement transaction, the Bank will generally sell a mortgage-
backed security agreeing to repurchase either the same or a substantially
identical security on a specified later date (which range in maturity from
overnight to ten years) at a price greater than the original sales price. The
difference in the sale price and purchase price is the cost of the use of the
proceeds. The mortgage-backed securities underlying the agreements are delivered
to the dealers who arrange the transactions. For agreements in which the Bank
has agreed to repurchase substantially identical securities, the dealers may
sell, loan or otherwise dispose of the Bank's securities in the
14
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. The line was repaid in
July 2000 and matured in November 2000.
In July 2000, the subsidiary trust, a subsidiary of the Company, issued
$309,000 of 11.045% common securities to the Company and $10,000,000 of 11.045%
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 subordinate 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.
On November 21, 2000, the Bank established a $5.0 million Federal Funds line
with Wells Fargo Bank. This is an uncommitted line and is intended to support
short-term liquidity.
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, 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.
BANK 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
15
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. PPCC is such an operating subsidiary of the Bank. As of December 31,
2000, the Bank maintained one operating subsidiary, four direct service
corporations and one indirect service corporation subsidiary. At December 31,
2000, the Bank's investment in its five service corporation subsidiaries
amounted to $40.1 million in the aggregate.
PPCC 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, PPCC 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 "PPCC."
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
16
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 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. The Gramm-Leach-Bliley Act, permits a financial
holding company to engage in a full range of financial activities. The
qualification requirements and the process to be treated as a financial holding
company requires that all the subsidiary banks at the time of election to become
a financial holding company must be and remain at all times well capitalized and
well managed.
Financial holding companies may engage, directly or indirectly, in any
activity that is determined to be (i) financial in nature, (ii) incidental to
such financial activity, or (iii) complementary to a financial activity and does
not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. The Gramm-Leach-Bliley Act,
specifically provides that the following activities have been determined to be
"financial in nature": (a) lending, trust and other banking activities; (b
insurance activities; (c) financial or economic advice or services; (d) pooled
investments; (e) securities underwriting and dealing; (f) existing bank holding
company domestic activities; (g) existing bank holding company foreign
activities; and (h) merchant banking activities.
In addition, the Gramm-Leach-Bliley Act specifically gives the Federal
Reserve Board the authority, by regulation or order, to expand the list of
"financial" or "incidental" activities, but requires consultation with the U.S.
Treasury, and gives the Federal Reserve Board authority to allow a financial
holding company to engage in any activity that is "complementary" to a financial
activity and does not "pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally."
17
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. 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.
The Bank's Tier-1 risk-based capital ratio was 10.50%, its leverage capital
ratio was 6.82% and its total risk-based capital ratio was 11.47% at
December 31, 2000, without consideration of regulatory assistance amounts.
18
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, 2000, 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
19
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.
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, 2000 the Bank's QTL percentage was 64.9%.
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. For the twelve months ended
December 31, 2000, the average SAIF and BIF assessment rate was 0.05%. The SAIF
and BIF rate is based on quarterly bank deposits.
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 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.
20
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 Company
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 Bank uses the specific chargeoff method in computing
its bad debt deduction. 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 payments of alternative minimum tax may be used as
credits against regular tax liabilities in future years. As of December 31,
2000, the Company had an alternative minimum tax credit carryforward of
approximately $2.0 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 three preceding taxable years and carried
forward and deducted from taxable income for fifteen succeeding
21
taxable years. For taxable years beginning after August 5, 1997, NOLs can be
carried back and deducted from taxable income for two preceding taxable years
and carried forward and deducted from taxable income for twenty succeeding
taxable years. The Company had federal tax NOLs of approximately $149.1 million
at December 31, 2000.
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 Company'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, 2000, the Company had $17.2 million
of NOLs which were created prior to the 1992 Ownership Change.
Similarly, the Company's public offering resulted in a second ownership
change within the meaning of Section 382 of the Code (the "1998 Ownership
Change"). The 1998 Ownership Change resulted in an annual Section 382 limitation
on the Company'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, 2000, the Company had $117.0 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 (as
defined therein) with respect to their ownership of Company's 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.
22
STATE TAXATION. The California franchise tax rate applicable to the Company
equals the franchise tax rate applicable to corporations generally plus an "in
lieu" rate approximately equal to personal property taxes and business license
taxes paid by such corporation (but generally not paid by banks or financial
corporations such as the Bank); however, the total rate cannot exceed 10.84%.
Under California regulations, bad debt deductions are available in computing
California franchise taxes using a three or six-year weighted average loss
experience method. The Company had no state tax NOLs at December 31, 2000.
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
Company's offices at December 31, 2000.
LEASE/OWNED LEASE
-------------------------------------------------
NET BOOK VALUE OF
PROPERTY AT
EXPIRATION DATE DECEMBER 31, TOTAL DEPOSITS AT
OFFICE LOCATION (DOLLARS IN THOUSANDS) 2000 DECEMBER 31, 2000
- --------------- ----------------------------- ----------------- -----------------
EXECUTIVE OFFICE (AND
BRANCH):
LOS ANGELES Leased $ 1,720 $ 33,230
5900 Wilshire Blvd. 04/2006
1st, 3rd, 15th and 16th Option: 1-5 years
Floors
Los Angeles, CA 90036
BRANCH OFFICES:
NORTH HOLLYWOOD Leased 299 152,413
6350 Laurel Canyon Blvd. 09/2009
North Hollywood, CA 91606 Option: 2-5 years
LONG BEACH Leased 298 50,236
525 East Ocean Blvd. 02/2010
Long Beach, CA 90802 Option: 1-10 years
BEVERLY HILLS Leased 100 130,986
9100 Wilshire Blvd. 03/2010
Beverly Hills, CA 90212 Option: 1-5 years
ORANGE Leased 41 62,358
216 E Chapman Avenue 12/2001
Orange, CA 92866-1506 Option: 2-5 years
PACIFIC PALISADES Leased 177 78,494
15305 Sunset Blvd. 12/2006
Pacific Palisades, CA 90272 Option: 1 - 10 years
MONTEBELLO Leased 111 105,006
1300 W Beverly Blvd. 08/2003
Montebello, CA 90640 Option: 1 - 10 years
GARDEN GROVE Owned 122 81,025
12112 Valley View
Garden Grove, CA 92845
23
LEASE/OWNED LEASE
-------------------------------------------------
NET BOOK VALUE OF
PROPERTY AT
EXPIRATION DATE DECEMBER 31, TOTAL DEPOSITS AT
OFFICE LOCATION (DOLLARS IN THOUSANDS) 2000 DECEMBER 31, 2000
- --------------- ----------------------------- ----------------- -----------------
SIMI VALLEY Leased 118 110,072
1445 Los Angeles Ave. 01/2002
Simi Valley, CA 93065 Option: 1-30 months
followed by 3-5 years
SYLMAR Leased 109 58,609
13831 Foothill Blvd. 09/2002
Sylmar, CA 91342 Option: 2-10 years
BUENA PARK Leased 93 149,800
5470 Beach Blvd. 12/2004
Buena Park, CA 90621 Option: 3-5 years
WOODLAND HILLS Owned 2,245 21,323
21919 Erwin Street
Woodland Hills, CA 91367
ENCINO Owned 1,759 30,931
16820 Ventura Blvd.
Encino, CA 91436
BEVERLY/SERRANO Leased 122 45,165
4500 W. Beverly Blvd. 01/2006
Los Angeles, CA 90004 Option: 2-5 years
TARZANA Leased 164 102,902
19500 Ventura Blvd. 10/2002
Tarzana, CA 91356
BURBANK Leased 313 163,836
240 North San Fernando Road 09/2005
Burbank, CA 91502 Option: 1-5 years
NO. IRVINE Leased 141 22,361
4860 Irvine Blvd. 12/2010
Irvine, CA 92620 Option: 1-20 years
SANTA CLARITA Owned 215 73,859
26425 Sierra Highway
Santa Clarita, CA 91321
VENTURA Leased 69 71,598
996 South Seaward Ave. 10/2001
Ventura, CA 93001 Option: 1-3 years
CALABASAS Leased 140 88,722
23642 Calabasas Road, Bldg 2 03/2007
Calabasas, CA 91302
IRVINE Leased 187 69,127
15475 Jeffrey Road 10/2005
Irvine, CA 92620-4102
24
LEASE/OWNED LEASE
-------------------------------------------------
NET BOOK VALUE OF
PROPERTY AT
EXPIRATION DATE DECEMBER 31, TOTAL DEPOSITS AT
OFFICE LOCATION (DOLLARS IN THOUSANDS) 2000 DECEMBER 31, 2000
- --------------- ----------------------------- ----------------- -----------------
BANK OF HOLLYWOOD--HOLLYWOOD Leased 453 70,779
6930 Hollywood Blvd. 12/2001
Los Angeles, CA 90028 Option: 2-5 years
BANK OF HOLLYWOOD--TOLUCA Leased 332 44,585
LAKE 05/2001
10100 Riverside Drive Option: 2-5 years
Toluca Lake, CA 91602
FAIRFAX Leased 84 85,693
145 South Fairfax Avenue 11/2002
Los Angeles, CA 90036 Option: 1-5 years
WESTMINSTER Leased 94 25,116
15555 Brookhurst Street 09/2005
Westminster, CA 92683 Option: 1-5 years
SAN PEDRO Owned 734 104,969
28110 South Western Avenue
San Pedro, CA 90732
------- ----------
$10,240 $2,033,195
======= ==========
In addition to the foregoing branch office locations, the Bank currently
operates 47 ATMs at December 31, 2000.
ITEM 3. LEGAL PROCEEDINGS
Except with respect to the Goodwill Litigation, the Ancillary Litigation,
and the Shareholder 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
25
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.
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 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.
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, although a trial judge has
been assigned, 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
26
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. Subject to Ariadne's right
to appeal, Bishop Estate and BIL Securities have been dismissed from the action.
The Company and the Bank (by demurrer and summary judgement) successfully
eliminated all but one of Ariadne's causes of action against them. 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 Company's public offering, whereby each
27
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 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).
28
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.
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
29
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.
THE SHAREHOLDER LITIGATION
Following the Company's public announcement of the proposed acquisition of
the Company by FBOP Corporation, three purported class action lawsuits were
filed by stockholders of the Company against the Company, the Bank, FBOP and
certain present and former directors of the Company in the Court of Chancery of
the State of Delaware (the "Shareholder Litigation"). The three lawsuits have
been consolidated under the caption IN RE PBOC HOLDINGS, INC. SHAREHOLDERS
LITIGATION, Cons. C.A. No. 18543 (the "Consolidated Action"). In addition to the
Consolidated Action, another purported class action lawsuit was filed on
March 1, 2001 by a stockholder of the Company, against the Company, the Bank,
FBOP and certain present and former directors of the Company in the Court of
Chancery of the State of Delaware under the caption ELLIOT WOLFSON V. PBOC
HOLDINGS, INC., ET AL. THE ("Wolfson Action"). The complaints in the
Consolidated Action and the Wolfson Action generally allege that the directors
of the Company, aided and abetted by FBOP, breached their fiduciary duties in
connection with their approval of the proposed acquisition. Plaintiffs purport
to seek, among other things, (i) an order enjoining the proposed acquisition;
(ii) rescission of the acquisition in the event that it is consummated; and/or
(iii) damages. The plaintiffs in the Wolfson Action also have filed a motion for
a preliminary injunction to stop the proposed merger from going forward. The
defendants in the Consolidated Action and the Wolfson Action intend to defend
the actions vigorously. See Exhibit 99.2 for the amended complaint filed in the
Consolidated Action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
30
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, 2001, the Company had approximately 30 stockholders of
record (not including the number of persons or entities holding stock in nominee
or street name through various brokerage firms) and 19,883,705 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
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
Year.......................................... 10.87 7.66
2000 HIGH LOW
- ---- -------- --------
First Quarter................................. 9.88 8.25
Second Quarter................................ 9.81 8.50
Third Quarter................................. 9.06 7.56
Fourth Quarter................................ 9.59 5.94
Year.......................................... 9.88 5.94
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.
31
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
The following selected historical consolidated financial and other data for
the five years ended December 31, 2000 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,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL CONDITION DATA:
Total assets................................... $ 3,308,183 $ 3,398,228 $ 3,335,027 $2,213,054 $1,747,918
Cash........................................... 35,421 19,337 22,166 14,113 14,720
Cash equivalents............................... 122,200 2,245 24,235 7,004 7,200
Securities available-for-sale.................. 502,608 771,864 1,004,937 571,160 502,301
Mortgage-backed securities held-to-maturity.... 3,761 4,326 6,282 9,671 10,971
Loans receivable, net.......................... 2,474,699 2,462,837 2,148,857 1,533,212 1,141,707
Real estate held for investment and sale,
net.......................................... 952 846 2,723 15,191 22,561
Deposits....................................... 2,033,195 1,647,337 1,542,162 1,266,615 1,371,243
Securities sold under agreements to
repurchase................................... 133,061 381,109 364,000 340,788 192,433
FHLB advances.................................. 871,000 1,123,700 1,198,000 472,000 80,000
Senior debt (1)................................ -- -- -- 11,113 11,398
Other borrowings (2)........................... 10,000 4,621 -- -- --
Minority interest (3).......................... 33,250 33,250 33,250 33,250 --
Stockholders' equity (4)....................... 213,629 179,457 180,606 79,602 64,822
SELECTED OPERATING DATA:
Interest and dividend income................... $ 252,272 $ 230,428 $ 180,873 $ 130,979 $ 122,896
Interest expense............................... 177,962 161,677 140,358 97,205 90,791
----------- ----------- ----------- ---------- ----------
Net interest income............................ 74,310 68,751 40,515 33,774 32,105
Provision for loan losses...................... 9,000 4,747 2,000 2,046 2,884
----------- ----------- ----------- ---------- ----------
Net interest income after provision for loan
losses....................................... 65,310 64,004 38,515 31,728 29,221
Gain (loss) on sale of mortgage-backed
securities, net.............................. (8,218) (3,217) 1,682 1,275 3,638
Gain (loss) on loan and servicing sales, net... 557 49 613 3,413 (53)
Income (loss) from other real estate
operations, net.............................. (39) 513 1,479 (1,805) 1,946
Other noninterest income....................... 3,924 2,547 2,662 2,234 2,593
Operating expenses............................. 46,053 38,123 46,962 29,543 27,816
----------- ----------- ----------- ---------- ----------
Earnings (loss) before income tax benefit,
minority interest and extraordinary item..... 15,481 25,773 (2,011) 7,302 9,529
Income tax benefit............................. 19,562 4,500 16,390 4,499 3,015
----------- ----------- ----------- ---------- ----------
Earnings before minority interest and
extraordinary item........................... 35,043 30,273 14,379 11,801 12,544
Minority interest.............................. 3,476 3,476 3,476 859 --
----------- ----------- ----------- ---------- ----------
Earnings before extraordinary item............. 31,567 26,797 10,903 10,942 12,544
Extraordinary item-gain on sale of FHLB
advances..................................... -- 6,678 -- -- --
----------- ----------- ----------- ---------- ----------
Net earnings................................... 31,567 33,475 10,903 10,942 12,544
Dividends on preferred stock................... -- -- 2,160 7,340 6,555
----------- ----------- ----------- ---------- ----------
Net earnings available to common
stockholders................................. $ 31,567 $ 33,475 $ 8,743 $ 3,602 $ 5,989
=========== =========== =========== ========== ==========
Earnings per share basic and diluted before
extraordinary item........................... $ 1.59 $ 1.31 $ 0.59 $ 1.14 $ 1.90
=========== =========== =========== ========== ==========
Earnings per share, basic and diluted (5)...... $ 1.59 $ 1.63 $ 0.59 $ 1.14 $ 1.90
=========== =========== =========== ========== ==========
Weighted average number of shares
outstanding.................................. 19,877,415 20,487,111 14,793,644 3,152,064 3,152,064
=========== =========== =========== ========== ==========
32
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
KEY OPERATING RATIOS: (6)
Return on average assets........................... 0.90% 0.97% 0.39% 0.57% 0.72%
Proforma return on average assets, as adjusted
(7)............................................ 0.31 0.77 0.72 0.57 0.72
Return on average equity......................... 15.89 19.49 7.79 15.37 22.00
Proforma return on average equity, as adjusted
(7)............................................ 5.45 15.60 14.37 15.37 22.00
Average equity to average assets................. 5.69 4.96 4.98 3.72 3.29
Dividend payout ratio............................ -- -- -- -- --
Average interest-earning assets to average
interest-bearing liabilities................... 105.67 105.51 103.79 100.69 100.00
Interest rate spread (8)......................... 1.87 1.75 1.30 1.80 1.91
Net interest margin (8).......................... 2.17 2.01 1.49 1.84 1.92
Operating expenses to average assets............. 1.32 1.10 1.67 1.55 1.60
Proforma operating expenses to average assets, as
adjusted (7)................................... 1.32 1.10 1.12 1.55 1.60
Efficiency ratio (9)............................. 65.29 55.54 100.02 72.17 64.52
Proforma efficiency ratio, as adjusted (7) (9)... 58.14 55.54 66.80 72.17 64.52
ASSET QUALITY DATA:
Total non-performing assets and troubled debt
restructurings (10)............................ $17,065 $10,494 $14,806 $33,123 $46,218
Non-performing loans as a percent of loans,
net............................................ 0.50% 0.13% 0.40% 0.65% 1.60%
Non-performing assets as a percent of total
assets (10).................................... 0.40 0.12 0.34 1.05 2.21
Non-performing assets and troubled debt
restructurings as a percent of total assets
(10)........................................... 0.52 0.31 0.44 1.50 2.64
Allowance for loan losses as a percent of loans,
gross.......................................... 0.92 0.81 0.86 1.15 1.99
Allowance for loan losses as a percent of non-
performing loans (10).......................... 193.36 662.40 222.14 179.97 127.65
Allowance for loan losses as a percent of non-
performing loans and troubled debt
restructurings (10)............................ 147.48 218.19 156.39 89.84 90.30
Net charge-offs to average loans, net............ 0.33 0.11 0.05 0.63 0.95
BANK REGULATORY CAPITAL RATIOS:
Tier 1 leverage.................................. 6.82% 6.78% 6.30% 5.43% 4.57%
Tier 1 risk-based................................ 10.50 11.08 11.48 10.74 9.15
Total risk-based................................. 11.47 11.96 12.36 11.99 10.38
- --------------------------
(1) The senior debt was repaid in connection with PBOC's initial public
offering.
(2) For the year ended December 31, 2000, reflects $10.0 million of
Company-obligated mandatorily redeemable preferred securities of a
subsidiary trust solely junior subordinated deferrable interest notes of the
Company (See Note 16 to the Financial Statements). For the year ended
December 31, 1999, reflects $4.6 million line of credit (See Note 15 to the
Financial Statements).
(3) Minority interest consists of the interest in People's Preferred Capital
Corporation held by persons other than People's Bank of California.
(4) At December 31, 2000, 1999, 1998 and 1997, stockholders' equity is net of
$35.4 million, $38.7 million, $13.6 million and $2.0 million of unrealized
losses on securities available-for-sale, respectively.
(5) Based on a weighted average number of shares of common stock of 19,877,415,
20,487,111, 14,793,644, 3,152,064, and 3,152,064 for the years ended
December 31, 2000, 1999, 1998, 1997 and 1996, respectively.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
33
(6) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods.
(7) For the year ended December 31, 2000, earnings are fully tax-effected and
exclude the effect of loss on investment securities and the income tax
benefit recognized during the period and, for the year ended December 31,
1999, excludes effect of extraordinary item. For the year ended
December 31, 1998, excludes effect of one-time initial public
offering-related expenses.
(8) 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.
(9) Efficiency ratio represents operating expenses as a percent of the aggregate
of net interest income and non-interest income.
(10) 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.
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.
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 decreased by $90.0 million or 2.7% to $3.3 billion
during the year ended December 31, 2000 and increased by $63.2 million or 1.9%
during the year ended December 31, 1999. During the third quarter of 2000, the
Bank took steps to improve its net interest margin and mitigate interest rate
risk by selling $197.4 million of low yielding fixed rate securities and
repaying short-term borrowings. In addition, the Bank continued to execute its
strategy to expand its franchise by purchasing, in the Southern California area,
two branches from another bank, with approximately $52.5 million in deposits,
and acquiring The Bank of Hollywood, which had two branches with $157.4 million
of assets and $145.1 million in deposits, in each case, as of the date of
acquisition.
34
CASH AND CASH EQUIVALENTS. Cash and cash equivalents (consisting of cash,
federal funds sold, commercial paper, securities purchased under agreements to
resell and time deposit accounts) amounted to $157.6 million and $21.6 million
at December 31, 2000 and 1999, respectively. The increase of $136.0 million
represents primarily an increase in federal funds sold, as part of management's
strategy to increase liquidity. The Bank manages its cash and cash equivalents
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, 2000, the Bank's regulatory
liquidity exceeded the minimum OTS requirements. See "Liquidity and Capital
Resources."
SECURITIES. At December 31, 2000, the Bank's securities portfolio (both
held-to-maturity and available-for-sale) amounted to $506.4 million or 15.3% of
the Company's total assets, as compared to $776.2 million or 22.8% at
December 31, 1999. During the third quarter of 2000 the Bank took steps to
improve its net interest margin and mitigate interest rate risk by selling
$197.4 million of low yielding fixed rate securities.
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, 2000, $3.8 million of the Bank's
securities portfolio was classified as held-to-maturity and reported at
historical cost and $502.6 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, 2000, the Bank's
securities classified as available-for-sale had in the aggregate $35.4 million
of unrealized losses, which represents a slight decrease from the $38.7 million
of unrealized losses at December 31, 1999, with no other than temporary
impairments.
The following table sets forth information regarding the carrying and market
value of the Bank's securities at the dates indicated.
AT DECEMBER 31,
-------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -----------------------
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....................... $ 36,001 $ 36,001 $ 34,202 $ 34,202 $ 36,977 $ 36,977
Investment-grade trust preferred
obligations....................... 216,798 216,798 241,875 241,875 324,965 324,965
Mortgage-backed securities.......... 181,402 181,402 421,439 421,439 584,515 584,515
SBA and asset backed securities..... 56,707 56,707 74,348 74,348 58,480 58,480
Non-investment-grade trust preferred
obligations....................... 11,700 11,700 -- -- -- --
-------- -------- -------- -------- ---------- ----------
$502,608 $502,608 $771,864 $771,864 $1,004,937 $1,004,937
======== ======== ======== ======== ========== ==========
Held-to-maturity:
Mortgage-backed securities.......... $ 3,761 $ 3,796 $ 4,326 $ 4,274 $ 6,282 $ 6,372
======== ======== ======== ======== ========== ==========
35
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,
-----------------------------------
2000 1999 1998
--------- ---------- ----------
(DOLLARS IN THOUSANDS)
Securities at beginning of year................... $ 776,190 $1,011,219 $ 580,831
Purchases and acquisitions(1)..................... 74,152 270,731 1,134,026
Sales............................................. (280,661) (322,040) (513,159)
Repayments and prepayments, amortization
/accretion of premiums/discounts................. (66,591) (158,625) (178,842)
Decrease (increase) in unrealized losses on
available-for-sale securities(2)................. 3,279 (25,095) (11,637)
--------- ---------- ----------
Securities at end of year(3)(4)................... $ 506,369 $ 776,190 $1,011,219
========= ========== ==========
- ------------------------
(1) Includes $49.9 million acquired through the acquisition of The Bank of
Hollywood.
(2) At December 31, 2000, the cumulative unrealized losses on securities
classified as available-for-sale amounted to $35.4 million, which reduces
stockholders' equity.
(3) At December 31, 2000, the book value and market value of the Bank's
securities (including held-to-maturity and available-for-sale securities)
amounted to $506.4 million and $506.4 million, respectively.
(4) At December 31, 2000, $331.2 million or 65.4% of the Bank's securities
portfolio consisted of adjustable-rate securities, compared to
$389.9 million or 50.2% and $501.1 million or 49.5% at December 31, 1999 and
1998, respectively.
LOANS RECEIVABLE. Net loans receivable increased by $11.9 million, or 0.48%
during the year ended December 31, 2000, and by $314.0 million, or 14.6%, during
the year ended December 31, 1999. Loan originations during 2000 decreased to
$425.4 million, compared to $828.8 million during 1999. In addition loan
purchases and acquisitions decreased during 2000 to $90.7 million compared to
$193.4 million during 1999 and $876.9 million during 1998. The significant
increase during 1998, was directly attributable to management's strategy of
leveraging the capital generated from the Company's public offering. 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. The decrease of $403.4 million in loan originations
during 2000 was due to a combination of market conditions and competition.
36
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loans at the dates indicated.
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997
----------------------- ----------------------- ----------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family
residential...... $1,357,154 53% $1,475,151 57% $1,494,756 68% $ 953,701 61%
Multi-family
residential...... 300,008 12 327,252 13 366,625 17 426,254 27
Commercial real
estate........... 477,314 19 420,919 16 206,402 9 135,407 9
Land and other..... 704 -- 847 -- 880 -- 5,896 --
---------- --- ---------- --- ---------- --- ---------- ---
Total mortgage
loans.......... 2,135,180 84 2,224,169 86 2,068,663 94 1,521,258 97
---------- --- ---------- --- ---------- --- ---------- ---
Other loans:
Commercial
business......... 160,768 6 159,740 6 62,665 3 22,484 2
Consumer........... 267,106 10 199,879 8 53,826 3 8,485 1
Secured by
deposits......... 1,343 -- 1,918 -- 3,537 -- 2,287 --
---------- --- ---------- --- ---------- --- ---------- ---
Total loans
receivable..... 2,564,397 100% 2,585,706 100% 2,188,691 100% 1,554,514 100%
========== === ========== === ========== === ========== ===
Less:
Undistributed loan
proceeds......... 67,427 95,683 17,152 6,206
Unamortized net
loan discounts
and deferred
origination
fees............. (2,752) 4,045 814 (6,859)
Deferred gain on
servicing sold... 1,333 2,090 2,971 4,131
Allowance for loan
losses........... 23,690 21,051 18,897 17,824
---------- ---------- ---------- ----------
Loans receivable,
net.............. $2,474,699 $2,462,837 $2,148,857 $1,533,212
========== ========== ========== ==========
DECEMBER 31,
-----------------------
1996
-----------------------
PERCENT OF
AMOUNT TOTAL
---------- ----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Single-family
residential...... $ 595,915 51%
Multi-family
residential...... 453,064 39
Commercial real
estate........... 110,931 10
Land and other..... 1,639 --
---------- ---
Total mortgage
loans.......... 1,161,549 100
---------- ---
Other loans:
Commercial
business......... 3,523 --
Consumer........... 988 --
Secured by
deposits......... 2,132 --
---------- ---
Total loans
receivable..... 1,168,192 100%
========== ===
Less:
Undistributed loan
proceeds......... 473
Unamortized net
loan discounts
and deferred
origination
fees............. 2,732
Deferred gain on
servicing sold... --
Allowance for loan
losses........... 23,280
----------
Loans receivable,
net.............. $1,141,707
==========
37
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization of the Bank's total loan portfolio
at December 31, 2000, 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, 2004- 2006- 2012- THERE-
2000 2001 2002 2003 2005 2011 2017 AFTER
------------ -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
MORTGAGE LOANS:
Single-family residential...... $1,357,154 $ 33,365 $ 34,067 $ 35,538 $ 78,157 $249,788 $329,188 $597,051
Multi-family residential....... 300,008 7,067 13,414 6,253 17,076 94,887 77,034 84,277
Commercial real estate......... 477,314 61,542 14,028 9,743 42,335 286,000 26,765 36,901
Land........................... 704 5 699 -- -- -- -- --
OTHER LOANS:
Commercial business............ 160,768 96,465 7,569 9,428 14,345 28,820 1,737 2,404
Consumer....................... 267,106 71,640 53,613 53,928 68,672 9,868 4,043 5,342
Secured by deposits............ 1,343 1,343 -- -- -- -- -- --
---------- -------- -------- -------- -------- -------- -------- --------
Total(1)..................... $2,564,397 $271,427 $123,390 $114,890 $220,585 $669,363 $438,767 $725,975
========== ======== ======== ======== ======== ======== ======== ========
- ------------------------------
(1) Of the $2.5 billion of loan principal repayments contractually due after
December 31, 2000, $1.3 billion have fixed-rates of interest and
$1.2 billion have adjustable-rates of interest.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the Bank
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells the 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).
38
The following table shows the activity in the Bank's loans during the
periods indicated.
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Gross loans held at beginning of year.................... $2,585,706 $2,188,691 $1,554,514
ORIGINATIONS OF LOANS:
Mortgage loans:
Single-family residential.............................. 71,412 201,836 389,475
Multi-family residential............................... 414 11,003 7,847
Commercial real estate and land........................ 85,033 253,477 116,242
OTHER LOANS:
Commercial business.................................... 111,283 166,140 57,492
Consumer............................................... 155,966 194,432 32,969
Secured by deposits.................................... 1,343 1,918 3,537
---------- ---------- ----------
Total originations................................... 425,451 828,806 607,562
---------- ---------- ----------
PURCHASES AND ACQUISITIONS OF LOANS:(1)
Single-family residential.............................. 324 191,576 821,716
Multi-family residential............................... 9,264 1,579 13,302
Commercial real estate................................. 57,437 -- 10,201
Land................................................... -- -- --
Commercial business.................................... 19,866 57 9,200
Consumer............................................... 3,832 183 22,479
---------- ---------- ----------
Total purchases and acquisitions..................... 90,723 193,395 876,898
---------- ---------- ----------
Total origination purchases, and acquisitions...... 516,174 1,022,201 1,484,460
---------- ---------- ----------
LOANS SOLD:
Single-family residential.............................. (3,825) (92,492) (37,051)
Multi-family residential............................... (9,238) -- --
Commercial real estate................................. -- (1,563) (357)
Commercial business.................................... (9,334) -- (5,000)
Consumer............................................... (9) (7) (13)
---------- ---------- ----------
Total sold........................................... (22,406) (94,062) (42,421)
---------- ---------- ----------
Repayments............................................... (467,707) (522,601) (794,127)
Transfers to real estate owned........................... (1,185) (6,384) (10,248)
Principal charge-offs.................................... (9,198) (2,139) (3,487)
Decrease in available lines of credit.................... (36,987) -- --
---------- ---------- ----------
Net activity in loans.................................... (21,309) 397,015 634,177
---------- ---------- ----------
Gross loans held at end of year.......................... $2,564,397 $2,585,706 $2,188,691
========== ========== ==========
- ------------------------
(1) Includes $43.0 million of commercial real estate loans, $19.9 million of
commercial business loans and $3.8 million of consumer loans, acquired
through the acquisition of The Bank of Hollywood.
NON-PERFORMING LOANS AND TROUBLED DEBT RESTRUCTURINGS. In the period from
December 31, 1996 to December 31, 2000, the Bank 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
("TDR's"). TDR's consist of loans with respect to which the Bank has agreed to
grant an interest rate concession or defer principal or interest payments.
Non-performing loans and TDR's have decreased from an aggregate of
$25.8 million at December 31, 1996 to an aggregate of $16.1 million at
December 31, 2000.
39
The following table sets forth information with respect to non-performing
assets identified by the Bank, including non-accrual loans, real estate owned
and TDR's at the dates indicated.
AT DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
NON-PERFORMING LOANS, NET:
Mortgage loans:
Single-family residential.................... $ 2,071 $ 2,331 $ 3,959 $ 8,435 $ 7,947
Multi-family residential..................... 545 557 428 405 9,198
Commercial real estate....................... 3,994 20 3,613 1,064 1,093
Non-mortgage loans:
Commercial business.......................... 5,143 163 99 -- --
Consumer..................................... 499 107 408 -- --
------- ------- ------- ------- -------
Total non-performing loans, net............ 12,252 3,178 8,507 9,904 18,238
------- ------- ------- ------- -------
REAL ESTATE OWNED:(1)
Single-family residential.................... 368 846 2,723 678 3,268
Multi-family residential..................... 634 -- -- 6,482 8,310
Commercial real estate....................... -- -- -- 5,921 8,614
Land......................................... -- -- -- 202 244
------- ------- ------- ------- -------
Total real estate owned........................ 1,002 846 2,723 13,283 20,436
------- ------- ------- ------- -------
Total non-performing assets.................... 13,254 4,024 11,230 23,187 38,674
Troubled debt restructurings................... 3,811 6,470 3,576 9,936 7,544
------- ------- ------- ------- -------
Total non-performing assets and troubled debt
restructurings............................... $17,065 $10,494 $14,806 $33,123 $46,218
======= ======= ======= ======= =======
Non-performing loans to total loans, net....... 0.50% 0.13% 0.40% 0.65% 1.60%
Non-performing loans to total assets........... 0.37 0.09 0.26 0.45 1.04
Non-performing assets to total assets.......... 0.40 0.12 0.34 1.05 2.21
Total non-performing assets and troubled debt
restructurings to total assets............... 0.52 0.31 0.44 1.50 2.64
- ------------------------
(1) For 2000, excludes $50,000 of general allowance for loan losses.
The interest income that would have been recorded during the years ended
December 31, 2000, 1999 and 1998 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 $1.6 million, $372,000, and $950,000, respectively.
Non-performing assets, stated at fair value, increased to $17.1 million at
December 31, 2000, compared to $10.5 million at December 31, 1999. As a result,
the ratio of non-performing assets to total assets increased from 0.12% at
December 31, 1999 to 0.40% at December 31, 2000. The increase was primarily the
result of a delinquency in one participation in a syndicated loan totaling
$2.7 million and one commercial real estate loan totaling $4.0 million. In
January 2000, the Company chose to discontinue its participation in syndicated
loans and to focus solely on local originations.
Of the Bank's $12.3 million of non-performing loans at December 31, 2000,
the largest loan was secured by a commercial property, with a carrying value of
$4.0 million. This loan has been classified as collateral dependent, and as of
December 31, 2000, was carried at fair value. The Bank's $1.0 million of real
estate owned at December 31, 2000 was comprised of one single-family residential
property and one multi-family residential property.
40
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.
The following table sets forth the activity in the Bank's allowance for loan
losses during the periods indicated.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Allowance at beginning of period............... $21,051 $18,897 $17,824 $23,280 $31,572
Addition to allowance due to Bank of Hollywood
acquisition.................................. 2,085 -- -- -- --
Provision for loan losses...................... 9,000 4,747 2,000 2,046 2,884
Transfer to other real estate owned............ (50) -- -- -- --
CHARGE-OFFS:
Mortgage loans:
Single-family residential.................. -- (303) (616) (1,967) (2,213)
Multi-family residential................... -- (131) (261) (5,599) (5,039)
Commercial real estate..................... (7) (820) -- (42) (3,371)
Land....................................... -- -- -- -- (1,478)
Non-mortgage loans:
Commercial business........................ (5,792) (741) (16) -- --
Consumer................................... (3,471) (1,101) (119) -- --
------- ------- ------- ------- -------
Total charge-offs........................ (9,270) (3,096) (1,012) (7,608) (12,101)
RECOVERIES:
Mortgage loans:
Single-family residential.................. 1 32 85 106 16
Multi-family residential................... -- -- -- -- 22
Commercial real estate..................... -- 60 -- -- 2
Land....................................... -- -- -- -- 885
Non-mortgage loans:
Commercial business........................ 1 134 -- -- --
Consumer................................... 872 277 -- -- --
------- ------- ------- ------- -------
Total recoveries......................... 874 503 85 106 925
------- ------- ------- ------- -------
Net charge-offs................................ (8,396) (2,593) (927) (7,502) (11,176)
------- ------- ------- ------- -------
Allowance at end of period..................... $23,690 $21,051 $18,897 $17,824 $23,280
======= ======= ======= ======= =======
Allowance for loan losses to total
nonperforming loans at end of period......... 193.36% 662.40% 222.14% 179.97% 127.65%
======= ======= ======= ======= =======
Allowance for loan losses to total
nonperforming loans and troubled debt
restructurings at end of period.............. 147.48% 218.19% 156.39% 89.84% 90.30%
======= ======= ======= ======= =======
Allowance for loan losses to total loans, gross
at end of period............................. 0.92% 0.81% 0.86% 1.15% 1.99%
======= ======= ======= ======= =======
41
As shown in the table above, net loan charge-offs (net of recoveries)
amounted to $8.4 million, $2.6 million and $927,000, during the years ended
December 31, 2000, 1999 and 1998, respectively. During 2000, the Bank
experienced increased net charge-offs of $5.8 million and $2.6 million on its
commercial business and consumer loans during 2000. The increased charge-offs in
commercial business loans was primarily the result of one participation in a
syndicated loan totaling $4.9 million, charged-off in December 2000. In
January 2000, the Company chose to discontinue its participation in syndicated
loans and to focus solely on local originations. The increased charge-offs in
consumer loans was primarily the result of delinquencies in the bank's
automobile loans portfolio. Net charge-offs in mortgage loans during the year
2000 decreased to $6,000 from $1.2 million during 1999. Management believes that
the Bank's allowance for loan losses at December 31, 2000 is adequate.
Nevertheless, there can be no assurances that additions to such allowances will
not be necessary in future periods, particularly if the growth in the Bank's
commercial and consumer lending continues. The ratio of allowance for loan
losses to non-performing loans decreased from 662.40% at December 31, 1999 to
193.36% at December 31, 2000. This decrease was due to an increase of
$9.1 million in non-performing loans (primarily, commercial real estate and
commercial business loans).
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,
---------------------------------------------------------------------------------------------
2000 1999 1998 1997
--------------------- --------------------- --------------------- ---------------------
PERCENT TO PERCENT TO PERCENT TO PERCENT TO
TOTAL TOTAL TOTAL TOTAL
AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE AMOUNT ALLOWANCE
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Single-family residential real
estate.......................... $ 3,594 15.2% $ 5,020 23.8% $ 5,636 29.8% $ 5,014 28.1%
Multi-family residential.......... 3,713 15.6 4,990 23.7 7,239 38.3 8,964 50.3
Commercial real estate............ 3,817 16.1 4,073 19.4 3,887 20.6 3,062 17.2
Land.............................. 36 0.2 42 0.2 44 0.2 305 1.7
Commercial business............... 7,547 31.9 3,959 18.8 1,160 6.1 352 2.0
Consumer.......................... 222 0.9 243 1.2 160 0.9 127 0.7
Auto.............................. 4,761 20.1 2,724 12.9 771 4.1 -- --
------- ----- ------- ----- ------- ----- ------- -----
Total........................... $23,690 100.0% $21,051 100.0% $18,897 100.0% $17,824 100.0%
======= ===== ======= ===== ======= ===== ======= =====
DEPOSITS. Total deposits increased by $385.9 million or 23.4% during the
year ended December 31, 2000. The Bank's aggregate certificates of deposit
increased from $1.1 billion, or 69.6% of total deposits, at December 31, 1999 to
$1.3 billion, or 65.0% of total deposits, at December 31, 2000. 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 $501.4 million, or 30.4% of
total deposits, at December 31, 1999 to $712.4 million, or 35.0% of total
deposits, at December 31, 2000.
42
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,
------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Checking accounts........................... $ 265,179 0.82% $ 182,275 1.22% $ 120,632 1.75%
Money market accounts....................... 254,022 5.07 141,149 4.13 96,422 4.71
Passbook accounts........................... 119,416 3.06 137,725 3.40 158,355 3.88
---------- ---------- ----------
Total transaction accounts.................. 638,617 461,149 375,409
Term certificates of deposit................ 1,240,982 5.95 1,145,621 5.22 1,010,307 5.66
---------- ---------- ----------
Total deposits............................ $1,879,599 4.92% $1,606,770 4.50% $1,385,716 5.05%
========== ==== ========== ==== ========== ====
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Beginning balance........................ $1,647,337 $1,542,162 $1,266,615
Net increase before interest............. 328,360 47,948 221,269
Interest credited........................ 57,498 57,227 54,278
---------- ---------- ----------
Net increase in deposits................. 385,858 105,175 275,547
---------- ---------- ----------
Ending balance........................... $2,033,195 $1,647,337 $1,542,162
========== ========== ==========
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,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
0.00% to 2.99%....................... $ -- $ 3,869 $ 4,536
3.00 to 3.99......................... 14 9,740 5,085
4.00 to 4.99......................... -- 207,756 107,373
5.00 to 6.99......................... 1,285,317 923,621 961,204
7.00 to 8.99......................... 35,486 962 30,961
---------- ---------- ----------
Total............................ $1,320,817(1) $1,145,948(1) $1,109,159(1)
========== ========== ==========
- ------------------------
(1) At December 31, 2000, 1999 and 1998, certificates of deposit in amounts
greater than or equal to $100,000 amounted to $409.8 million,
$320.4 million and $316.3 million, respectively.
43
The following table sets forth the amount and remaining maturities of the
Bank's term certificates of deposit at December 31, 2000.
OVER SIX OVER ONE OVER TWO
MONTHS YEAR YEARS
SIX MONTHS THROUGH THROUGH THROUGH OVER
AND LESS ONE YEAR TWO YEARS THREE YEARS THREE YEARS
---------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
0.00% to 2.99%........................ $ -- $ -- $ -- $ -- $ --
3.00 to 3.99.......................... -- -- -- -- 14
4.00 to 4.99.......................... -- -- -- -- --
5.00 to 6.99.......................... 580,828 257,360 395,961 42,114 9,054
7.00 to 8.99.......................... -- -- -- 13,194 22,292
-------- -------- -------- ------- -------
Total............................. $580,828 $257,360 $395,961 $55,308 $31,360
======== ======== ======== ======= =======
The following table presents the maturity of term certificates of deposit in
amounts greater than or equal to $100,000 at December 31, 2000.
AT DECEMBER 31, 2000
----------------------
(DOLLARS IN THOUSANDS)
3 months or less......................................... $118,378
Over 3 months through 6 months........................... 64,301
Over 6 months through 12 months.......................... 75,663
Over 12 months........................................... 151,434
--------
Total................................................ $409,776
========
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,
-----------------------------------
2000 1999 1998
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
FHLB OF SAN FRANCISCO ADVANCES:
Average balance outstanding............................. $1,026,633 $1,211,000 $ 902,083
Maximum amount outstanding at any month-end during the
period................................................ 1,117,500 1,259,000 1,249,000
Balance outstanding at end of period.................... 871,000 1,123,700 1,198,000
Weighted average interest rate during the period........ 6.14% 5.43% 5.28%
Weighted average interest rate at end of period......... 6.19% 5.15% 5.38%
Weighted average remaining term to maturity at end of
period (in years)..................................... 4.78 3.49 5.01
SECURITIES SOLD UNDER AGREEMENTS TO PURCHASE:
Average balance outstanding............................. $ 330,748 $ 417,604 $ 385,451
Maximum amount outstanding at any month-end during the
period................................................ 450,907 480,181 658,409
Balance outstanding at end of period.................... 133,061 381,109 364,000
Weighted average interest rate during the period........ 6.49% 5.62% 5.75%
Weighted average interest rate at end of period......... 7.02% 5.85% 5.61%
Weighted average remaining term to maturity at end of
period (in years)..................................... 1.50 2.40 3.73
44
Advances from the FHLB of San Francisco amounted to $871.0 million and
$1.1 billion at December 31, 2000 and 1999, respectively. Of the Bank's FHLB
advances outstanding as of December 31, 2000, $146.0 million with a weighted
interest rate of 7.04% matures in 2002, $235.0 million with a weighted interest
rate of 5.60% matures in 2003 and $490.0 million with a weighted interest rate
of 6.22% matures between 2007 and 2008. Certain of these advances from the FHLB
of San Francisco have call provisions. As of December 31, 2000 the weighted
average term to maturity of the Bank's FHLB advances amounted to 4.78 years
compared to 3.49 years at December 31, 1999, and the weighted interest rate at
December 31, 2000 was 6.19% compared to 5.15% at December 31, 1999. At
December 31, 2000 the Bank had a collaterized available line of credit of
approximately $1.1 billion with the FHLB of San Francisco.
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, 2000, reverse repurchase agreements amounted to $133.1 million,
compared to $381.1 million at December 31, 1999. As of December 31, 2000, the
weighted average remaining term to maturity of the Bank's reverse repurchase
agreements decreased to 1.50 years, compared to 2.40 years at December 31, 1999,
and such reverse repurchase agreements had a weighted average interest rate of
7.02% at December 31, 2000 as compared to 5.85% at December 31, 1999. Certain of
the reverse repurchase agreements at December 31, 1999 had call provisions.
During the fourth quarter of 1999 the Bank sold $199.0 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 $10.0 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. The line was repaid in July 2000 and
matured in November 2000. The line totaled $4.7 million at December 31, 1999.
In July 2000, the Company, through the subsidiary trust, issued $10,000,000
of 11.045% preferred securities in a private placement transaction. These funds
were utilized to payoff the Company's line of credit and as working capital. See
Note 16 under Item 8--Financial Statements and Supplementary Data.
On November 21, 2000, the Bank established a $5.0 million Federal Funds line
with Wells Fargo Bank. This is an uncommitted line intended to support
short-term liquidity.
STOCKHOLDER'S EQUITY. Stockholder's equity increased from $179.5 million at
December 31, 1999 to $213.6 million at December 31, 2000. The Company's net
earnings for the year 2000 of $31.6 million and a $3.3 million change in the
market valuation for securities available-for-sale (primarily due to sales of
securities available-for-sale) accounted for the increase. The Company's net
earnings for the year 2000 include a $25.0 million income tax benefit. The
Company determined that a significant portion of the valuation allowance against
the deferred tax assets was no longer necessary based on its recent earnings
history and the projections of future taxable income. The deferred tax asset
resulted primarily from income tax net operating loss carry-forwards from prior
years. In addition, net earnings were impacted by an $8.7 million
($7.7 million, net of applicable tax benefits) loss on sale of securities, as a
result of the Company's decision to sell $197.4 million of low-yielding fixed
rate securities to mitigate interest rate risk.
RESULTS OF OPERATIONS
The Company reported net earnings of $31.6 million, or $1.59 per diluted
share, for the year ended December 31, 2000, which were impacted by a
$25.0 million income tax benefit and an $8.7 million loss on the sale of
securities. For the years ended December 31, 1999 and 1998, the Company reported
net earnings, before preferred dividends, of $33.5 million, or $1.63 per diluted
share and $10.9 million, or $0.74 per diluted share, respectively. The 1999
results were impacted by an
45
extraordinary gain on sale of FHLB advances of $6.7 million and an income tax
benefit of $4.5 million. Excluding the $25.0 million income tax benefit and the
$8.7 million loss on sale of securities, and on a proforma fully-taxable basis,
net earnings for the year ended December 31, 2000 would have been
$10.8 million, or $0.54 per diluted share. Excluding the $6.7 million
extraordinary item, and on a proforma basis, net earnings for the year ended
December 31, 1999 would have been $26.8 million, or $1.31 per diluted share.
During the year 2000, the Company took steps to improve its net interest
margin and mitigate interest rate risk by selling $197.4 million of low-yielding
fixed rate securities, which resulted in an $8.7 million loss in the third
quarter of 2000. In addition, the Company continued to execute its strategy to
expand the Bank's franchise by purchasing, in the Southern California area, the
Bank of Hollywood in January 2000 and two branches from another bank in
December 2000.
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-earnings assets and interest bearing
liabilities.
Net interest income totaled $74.3 million, $68.8 million and $40.5 million
during the years ended December 31, 2000, 1999 and 1998, respectively. Net
interest income increased by $5.6 million or 8.1%, for the year ended
December 31, 2000, compared to the prior year. The increase was primarily due to
a net shift in the mix of average interest-earning assets and interest-bearing
liabilities. During the year ended December 31, 2000, average loans receivable
increased by $256.2 million or 11.1% to $2.6 billion over the prior year. Within
the average loan receivable portfolio, single-family residential loans and
multi-family residential loans decreased by approximately $79.0 million for the
year ended December 31, 2000 as compared to the prior year, while commercial
real estate loans (including construction loans), commercial business loans and
consumer loans increased during 2000, by $153.8 million, $65.4 million and
$116.3 million, respectively, compared to 1999. The increase in average loans
receivable was offset by decreases in average mortgage-backed securities of
$247.6 million. For the year ended December 31, 2000, other borrowings, which
are comprised of FHLB advances and securities sold under repurchase agreements,
decreased an average of $271.3 million over the prior year and deposits
increased by an average of $272.8 million over 1999, with transaction accounts
comprising $177.5 million or 65.0% of the total average deposits increase during
the year.
As a result of the shift in interest-earning assets and interest-bearing
liabilities, the Company's interest rate margin for the twelve months ended
December 31, 2000, increased by 16 basis points or 8.0% to 2.17%, compared to
2.01% for the twelve months ended December 31, 1999. The increase in net
interest margin during 2000 compared to 1999 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.
46
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2000 1999
---------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable (1)............................... $2,560,691 $195,089 7.62% $2,304,450 $166,595 7.23%
Mortgage-backed securities (2)..................... 366,430 22,923 6.26 614,019 34,535 5.62
Other interest-earning assets (3).................. 443,116 30,053 6.78 430,210 25,869 6.01
FHLB stock......................................... 58,004 4,207 7.25 65,116 3,429 5.27
---------- -------- ---------- --------
Total interest-earning assets.................... 3,428,241 252,272 7.36 3,413,795 230,428 6.75
Noninterest-earning assets........................... 64,975 47,889
---------- ----------
Total assets..................................... $3,493,216 $3,461,684
========== ==========
Interest-bearing liabilities:
Deposits:
Transaction accounts (4)......................... $ 638,617 $ 18,716 2.93% $ 461,149 $ 12,520 2.71%
Term certificates of deposit..................... 1,240,982 73,849 5.95 1,145,621 59,771 5.22
---------- -------- ---------- --------
Total deposits....................................... 1,879,599 92,565 4.92 1,606,770 72,291 4.50
Senior debt and other borrowings................... 3,115 378 12.13 -- 19 --
FHLB advances and repurchase agreements............ 1,357,381 84,459 6.22 1,628,656 89,221 5.48
Preferred securities of subsidiary trust........... 4,333 481 11.10 -- -- --
Hedging costs...................................... -- 79 -- -- 146 --
---------- -------- ---------- --------
Total interest-bearing liabilities............... 3,244,428 177,962 5.49% 3,235,426 161,677 5.00%
-------- --------
Noninterest-bearing liabilities.................... 50,106 54,474
---------- ----------
Total liabilities................................ 3,294,534 3,289,900
Stockholders' equity................................. 198,682 171,784
---------- ----------
Total liabilities and stockholders' equity........... $3,493,216 $3,461,684
========== ==========
Net interest-earning assets.......................... $ 183,813 $ 178,369
========== ==========
Net interest income/interest rate spread............. $ 74,310 1.87% $ 68,751 1.75%
======== ====== ======== ======
Net interest margin.................................. 2.17% 2.01%
====== ======
Ratio of average interest-earning assets to average
interest-bearing liabilities....................... 105.67% 105.51%
====== ======
YEAR ENDED DECEMBER 31,
----------------------------------
1998
----------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST
---------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable (1)............................... $1,814,855 $125,851 6.93%
Mortgage-backed securities (2)..................... 557,038 32,439 5.82
Other interest-earning assets (3).................. 310,462 20,062 6.46
FHLB stock......................................... 43,464 2,521 5.80
---------- --------
Total interest-earning assets.................... 2,725,819 180,873 6.64
Noninterest-earning assets........................... 84,039
----------
Total assets..................................... $2,809,858
==========
Interest-bearing liabilities:
Deposits:
Transaction accounts (4)......................... $ 375,409 $ 12,786 3.41%
Term certificates of deposit..................... 1,010,307 57,141 5.66
---------- --------
Total deposits....................................... 1,385,716 69,927 5.05
Senior debt and other borrowings................... 4,467 445 9.96
FHLB advances and repurchase agreements............ 1,236,120 69,772 5.64
Preferred securities of subsidiary trust........... -- -- --
Hedging costs...................................... -- 214 --
---------- --------
Total interest-bearing liabilities............... 2,626,303 140,358 5.34%
--------
Noninterest-bearing liabilities.................... 43,661
----------
Total liabilities................................ 2,669,964
Stockholders' equity................................. 139,894
----------
Total liabilities and stockholders' equity........... $2,809,858
==========
Net interest-earning assets.......................... $ 99,516
==========
Net interest income/interest rate spread............. $ 40,515 1.30%
======== ======
Net interest margin.................................. 1.49%
======
Ratio of average interest-earning assets to average
interest-bearing liabilities....................... 103.79%
======
- ------------------------------
(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 cash equivalents and investment securities.
(4) Includes passbook checking and money market accounts.
47
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, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 COMPARED TO
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
---------------------------------------------- ----------------------------------------------
TOTAL NET TOTAL NET
INCREASE (DECREASE) DUE TO INCREASE INCREASE (DECREASE) DUE TO INCREASE
RATE VOLUME RATE/VOLUME (DECREASE) RATE VOLUME RATE/VOLUME (DECREASE)
-------- -------- ----------- ---------- -------- -------- ----------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable.............. $ 8,972 $18,524 $ 998 $28,494 $ 5,350 $33,951 $1,443 $40,744
Mortgage-backed securities.... 3,877 (13,925) (1,564) (11,612) (1,109) 3,318 (113) 2,096
Other interest-earning
assets...................... 3,309 776 99 4,184 (1,394) 7,738 (537) 5,807
FHLB stock.................... 1,294 (375) (141) 778 (232) 1,256 (116) 908
------- ------- ------ ------- ------- ------- ------ -------
Total net change in income on
interest- earning assets.... 17,452 5,000 (608) 21,844 2,615 46,263 677 49,555
------- ------- ------ ------- ------- ------- ------ -------
Interest-bearing liabilities:
Deposits:
Transaction accounts........ 995 4,818 383 6,196 (2,594) 2,920 (592) (266)
Term certificates of
deposit................... 8,403 4,975 700 14,078 (4,430) 7,653 (593) 2,630
------- ------- ------ ------- ------- ------- ------ -------
Total deposits............ 9,398 9,793 1,083 20,274 (7,024) 10,573 (1,185) 2,364
Senior debt and other
borrowings.................. -- 359 -- 359 -- (445) 19 (426)
Preferred securities of a
subsidiary trust............ -- 481 -- 481 -- -- -- --
FHLB advances and repurchase
agreements.................. 12,117 (14,861) (2,018) (4,762) (2,055) 22,156 (652) 19,449
Hedging costs................. -- -- (67) (67) -- -- (68) (68)
------- ------- ------ ------- ------- ------- ------ -------
Total net change in expense on
interest- bearing
liabilities................... 21,515 (4,228) (1,002) 16,285 (9,079) 32,284 (1,886) 21,319
------- ------- ------ ------- ------- ------- ------ -------
Change in net interest income... $(4,063) $ 9,228 $ 395 $ 5,559 $11,694 $13,979 $2,563 $28,236
======= ======= ====== ======= ======= ======= ====== =======
48
INTEREST INCOME. Total interest income increased by $21.8 million or 9.5%
during the year ended December 31, 2000 and increased by $49.6 million or 27.4%
during the year ended December 31, 1999. These increases were primarily due to
the shift in the mix of interest-earning assets. Interest income on loans
receivable, the largest component of interest-earning assets, increased by
$28.5 million or 17.1% during the year ended December 31, 2000 and increased by
$40.7 million or 32.4% during the year ended December 31, 1999. The increase
during 2000 was due to a shift in the portfolio to a greater proportion of
commercial and consumer loans, which resulted in an increase in the weighted
average yield earned on the loan portfolio. The increase in interest income in
1999 was primarily due to loan growth and investment of funds as a result of
leverage of capital raised in the Company's public offering. See "Item 1.
Business--Lending Activities--Origination, Purchase, Acquisition and Sale of
Loans."
Interest income on mortgage-backed securities decreased by $11.6 million or
33.6% during the year ended December 31, 2000 and decreased by $2.1 million or
6.5% during the year ended December 31, 1999. The decrease during 2000 and 1999
was mainly due to a decrease in the average balance of such securities, due to
mortgage-backed securities sales.
Interest income on other interest-earning assets, consisting of U.S.
Government agency securities, corporate trust preferred securities, FHLB stock
and cash equivalents (which consists of federal funds sold, commercial paper,
securities purchased under agreements to resell and time deposit accounts)
increased by $5.0 million or 16.9% during the year ended December 31, 2000 and
increased by $6.7 million or 29.7% during the year ended December 31, 1999. The
increase during the year ended December 31, 2000 was due primarily to increases
of $4.6 million and $401,000 in the average yield and average balance of such
portfolios, respectively. The increase during 1999 was due primarily to a
$141.4 million increase in the average balance of investments and FHLB stock.
INTEREST EXPENSE. Total interest expense increased by $16.3 million or
10.1% during the year ended December 31, 2000 and increased by $21.3 million or
15.2% during the year ended December 31, 1999. The increase during 2000 was the
result of a $9.0 million or 0.28% increase in the average balance of
interest-bearing liabilities and an increase of 49 basis points in the average
cost. The increase during 1999 was the result of a $609.1 million or 23.2%
increase in the average balance of interest-bearing liabilities. Interest
expense on deposits, the largest component of the Bank's interest-bearing
liabilities, increased by $20.3 million or 28.0% during the year ended
December 31, 2000 and increased by $2.4 million or 3.4% during the year ended
December 31, 1999. The increase during the year ended December 31, 2000 was
primarily due to a $272.8 million increase in the average balance of deposits
and an increase of 42 basis points in the average cost of deposits. The increase
during the year ended December 31, 1999 was primarily due to a $221.1 million
increase in the average balance of deposits, partially offset by a decrease of
55 basis points in the average cost of deposits.
Interest expense on borrowings consists primarily of reverse repurchase
agreements and FHLB advances. Interest expense on borrowings decreased by
$4.8 million or 5.3% during the year ended December 31, 2000 and increased by
$19.5 million or 27.9% during the year ended December 31, 1999. Interest expense
on advances from the FHLB decreased by $2.8 million or 4.2% during 2000 and
increased by $18.1 million or 38.1% during 1999. The Bank's management has
utilized FHLB advances when the rates and other terms on such borrowings are
favorable as compared to its other funding sources. During 2000, the average
balance of FHLB advances and reverse repurchase agreements decreased by
$271.3 million, or 16.7%. The Bank has offered a wide array of deposit products
through its branch system in order to foster retail deposit growth. During the
year 2000, average retail deposits grew by $272.8 million or 17.0%. Interest
expense on securities sold under agreements to repurchase decreased by
$2.0 million or 8.5% during the year ended December 31, 2000 and increased by
$1.3 million or 6.0% during the year ended December 31, 1999.
49
The Bank's interest expense during the years ended December 31, 2000, 1999
and 1998 included the costs of hedging the Bank's interest rate exposure and
does not include the change in the fair value of the hedging instruments. Such
hedging costs amounted to $79,000, $146,000 and $214,000 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 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, 2000, the Bank had no remaining interest rate swap contracts and
three remaining interest rate corridors with an aggregate contract amount of
$20.0 million. On January 1, 2001, the Company adopted SFAS 133, which did not
have a material impact on the Company's financial position and results of
operation. The three remaining interest rate corridors will mature during the
first half of 2001, and management expects not to adopt hedge accounting,
thereafter. Had the Company adopted SFAS 133 at December 31, 2000, the impact to
earnings would have been $(19,000).
PROVISION FOR LOAN LOSSES. The Bank established provisions for loan losses
of $9.0 million, $4.7 million and $2.0 million during the years ended
December 31, 2000, 1999 and 1998, 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. The increase in provision
for loan losses in 2000 reflects the Bank's increased volume of originations of
commercial real estate, commercial business and consumer loans, as well as the
increase in non-performing loans during the year.
Non-performing loans increased to $12.3 million, at December 31, 2000
compared to $3.2 million at December 31, 1999. The increase was primarily the
result of a delinquency in one participation in a syndicated loan totaling
$2.7 million and one commercial real estate loan totaling $4.0 million. In
January 2000, the Company chose to discontinue its participation in syndicated
loans and to focus solely on local originations.
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, 2000
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 $3.7 million during
the year ended December 31, 2000 and decreased by $6.5 million during the year
ended December 31, 1999. Loan service and loan related fees amounted to
$793,000, $219,000 and $111,000 during the years ended December 31, 2000, 1999
and 1998, respectively.
The Bank recognized net gains (losses) on sales of mortgage-backed and other
securities of $(8.2) million, $(3.2) million and $1.7 million during the years
ended December 31, 2000, 1999 and 1998, respectively. During such respective
periods, the Bank sold $280.7 million, $322.0 million and $513.2 million of
mortgage-backed securities and other securities. During the third quarter 2000,
the Bank took steps to improve its net interest margin and mitigate interest
rate risk by selling
50
$197.4 million of low-yielding mortgage-backed securities and realized a
$8.7 million loss. The 1999 sales were completed in an effort to improve
regulatory capital ratios.
Net gains on the sale of loans amounted to $557,000, $49,000 and $613,000
during the years ended December 31, 2000, 1999 and 1998, respectively. The Bank
sold $22.4 million, $94.1 million and $42.4 of loans during the years ended
December 31, 2000, 1999 and 1998, respectively. See "Item 1. Business--Lending
Activities--Origination, Purchase, Acquisition and Sale of Loans."
Income (loss) from real estate operations amounted to $(39,000), $513,000
and $1.5 million during the years ended December 31, 2000, 1999 and 1998,
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. Provisions for losses on real estate owned and real estate held for
investment amounted to $0, $53,000 and $0 for the respective periods.
Deposit fee income of $2.5 million in 2000 increased from $1.9 million in
1999 and $1.6 million in 1998. The increase is primarily due to the acquisition
of two branches during 1999, the acquisition of the Bank of Hollywood during the
first quarter 2000 and the acquisition of two branches from another bank during
December 2000. The increase during 2000 was primarily attributable to increases
in service charges and non-sufficient funds charges ("NSF") which increased by
$223,000 and $362,000, respectively, from the prior year. The increase during
1999 was primarily due to increases in service charges and NSF fees of $91,000
and $156,000, respectively.
Miscellaneous other income, consisting primarily of fees from brokerage
services, amounted to $600,000, $477,000 and $1.0 million during the years ended
December 31, 2000, 1999 and 1998, respectively. Brokerage services fees during
the year 2000 amounted to $540,000 compared to $471,000 during the prior year.
Miscellaneous other income 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 subsidiary income of $209,000.
OPERATING EXPENSES. Total operating expenses increased by $7.9 million or
20.8% during the year ended December 31, 2000 and increased by $8.8 million or
18.8% during the year ended December 31, 1999. The increase in operating
expenses during 2000 and 1999 were primarily attributable to the acquisition of
two branches during the third quarter of 1999, the Bank of Hollywood acquisition
during the first quarter of 2000 and the acquisition of two branches from
another bank during December 2000. During the years ended December 31, 2000,
1999 and 1998, total operating expenses as a percentage of average total assets
amounted to 1.32%, 1.10% and 1.67%, respectively, and the Company's efficiency
ratio amounted to 65.3%, 55.5% and 100.0%, respectively.
The principal category of the Company's operating expenses is personnel and
benefits expense of the Bank, which amounted to $18.5 million, $15.8 million and
$23.8 million during the years ended December 31, 2000, 1999 and 1998,
respectively. The decrease in such expense in 1999 was primarily the result of
the 1998 one-time $11.1 million payment of benefits to certain senior executives
in connection with the Company's public offering. The increase during 2000 was
primarily due to the expansion of the Bank's branch network and commercial
business and consumer lending activities.
Occupancy expense amounted to $11.4 million, $10.1 million and $8.4 million
during the years ended December 31, 2000, 1999 and 1998, respectively. The
increase in such expense during the year ended December 31, 2000 was primarily
due to the acquisition of two branches from another bank and the acquisition of
the Bank of Hollywood. 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 $893,000, $1.4 million and $7.3 million
during the years ended December 31, 2000, 1999 and 1998, respectively. The
decrease in 1999 was primarily due to the absence
51
of the one-time special FDIC assessment, paid in 1998, 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.
Professional services expense amounted to $3.0 million, $1.5 million and
$1.3 million during the years ended December 31, 2000, 1999 and 1998,
respectively. These increases were primarily due to increases in other
consulting expenses.
Office related expenses have increased over the periods presented and
amounted to $5.5 million, $5.1 million and $4.4 million during the years ended
December 31, 2000, 1999 and 1998, 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 $6.7 million, $4.3 million and
$1.8 million during the years ended December 31, 2000, 1999 and 1998,
respectively. The increase during 2000 was due primarily to increases in
customer data processing charges of $976,000, goodwill amortization expense of
$1.4 million and regulatory assessments of $56,000.
Goodwill expense amounted to $1.9 million, $481,000 and $68,000 during the
years ended December 31, 2000, 1999 and 1998, respectively. The increase during
2000 in goodwill reflects costs associated the Bank's purchase of the Bank of
Hollywood and two branches from another bank during the year.
INCOME TAXES. During the years ended December 31, 2000, 1999 and 1998, the
Company recognized $19.6 million, $4.5 million and $16.4 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,
2000, the Company had $149.1 million of federal NOLs which expire between 2003
and 2018.
The Company had Federal and California alternative minimum tax credit
carryforwards at December 31, 2000 and 1999 of approximately $2.0 million and
$1.6 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 Company's ability to utilize any NOLs created prior to the 1992 Ownership
Change in any one year of approximately $7.7 million. At December 31, 2000, the
Company had $17.2 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 Company'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, 2000, the Company had
$117.0 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
52
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.
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, the Bank emphasizes loan
products tied to a U.S. Treasury based index (which reacts much more quickly to
changes in interest rates). During the years ended December 31, 2000 and 1999,
the Bank sold loans totaling $22.4 million and $94.1 million, respectively, in
order to raise liquidity to support new loan originations. See "Item 1.
Business-Lending Activities-Origination, Purchase, Acquisition 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 $0, $10.0 million and $105.7 million during the years ended
December 31, 2000, 1999 and 1998, respectively. In addition, during the fourth
quarter of 1999, the Bank sold $200.9 million of investment securities which
include, in part, the 1998 purchases of adjustable-rate mortgage-backed
securities. At December 31, 2000, $96.7 million or 52.2% of the Bank's
mortgage-backed securities consisted of adjustable-rate instruments. See "Item
1. Business-Investment Activities."
During the years ended December 31, 2000, 1999 and 1998, the Bank originated
in the aggregate $268.6 million, $362.5 million and $94.0 million, respectively,
of commercial business and consumer loans which amounted to 63.1%, 43.7% and
15.5% 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 borrowings, which carry high interest rates and are a
volatile funding source, in favor of retail deposits. As a result, FHLB advances
and reverse repurchase agreements have decreased from $1.5 billion in the
aggregate at December 31, 1999 to $1.0 billion in the aggregate at December 31,
2000, with the Bank's deposits increasing by $385.9 million over the same
period.
Consistent with management's strategy of reducing lower-yielding securities
in the portfolio, during the third quarter the Bank recognized a $8.7 million
net loss on the sale of $197.4 million of investment securities.
53
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 counter-parties. 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 loans or securities being
hedged.
At December 31, 2000, the Bank was also a party to three interest rate
corridor agreements, which agreements expire during 2001 and cover an aggregate
contract amount of approximately $20.0 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, 2000, the interest rate
corridors have an average strike price of 6.64% and an average limit rate of
8.24% (the Bank's interest rate corridors are based on the three month London
Inter-Bank Offered Rate ("LIBOR"). The aggregate net expense relating to the
Bank's interest rate corridors and floors was $79,000, $146,000 and $214,000
during the years ended December 31, 2000, 1999, and 1998, respectively. See
"Item 8. Financial Statements and Supplementary Data" Note (21)-Notes to
Consolidated Financial Statements. On January 1, 2001, the Company adopted
SFAS 133, which did not have a material impact on the Company's financial
position and results of operations.
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 the
amount of 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.
54
The following table summarizes the anticipated maturities or repricing of
the Bank's interest-earning assets and interest-bearing liabilities as of
December 31, 2000, based on the information and assumptions set forth in the
notes below.
MORE THAN
THREE TO MORE THAN ONE THREE YEARS
WITHIN THREE TWELVE YEAR TO TO OVER FIVE
MONTHS MONTHS THREE YEARS FIVE YEARS YEARS TOTAL
------------ --------- ------------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets (1):
Loans receivable (2):
Single-family residential
loans:
Fixed.................... $ 15,765 $ 76,181 $ 158,954 $ 128,667 $402,040 $ 781,607
Adjustable............... 124,883 118,532 125,468 200,260 4,385 573,528
Multi-family residential:
Fixed.................... 398 3,844 3,936 4,384 13,673 26,235
Adjustable............... 262,720 10,509 -- -- -- 273,229
Commercial, industrial and
land:
Fixed.................... 167,874 96,780 -- -- -- 264,654
Adjustable............... 5,257 14,968 39,662 37,193 112,290 209,370
Other loans (3)............ 124,762 116,014 116,064 51,873 14,866 423,579
Mortgage-backed and other
securities(4).............. 67,935 30,662 44,978 18,976 26,203 188,754
Other interest-earning
assets(5).................. 372,863 -- -- -- 155,734 528,597
---------- --------- ---------- --------- -------- ----------
Total.................. 1,142,457 467,490 489,062 441,353 729,191 3,269,553
---------- --------- ---------- --------- -------- ----------
Interest-bearing liabilities:
Deposits:
Checking accounts........ 320,707 -- -- -- -- 320,707
Passbook accounts........ 278,673 -- -- -- -- 278,673
Money market accounts.... 112,998 -- -- -- -- 112,998
Term certificates of
deposit(6)............. 275,772 619,792 416,022 9,161 70 1,320,817
Other borrowings........... -- -- 824,061 -- 190,000 1,014,061
---------- --------- ---------- --------- -------- ----------
Total.................. 988,150 619,792 1,240,083 9,161 190,070 3,047,256
---------- --------- ---------- --------- -------- ----------
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities................ $ 154,307 $(152,302) $ (751,021) $ 432,192 $539,121 $ 222,297
========== ========= ========== ========= ======== ==========
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities as a percent of
total assets............... 4.66% (4.60)% (22.70)% 13.06% 16.30% 6.72%
========== ========= ========== ========= ======== ==========
Cumulative excess
(deficiency) of
interest-earning assets
over interest-bearing
liabilities................ $ 154,307 $ 2,005 $ (749,016) $(316,824) $222,297
========== ========= ========== ========= ========
Cumulative excess
(deficiency) of
interest-earning assets
over interest-bearing
liabilities as a percent of
total assets............... 4.66% 0.06% (22.64)% (9.58)% 6.72%
========== ========= ========== ========= ========
- ------------------------
(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
55
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
$12.3 million at December 31, 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
$35.4 million.
(5) Comprised of cash equivalents, investment securities and FHLB stock.
(6) Includes $61.4 million of callable term certificates of deposits.
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, 2000 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 $189,737 $168,473
+200 186,001 205,732
+100 181,356 239,819
0 173,853 270,893
-100 166,703 287,480
-200 155,460 263,136
-300 141,897 237,092
- ------------------------
(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, 2000, 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
56
its liquidity in accordance with guidelines established by the Bank and
applicable regulatory requirements. The Bank's need for liquidity is affected by
loan demand, net changes in deposit levels and the scheduled maturities of its
borrowings. The Bank can minimize the cash required during the times of heavy
loan demand by modifying its credit policies or reducing its marketing effort.
Liquidity demand caused by net reductions in deposits are usually caused by
factors over which the Bank has limited control. The Bank derives its liquidity
from both its assets and liabilities. Liquidity is derived from assets by
receipt of interest and principal payments and prepayments, by the ability to
sell assets at market prices and by utilizing unpledged assets as collateral for
borrowings. Liquidity is derived from liabilities by maintaining a variety of
funding sources, including deposits, advances from the FHLB of San Francisco and
other short and long-term borrowings.
The Bank's liquidity management is both a daily and long-term function of
funds management. Liquid assets are generally invested in short-term investments
such as securities purchased under agreements to resell 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, 2000, the Bank had $1.2 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.
As presented in the Consolidated Statement of Cash Flows for the year ended
December 31, 2000 and 1999, the sources of liquidity vary between years. The
primary sources of funds in 2000 were sales, principal repayments and maturities
of investment securities and mortgage-backed securities totaling $336.9 million
and an increase in deposit funds of $240.8 million. These sources of funds were
used to reduce $500.7 million of Federal Home Loan Bank advances and securities
sold under agreement to repurchase.
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. The line of credit had been repaid in July 2000 and matured in
November 2000.
On July 2000, the subsidiary trust, a subsidiary of the Company, issued
$309,000 of 11.045% common securities to the Company and $10,000,000 of 11.045%
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 subordinate 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.
On November 21, 2000, the Bank established a $5.0 million Federal Funds line
with Wells Fargo Bank. This is an uncommitted line intended to support
short-term liquidity.
At December 31, 2000, the Bank had outstanding commitments to originate
lines of credit of $836,000, and commitments to originate mortgage and
non-mortgage loans of $24.1 million. Certificates of deposit which are scheduled
to mature within one year totaled $895.6 million at December 31, 2000, and no
borrowings were scheduled to mature within the same period. 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."
57
The following table reflects the Bank's actual levels of regulatory capital
and applicable regulatory capital requirements at December 31, 2000.
REQUIRED ACTUAL EXCESS
------------------- ------------------- -------------------
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Tangible capital....................... 1.50% $ 49,164 6.82% $223,564 5.32% $174,400
Tier 1 leverage capital................ 4.00 131,105 6.82 223,564 2.82 92,459
Tier 1 risk-based capital(1)(2)........ 4.00 85,174 10.50 223,564 6.50 138,390
Risk-based capital(1)(2)............... 8.00 170,349 11.47 244,317 3.47 73,968
- ------------------------
(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 $3.3 billion. Risk-based capital is computed as
a percentage of adjusted risk-weighted assets of $2.1 billion.
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. On January 1, 2001, the Company adopted SFAS 133, which did not have a
material impact on the Company's financial position and results of operation.
The three remaining interest rate corridors will mature during the first half of
2001, and management expects not to adopt hedge accounting, thereafter. Had the
Company adopted SFAS 133 at December 31, 2000, the impact to earnings would have
been $(19,000).
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."
58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PBOC HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report................................ 60
Consolidated Statements of Financial Condition-December 31,
2000 and 1999............................................. 61
Consolidated Statements of Operations-Years ended
December 31, 2000, 1999 and 1998.......................... 62
Consolidated Statements of Comprehensive Earnings
(Loss)-Years ended December 31, 2000, 1999 and 1998....... 63
Consolidated Statements of Changes in Stockholders'
Equity-Years ended December 31, 2000, 1999 and 1998....... 64
Consolidated Statements of Cash Flows-Years ended
December 31, 2000, 1999 and 1998.......................... 65
Notes to Consolidated Financial Statements.................. 67
59
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, 2000
and 1999 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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Los Angeles, California
January 29, 2001
60
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999
---------- ----------
ASSETS
Cash (note 3)............................................... $ 35,421 $ 19,337
Cash equivalents (note 3)................................... 122,200 2,245
Securities available-for-sale, at estimated market values
(notes 4, 13 and 14)...................................... 502,608 771,864
Mortgage-backed securities held-to-maturity, market values
$3,796 and $4,274 at December 31, 2000 and 1999 (notes 6
and 14)................................................... 3,761 4,326
Loans receivable, net (notes 7, 8 and 14)................... 2,474,699 2,462,837
Real estate held for sale, net (note 9)..................... 952 846
Premises and equipment, net (note 10)....................... 10,805 7,105
Federal Home Loan Bank stock, at cost (note 14)............. 53,355 66,643
Interest receivable......................................... 17,669 16,863
Goodwill (note 11).......................................... 22,949 7,246
Deferred tax assets (note 17)............................... 54,004 34,220
Other assets................................................ 9,760 4,696
---------- ----------
Total assets.............................................. $3,308,183 $3,398,228
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 12).......................................... $2,033,195 $1,647,337
Securities sold under agreements to repurchase (note 13).... 133,061 381,109
Advances from Federal Home Loan Bank (note 14).............. 871,000 1,123,700
Accrued expenses and other liabilities...................... 14,048 28,754
Other borrowings (note 15).................................. -- 4,621
---------- ----------
Total liabilities......................................... 3,051,304 3,185,521
---------- ----------
Company-obligated mandatorily redeemable preferred
securities of a subsidiary trust holding solely junior
subordinated deferrable interest notes of the Company
(note 16)................................................. 10,000 --
Commitments and contingencies (notes 7, 10 and 23)
Minority interest (note 1)................................ 33,250 33,250
Stockholders' equity (notes 1, 18, 19 and 25):
Common stock, par value $.01 per share. Authorized
75,000,000; issued 21,876,205 shares; and outstanding
19,876,205 and 19,941,005 shares at December 31, 2000
and 1999, respectively.................................. 219 219
Additional paid-in capital................................ 259,207 259,260
Accumulated other comprehensive loss...................... (35,021) (38,300)
Retained earnings (accumulated deficit)................... 8,555 (23,012)
Treasury stock, at cost (2,000,000 and 1,935,200 shares at
December 31, 2000 and 1999, respectively)............... (19,331) (18,710)
---------- ----------
Total stockholders' equity.............................. 213,629 179,457
---------- ----------
Total liabilities and stockholders' equity.............. $3,308,183 $3,398,228
========== ==========
See accompanying notes to consolidated financial statements.
61
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
---------- ---------- ----------
INTEREST AND DIVIDEND INCOME:
Cash equivalents.......................................... $ 4,995 $ 1,817 $ 2,316
Investment securities available-for-sale.................. 25,058 24,052 17,746
Mortgage-backed securities................................ 22,923 34,535 32,439
Loans receivable.......................................... 195,089 166,595 125,851
Federal Home Loan Bank stock.............................. 4,207 3,429 2,521
---------- ---------- ----------
Total interest and dividend income...................... 252,272 230,428 180,873
---------- ---------- ----------
INTEREST EXPENSE:
Deposits (note 12)........................................ 92,565 72,291 69,927
Advances from the Federal Home Loan Bank.................. 62,982 65,743 47,613
Securities sold under agreements to repurchase............ 21,477 23,478 22,159
Other borrowings.......................................... 859 19 --
Senior debt............................................... -- -- 445
Hedging costs, net (note 21).............................. 79 146 214
---------- ---------- ----------
Total interest expense.................................. 177,962 161,677 140,358
---------- ---------- ----------
Net interest income......................................... 74,310 68,751 40,515
Provision for loan losses (note 8).......................... 9,000 4,747 2,000
---------- ---------- ----------
Net interest income after provision for loan losses....... 65,310 64,004 38,515
---------- ---------- ----------
OTHER INCOME:
Loan service and loan related fees........................ 793 219 111
Gain (loss) on sale of mortgage-backed securities, net.... (8,218) (3,217) 1,682
Gain on loan and loan servicing sales, net (note 5)....... 557 49 613
Income (loss) from real estate operations, net (note 9)... (39) 513 1,479
Deposit fee income........................................ 2,531 1,851 1,585
Other income.............................................. 600 477 966
---------- ---------- ----------
Total other income (loss)................................. (3,776) (108) 6,436
---------- ---------- ----------
OPERATING EXPENSES:
Personnel and benefits.................................... 18,508 15,719 23,814
Occupancy................................................. 11,382 10,056 8,371
FDIC insurance............................................ 893 1,408 7,316
Professional services..................................... 3,035 1,511 1,294
Office related expenses................................... 5,542 5,142 4,393
Other..................................................... 6,693 4,287 1,774
---------- ---------- ----------
Total operating expenses.................................. 46,053 38,123 46,962
---------- ---------- ----------
Earnings (loss) before income tax benefit, minority interest
and extraordinary item.................................... 15,481 25,773 (2,011)
Income tax benefit (note 17)................................ 19,562 4,500 16,390
---------- ---------- ----------
Earnings before minority interest and extraordinary item.... 35,043 30,273 14,379
Minority interest........................................... 3,476 3,476 3,476
---------- ---------- ----------
Earnings before extraordinary item........................ 31,567 26,797 10,903
Extraordinary item--gain on sale of FHLB advances........... -- 6,678 --
---------- ---------- ----------
Net earnings.............................................. 31,567 33,475 10,903
Preferred dividends......................................... -- -- (2,160)
---------- ---------- ----------
Net earnings available to common stockholders............. $ 31,567 $ 33,475 $ 8,743
========== ========== ==========
Earnings per share, basic and diluted before extraordinary
item...................................................... $ 1.59 $ 1.31 $ 0.59
Earnings per share, basic and diluted....................... $ 1.59 $ 1.63 $ 0.59
Weighted average shares outstanding......................... 19,877,415 20,487,111 14,793,644
See accompanying notes to consolidated financial statements.
62
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net earnings................................................ $31,567 $33,475 $10,903
Other comprehensive earnings (loss):
Unrealized gain (loss) on securities available-for-sale..... (4,939) (26,517) (11,190)
Reclassification of realized (gain) loss included in
earnings.................................................. 8,218 1,422 (447)
Decrease (increase) in minimum pension liability, net of
tax....................................................... -- 820 (121)
------- ------- -------
Other comprehensive earnings (loss)......................... 3,279 (24,275) (11,758)
------- ------- -------
Comprehensive earnings (loss)............................... $34,846 $ 9,200 $ (855)
======= ======= =======
See accompanying notes to consolidated financial statements.
63
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
COMMON STOCK ACCUMULATED
--------------------------------------------------------- OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED STOCK NUMBER AMOUNT PAID-IN CAPITAL INCOME (LOSS)
--------------- ---------- -------- --------------- --------------
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)
Net earnings................................. -- -- -- -- --
Change in unrealized losses on securities.... -- -- -- -- 3,279
Stock based compensation..................... -- -- -- (53) --
Purchases of treasury stock.................. -- (64,800) -- -- --
---- ---------- ---- -------- --------
Balance, December 31, 2000 $ -- 19,876,205 $219 $259,207 $(35,021)
==== ========== ==== ======== ========
ACCUMULATED
EARNINGS TREASURY
(DEFICIT) STOCK TOTAL
------------ -------- --------
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
Net earnings................................. 31,567 -- 31,567
Change in unrealized losses on securities.... -- -- 3,279
Stock based compensation..................... -- -- (53)
Purchases of treasury stock.................. -- (621) (621)
-------- -------- --------
Balance, December 31, 2000 $ 8,555 $(19,331) $213,629
======== ======== ========
See accompanying notes to consolidated financial statements.
64
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings......................................... $ 31,567 $ 33,475 $ 10,903
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 1,871 1,844 1,221
Provision for loan and real estate losses.......... 9,000 4,747 2,000
Decrease in valuation allowance on net deferred tax
asset............................................ (25,388) (15,870) (15,569)
Decrease in net deferred tax asset................. 6,550 8,966 829
Write-down for discontinued lease operations....... 51 51 55
Amortization and accretion of premiums, discounts
and deferred fees................................ (5,514) 7,786 11,524
Amortization of purchase accounting intangible
assets, premiums and discounts, net.............. 155 184 180
(Gain) loss on sale of mortgage-backed
securities....................................... 8,218 3,217 (1,682)
Gain on sale of FHLB advances...................... -- 6,678 --
Gain on sale of loans and loan servicing........... (557) (49) (613)
(Gain) loss on real estate sales................... 4 (602) (2,180)
Federal Home Loan Bank stock dividend.............. (4,194) (3,421) (1,640)
(Increase) decrease in accrued interest
receivable....................................... (219) 744 (4,391)
Increase (decrease) in accrued interest payable.... (878) (1,898) 5,974
(Increase) decrease in other assets................ (3,793) 5,892 (3,526)
Increase (decrease) in accrued expenses............ (14,059) 13,645 1,349
Amortization of goodwill and core deposit
intangible....................................... 1,912 481 68
----------- ----------- -----------
Net cash provided by operating activities........ 4,726 65,870 4,502
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment and mortgage-backed
securities available-for-sale...................... 272,443 318,823 514,841
Proceeds from sale of loans and servicing rights..... 22,963 94,111 43,034
Investment and mortgage-backed security principal
repayments and maturities.......................... 64,475 153,189 173,830
Loan originations, net of repayments and net
chargeoffs......................................... 51,789 (228,128) 206,219
Purchases of investments and mortgage-backed
securities available-for-sale...................... (24,251) (270,731) (1,134,026)
Purchases of loans................................... (24,038) (193,395) (876,898)
Costs capitalized on real estate..................... 123 40 (174)
Proceeds from sale of real estate.................... 886 8,823 18,923
Additions to premises and equipment.................. (4,924) (1,921) (1,937)
Purchase of FHLB stock............................... -- (72) (37,876)
Redemption of FHLB stock............................. 17,482 -- --
Increase in goodwill and core deposit intangible..... (17,615) (6,953) (402)
The Bank of Hollywood acquisition.................... 27,178 -- --
----------- ----------- -----------
Net cash provided by (used in) investing
activities....................................... 386,511 (126,214) (1,094,466)
----------- ----------- -----------
65
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital infusion, net.................. $ -- $ -- $ 129,611
Repayment on senior debt............................. -- -- (11,370)
Preferred dividend paid.............................. -- -- (19,439)
Redemption of preferred stock........................ -- -- (5)
Purchases of treasury stock.......................... (621) (10,402) (8,308)
Net increase in deposits............................. 240,792 105,175 275,547
Net increase (decrease) in securities sold under
agreements to repurchase........................... (248,048) 17,109 23,212
Proceeds from FHLB advances.......................... 4,916,894 3,344,743 4,360,900
Repayment of FHLB advances........................... (5,169,594) (3,425,721) (3,634,900)
Net change in other borrowings....................... (4,621) 4,621 --
Issuance of preferred securities of a subsidiary
trust.............................................. 10,000 -- --
----------- ----------- -----------
Net cash provided by (used in) financing
activities....................................... (255,198) 35,525 1,115,248
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents... 136,039 (24,819) 25,284
Cash and cash equivalents at beginning of year......... 21,582 46,401 21,117
----------- ----------- -----------
Cash and cash equivalents at end of year............... $ 157,621 $ 21,582 $ 46,401
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest........................................... $ 178,841 $ 163,575 $ 134,632
Income taxes....................................... 2,690 300 120
Supplemental schedule of non cash investing and
financing activities:
Foreclosed real estate............................... $ 1,185 $ 6,384 $ 10,248
Loans originated in connection with sale of
foreclosed real estate............................. -- -- 6,147
Transfer of loans held for investment to loans held
for sale........................................... 22,406 94,062 42,421
See accompanying notes to consolidated financial statements.
66
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
On May 15, 1998, the Company completed an Offering of its Common Stock
("IPO"). 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
accounting principles generally accepted in the United States of America 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 revenue and expense 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, People's Bank of California and PBOC Capital Trust, all of
which are wholly owned, except for one of the Bank's subsidiaries, People's
Preferred Capital Corporation ("PPCC"), 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.
67
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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. Direct costs, if any, to originate a
commitment are expensed as incurred. Expired commitment fees of $41,000 were
recognized during the year ended December 31, 2000. There were no expired
commitment fees recorded during 1999.
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 earnings (loss) 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.
68
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRED LOANS
A loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. The measurement of impairment may be
based on (1) the present value of the expected future cash flows of the impaired
loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized by
recording a valuation allowance.
Interest income on impaired loans is recognized on a cash basis if it is
determined that collection of principal is probable. Loans that are 90 days or
more past due, or when full collection of principal and interest is not
probable, are placed on nonaccrual status and interest income that has been
earned but not collected is reversed. Loans are returned to accrual status when
the borrower has had a period of sustained repayment performance. Management
considers all loans formally treated as troubled debt restructurings to be
impaired loans in the year of restructuring.
ALLOWANCE FOR LOAN LOSSES
Valuation allowances for losses on loans and real estate are provided on
both a specific and general basis. Specific and general valuation allowances are
increased by provisions charged to expense and decreased by charge-offs of loans
net of recoveries. Specific allowances are provided for impaired loans for which
the expected loss is measurable. General valuation allowances are provided based
on a formula which incorporates a number of factors, including economic trends,
industry experience, estimated collateral values, past loss experience, the
Bank's underwriting practices, and management's ongoing assessment of the credit
risk inherent in the asset portfolio. The Bank periodically reviews the
assumptions and formula by which additions are made to the specific and general
valuation allowances for losses in an effort to refine such allowance in light
of the current status of the factors described above.
While management uses the best information available to make the periodic
evaluations of specific and general valuation allowances, adjustments to both
allowances may be necessary if actual future economic conditions differ
substantially from the assumptions used in making such periodic evaluations.
Regulatory examiners may require the 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. 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, estimated disposition costs and
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
69
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
sale are capitalized. Expenses related to holding such real estate, net of
rental and other income, are charged against operations as incurred.
DEPRECIATION AND AMORTIZATION
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which ranges from 3 to 30 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 taxes
(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. On January 1, 2001, the Company adopted SFAS 133, which did not have
a material impact on the Company's financial position and results of operations.
The three remaining interest rate corridors will mature during the first half of
2001, and management expects not to adopt hedge accounting, thereafter. Had the
Company adopted SFAS 133 at December 31, 2000, the impact to earnings would have
been $(19,000).
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
70
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
In March 2000, the Financial Accounting Standards Board issued "FASB
Interpretation No. 44--Accounting for Certain Transactions involving Stock
Compensation", an interpretation of APB 25. The provisions of this
Interpretation were effective July 1, 2000, and shall be applied prospectively.
Management adopted FASB Interpretation No. 44 on July 1, 2000 and FASB
Interpretation No. 44 did not impact the Company's accounting for stock options.
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.
CASH AND CASH EQUIVALENTS
For the purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments (investments) purchased with an
original maturity of three months or less to be cash equivalents. This currently
includes cash and amounts due from banks, Federal funds sold, commercial paper
and time deposit accounts.
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
71
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
already taken to expand and strengthen its lending programs, particularly in the
consumer and commercial areas.
The Bank implemented an asset/liability management strategy to limit its
exposure to earnings and asset valuation fluctuations resulting from interest
rate changes over time. The Bank reduced its 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.
As part of the program to strengthen its lending infrastructure, the Company
has expanded and refined its loan underwriting and review policies and
procedures. In addition, during the year the Company added several experienced
commercial bankers to its senior management team.
In August 2000, the Company added two new directors to the Boards of the
Company and the Bank.
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. On January 1, 2001, the Company adopted SFAS 133, which did not have a
material impact on the Company's financial position and results of operations.
The three remaining interest rate corridors will mature during the first half of
2001, and management expects not to adopt hedge accounting, thereafter. Had the
Company adopted SFAS 133 at December 31, 2000, the impact to earnings would have
been $(19,000).
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
72
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company with the underwriters of the IPO, 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 IPO, 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.
NOTE 2: ACQUISITIONS, PENDING ACQUISITION AND MERGER AGREEMENT WITH FBOP
CORPORATION
ACQUISITIONS
On January 31, 2000, using the purchase accounting method, 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 $27.2 million. In
connection with the acquisition, the Company recorded an addition of
$15.3 million of goodwill which is being amortized on a straight-line basis over
15 years.
On December 4, 2000, the Company completed the acquisition of two branch
offices and related deposits from another bank. The purchase of the two offices
includes buildings, furniture, fixtures and equipment totaling $4.1 million. The
two branches have a combined deposit base of just over $52.5 million. In
connection with the acquisition the Company recorded an addition of
$2.3 million in core deposit intangible, which is being amortized on a
straight-line basis over 8 years.
PENDING ACQUISITION
MERGER AGREEMENT WITH BYL BANCORP. 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 33 branch offices and approximately $3.5 billion in total
assets, servicing Los Angeles, Orange, Ventura and Riverside counties. BYL
Bancorp also originates for sale, single-family residential loans. BYL had total
assets of $284.9 million, total deposits of $254.4 million and stockholders'
equity of $29.2 million at December 31, 2000, the last date as to which public
financial information was available.
Under the terms of the merger 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 Bancorp 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
Bancorp's shareholders. BYL Bancorp has scheduled a special meeting
73
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 2: ACQUISITIONS, PENDING ACQUISITION AND MERGER AGREEMENT WITH FBOP
CORPORATION (CONTINUED)
of its shareholders for March 21, 2001 to vote on the merger agreement and the
transactions contemplated thereunder. The description of the merger does not
purport to be complete and is quantified in its entirety by reference to the
text of the merger agreement. See the Exhibit Index included in this Form 10-K.
MERGER AGREEMENT WITH FBOP CORPORATION. On December 8, 2000, PBOC agreed to
merge with FBOP Corporation ("FBOP"), a closely held bank and savings
institution holding company that owns banks in California, Illinois and Texas.
The terms of the Agreement and Plan of Merger by and among PBOC, FBOP and FBOP
Acquisition Company ("Acquisition"), dated as of December 8, 2000, provide 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
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 consummation of the merger is subject to certain conditions, including
approval by the shareholders of PBOC and applicable regulatory approvals. PBOC
has scheduled a special meeting of its shareholders to vote on the merger on
April 19, 2001. The parties expect that the merger will be consummated in the
second quarter of 2001.
NOTE 3: CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Cash..................................................... $ 35,421 $19,337
Cash equivalents:
Federal Funds Sold..................................... 121,800 2,000
Time deposit accounts.................................. 400 245
-------- -------
Total cash equivalents................................. 122,200 2,245
-------- -------
Total cash and cash equivalents.......................... $157,621 $21,582
======== =======
The Company manages its cash and cash equivalents (consisting of federal
funds sold, commercial paper, securities purchased under agreement to resell and
time deposit accounts) based upon the Company's operating, investing and
financing activities. During the year ended December 31, 2000 and 1999, the
Company's average federal funds sold amounted to $40.2 million and
$20.9 million, respectively. The weighted average interest rate on such federal
funds sold were 6.14% and 4.98%, for the years ended December 31, 2000 and 1999,
respectively. During the years 2000 and 1999, the average commercial paper
purchased was $32.3 million and zero, respectively. The average weighted
interest rate on commercial paper purchased during 2000 was 6.84%. The
outstanding balance of commercial paper at December 31, 2000 and 1999 was zero.
The bank also from time to time purchases securities under agreements to resell
and those securities are held by a third party institution.
74
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 3: CASH AND CASH EQUIVALENTS (CONTINUED)
The average outstanding balance of such agreements was $4.3 million and
$10.4 million during the years ended December 31, 2000 and 1999, respectively.
The weighted interest rate on such agreements was approximately 6.16% and 5.08%
during the years ended December 31, 2000 and 1999, respectively. The maximum
outstanding balance at any month-end was $35.0 million and $78.0 million during
2000 and 1999, respectively. The outstanding balance of securities under
agreement to resell at December 31, 2000 and 1999 was zero.
For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, federal funds sold, commercial paper,
securities under agreements to resell and time deposit accounts.
NOTE 4: 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, 2000 and 1999 were as follows (dollars in
thousands):
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
2000
------------------------------------------------
Debt securities issued by government agencies:
Due after five years to ten years................. $ 37,000 $ -- $ (999) $ 36,001
Corporate trust preferred:
Due after ten years............................... 239,422 -- (22,624) 216,798
Mortgage-backed securities.......................... 184,742 389 (3,729) 181,402
SBA certificates.................................... 48,864 -- (562) 48,302
Asset backed securities............................. 8,497 -- (92) 8,405
Non-investment-grade corporate trust preferred......
securities 19,510 -- (7,810) 11,700
-------- ---- -------- --------
Total securities available-for-sale............. $538,035 $389 $(35,816) $502,608
======== ==== ======== ========
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 backed securities........................... 9,907 -- (113) 9,794
-------- ---- -------- --------
Total securities available-for-sale............. $810,570 $494 $(39,200) $771,864
======== ==== ======== ========
Proceeds from sales of investments and mortgage-backed securities
available-for-sale were approximately $272,443,000, $318,823,000 and
$514,841,000 in each of the years ended December 31, 2000, 1999 and 1998,
respectively, and resulted in gross realized gains of approximately $456,000,
75
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 4: SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
$204,000 and $1,847,000, respectively, and gross realized losses of
approximately $8,674,000, $3,421,000 and $165,000 in the years ended
December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000 and 1999, the amortized cost and estimated fair value
of mortgage-backed securities available-for-sale pledged to secure borrowings
and swap agreements are as follows:
2000 1999
---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Pledged against:
Securities sold under agreements to repurchase.... $152,712 $150,081 $420,531 $399,973
Advances from Federal Home Loan Bank.............. 52,187 51,570 68,896 67,779
Swap and corridor agreements...................... -- -- 65 65
Treasury tax and loan account..................... 550 550 13,698 12,840
-------- -------- -------- --------
$205,449 $202,201 $503,190 $480,657
======== ======== ======== ========
NOTE 5: LOANS HELD-FOR-SALE
Proceeds from sales of loans held-for-sale and servicing rights were
approximately $23.0 million, $94.1 million and $43.0 million in each of the
years ended December 31, 2000, 1999 and 1998, respectively. The sales resulted
in net realized gains of approximately $557,000, $49,000 and $613,000 in each of
the years ended December 31, 2000, 1999 and 1998, respectively. 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
$1.3 million and $2.1 million at December 31, 2000 and 1999, respectively.
NOTE 6: 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, 2000 and 1999 are as
follows (dollars in thousands):
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
2000.................................... $3,761 $35 $ -- $3,796
====== === ==== ======
1999.................................... $4,326 $ 4 $(56) $4,274
====== === ==== ======
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 2000 and 1999.
76
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 7: LOANS RECEIVABLE
A summary of loans receivable at December 31, 2000 and 1999 is as follows
(dollars in thousands):
2000 1999
---------- ----------
Real estate loans
Single-family residential:
Fixed-rate................................................ $ 782,659 $1,057,956
Variable-rate............................................. 574,495 417,195
Multifamily, primarily variable-rate........................ 300,008 327,252
Commercial and industrial................................... 477,314 420,919
Land, primarily fixed-rate.................................. 704 847
---------- ----------
Real estate loans........................................... 2,135,180 2,224,169
---------- ----------
Commercial business loans, primarily variable-rate.......... 160,768 159,740
Consumer loans, primarily fixed-rate........................ 267,106 199,879
Secured by deposits......................................... 1,343 1,918
---------- ----------
All loans................................................. 2,564,397 2,585,706
Less:
Undistributed loan proceeds............................... 67,427 95,683
Unamortized net loan (premiums)/discounts and deferred
origination fees........................................ (2,752) 4,045
Deferred gain on servicing sold........................... 1,333 2,090
Allowance for loan losses (note 8)........................ 23,690 21,051
---------- ----------
$2,474,699 $2,462,837
========== ==========
Nonaccrual loans were $12.3 million, $3.2 million and $8.5 million at
December 31, 2000, 1999 and 1998, respectively. If loans which were on
nonaccrual at December 31, 2000, 1999 and 1998 had performed in accordance with
their terms for the year or since origination, if shorter, interest income from
these loans would have been $1,594,000, $372,000 and $950,000, respectively.
Interest collected on these loans for these years was $944,000, $140,000 and
$364,000, respectively.
Certain loans meet the criteria of trouble debt restructuring ("TDR"). TDR's
totaled $3.8 million and $6.5 million at December 31, 2000 and 1999,
respectively. The Bank has no commitments to lend additional funds to borrowers
whose loans are classified as TDR's at December 31, 2000.
The Company's variable-rate real estate loans are indexed primarily to the
COFI and U.S. Treasury one-year and ten-year CMT. Commercial business loans are
indexed primarily to prime rate.
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 residential,
multifamily, and commercial real estate secured loans are concentrated primarily
in the state of California, which comprised 83.6% of the portfolio of such loans
at December 31, 2000. The remaining 16.4% of the portfolio of such loans, was
spread over 46 states and the District of Columbia, with no significant
concentration in any of these states.
77
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 7: LOANS RECEIVABLE (CONTINUED)
At December 31, 2000, the Company had loan commitments to originate loans,
as follows (dollars in thousands):
Real estate loans
Single-family residential................................. $ 3,066
Construction loans........................................ 19,306
Commercial business loan.................................. 1,763
Home equity lines of credit............................... 836
-------
$24,971
=======
In addition to the above loan commitments, the Bank had an outstanding loan
commitment for $44,000 on one syndicated commercial non-performing loan.
Other than the above loan commitments the Bank had no additional outstanding
commitments to originate or purchase loans.
NOTE 8: 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, 2000, 1999 and 1998 is as follows (dollars in
thousands):
2000 1999 1998
-------- -------- --------
Balance at beginning of year................................ $21,051 $18,897 $17,824
Addition to allowance due to Bank of Hollywood
acquisition............................................... 2,085 -- --
Provision for loan losses................................... 9,000 4,747 2,000
Transfer to other real estate owned......................... (50) -- --
Recoveries credited to the allowance........................ 874 503 85
------- ------- -------
32,960 24,147 19,909
Losses charged to the allowance............................. (9,270) (3,096) (1,012)
------- ------- -------
Balance at end of year...................................... $23,690 $21,051 $18,897
======= ======= =======
The Bank's gross impaired loans were $16.9 million and $7.2 million as of
December 31, 2000 and 1999, respectively. The average impaired loans for the
years ended 2000, 1999 and 1998 were $14.2 million, $9.6 million, and
$9.6 million, respectively. Gross impaired loans with a valuation allowance
totaled $9.1 million and gross impaired loans without a valuation allowance
totaled $7.8 million at December 31, 2000. Interest income recognized related to
these loans was $1.1 million, $465,000 and $552,000 for 2000, 1999 and 1998,
respectively.
The valuation allowance related to impaired loans was $2.6 million and
$969,000 at December 31, 2000 and 1999, respectively, and is included in the
schedule of the allowance for loan losses described above.
78
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 9: REAL ESTATE HELD FOR SALE
Real estate at December 31, 2000 and 1999, consisted of the following
(dollars in thousands):
2000 1999
-------- --------
Acquired in settlement of loans:
Single-family residential................................. $ 368 $883
Multi-family residential.................................. 634 --
------ ----
1,002 883
Less allowance for losses................................. (50) (37)
------ ----
Acquired in settlement of loans......................... $ 952 $846
====== ====
A summary of the components of the income from real estate operations in
each of the years ended December 31, 2000, 1999 and 1998 is as follows (dollars
in thousands):
2000 1999 1998
-------- -------- --------
Gross income from real estate operations............... $ 2 $338 $1,147
Operating expenses..................................... 37 374 1,848
---- ---- ------
Loss from operations................................. (35) (36) (701)
Gain (loss) on real estate sales....................... (4) 602 2,180
---- ---- ------
Gain (loss) from real estate operations.............. (39) 566 1,479
Provisions for losses.................................. -- (53) --
---- ---- ------
Total income (loss) from real estate operations...... $(39) $513 $1,479
==== ==== ======
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, 2000, 1999 and 1998, respectively, is as follows (dollars in
thousands):
DIRECT REAL
REAL ESTATE ESTATE
ACQUIRED INVESTMENTS TOTAL
----------- ----------- --------
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
Transfer from allowance for loan losses....... 50 -- 50
Charge-offs................................... (37) -- (37)
------- ------- -------
Balance, December 31, 2000.................... $ 50 $ -- $ 50
======= ======= =======
79
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 10: PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2000 and 1999, consisted of the
following (dollars in thousands):
2000 1999
-------- --------
Land.................................................... $ 3,771 $ 521
Buildings............................................... 1,915 999
Furniture, fixtures and equipment....................... 16,805 16,125
Leasehold improvements.................................. 7,205 5,857
-------- --------
29,696 23,502
Less accumulated depreciation and amortization.......... (18,891) (16,397)
-------- --------
$ 10,805 $ 7,105
======== ========
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
$3.7 million, $3.0 million and $2.6 million, net of sublease income of
approximately $201,000, $164,000 and $166,000, in each of the years ended
December 31, 2000, 1999 and 1998, respectively.
Approximate minimum lease commitments under noncancellable operating leases
at December 31, 2000 are as follows (dollars in thousands):
YEAR GROSS SUBLEASE NET
- ---- -------- -------- --------
2001............................................. $ 3,749 $(300) $ 3,449
2002............................................. 3,368 (203) 3,165
2003............................................. 3,111 (203) 2,908
2004............................................. 2,674 (103) 2,571
2005............................................. 2,448 (75) 2,373
Thereafter....................................... 5,169 -- 5,169
------- ----- -------
$20,519 $(884) $19,635
======= ===== =======
NOTE 11: GOODWILL
The Company's goodwill account totaled $22.9 million and $7.2 million at
December 31, 2000 and 1999, respectively. In January 2000, the Company acquired
The Bank of Hollywood, a California commercial bank with $157.4 million of
assets and $145.1 million of deposits. The Company also acquired two branches
from another bank, which included buildings, furniture and fixtures and
equipment and $52.5 million in deposits, during December 2000. As a result, the
Company's Goodwill account increased $15.7 million at December 31, 2000, which
represents the excess of purchase price over the fair value of the assets
acquired.
Goodwill amortization was $1.9 million and $481,000 for the twelve months
ended December 31, 2000 and 1999, respectively.
80
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 12: DEPOSITS
Deposits at December 31, 2000 and 1999 consisted of the following (dollars
in thousands):
2000 1999
------------------------- -------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
---------- ------------ ---------- ------------
Transaction accounts:
Checking accounts........................... $ 320,707 0.59% $ 214,113 1.08%
Passbook accounts........................... 112,998 2.55 134,377 3.33
Money market accounts....................... 278,673 5.15 152,899 4.37
---------- ----------
Transaction accounts........................ 712,378 2.68 501,389 2.69
---------- ----------
Term certificates:
3-month..................................... 264,065 5.82 6,857 3.71
6-month..................................... 142,649 6.02 52,922 4.47
12-month.................................... 177,270 6.29 627,514 5.21
18-month.................................... 250,759 6.60 35,897 5.13
24-month.................................... 16,933 6.10 72,003 5.30
36-month.................................... 40,461 6.76 11,580 5.64
48-month.................................... 2,282 5.64 775 5.54
60-month.................................... 16,622 7.06 17,967 5.84
$100,000 and over........................... 409,776 6.42 320,433 5.27
---------- ----------
Term certificates......................... 1,320,817 6.29 1,145,948 5.19
---------- ----------
Total................................... $2,033,195 5.02% $1,647,337 4.43%
========== ==== ========== ====
Term certificates of deposit outstanding by remaining maturity date at
December 31, 2000 are as follows (dollars in thousands):
WEIGHTED
AMOUNT AVERAGE RATE
---------- ------------
Due within 3 months.................................. $ 367,795 5.87%
Over 3 months but within 6 months.................... 185,788 5.98
Over 6 months but within 9 months.................... 223,136 6.64
Over 9 months but within 12 months................... 57,451 5.45
Over 12 months but within 24 months.................. 399,953 6.62
Over 24 months but within 36 months.................. 55,280 6.78
Over 36 months....................................... 31,414 6.95
----------
Total................................................ $1,320,817 6.29%
==========
81
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 12: DEPOSITS (CONTINUED)
The components of deposit interest expense in each of the years ended
December 31, 2000, 1999 and 1998 are as follows (dollars in thousands):
2000 1999 1998
-------- -------- --------
Checking accounts........................................... $ 2,177 $ 2,218 $ 2,107
Passbook and money market accounts.......................... 16,539 10,302 10,679
Term certificates--under $100,000........................... 52,699 44,511 45,217
Term certificates--$100,000 and over........................ 21,406 15,465 12,132
------- ------- -------
92,821 72,496 70,135
Interest forfeitures on early withdrawals................... (256) (205) (208)
------- ------- -------
$92,565 $72,291 $69,927
======= ======= =======
NOTE 13: 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 $133.1 million and
$381.1 million outstanding reverse repurchase agreements at December 31, 2000
and 1999, respectively.
The maximum repurchase liability balances outstanding at any month-end
during the years ended December 31, 2000 and 1999 were approximately
$450.9 million and $480.2 million, respectively. The average balances
outstanding during each of the years ended December 31, 2000 and 1999 were
approximately $330.7 million and $417.6 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.
82
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 13: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (CONTINUED)
The scheduled maturities and weighted average interest rates of securities
sold under agreements to repurchase at December 31, 2000 and 1999 are as follows
(dollars in thousands):
2000 1999
----------------------- -----------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
-------- ------------ -------- ------------
Year of maturity:
2000........................... $ -- --% $150,000 5.94%
2001........................... -- -- 71,109 6.57
2002........................... 133,061 7.02 60,000 5.83
2003........................... -- -- 50,000 5.34
2008........................... -- -- 50,000 5.10
-------- --------
$133,061 7.02% $381,109 5.85%
======== ==== ======== =====
Securities sold under agreements to repurchase at December 31, 2000 and
1999, were collateralized by investment securities with a current principal
balance of approximately $152.7 million and $420.5 million, respectively.
Certain of the 1999 agreements were subject to call provisions.
NOTE 14: ADVANCES FROM THE FHLB
Advances from the FHLB at December 31, 2000 and 1999 were collateralized by
investment securities and mortgage loans with a current principal balance of
approximately $1.6 billion and $1.7 billion, respectively, and by the required
investment in the stock of the FHLB with a carrying value at December 31, 2000
and 1999 of approximately $53.4 million and $66.6 million, respectively.
At December 31, 2000, 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 $281.5 million of unused line of credit as of
December 31, 2000 with the FHLB.
The scheduled maturities and weighted average interest rates of advances at
December 31, 2000 and 1999 are as follows (dollars in thousands):
2000 1999
----------------------- -------------------------
WEIGHTED WEIGHTED
YEAR OF MATURITY AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
- ---------------- -------- ------------ ---------- ------------
2000....................... $ -- --% $ 613,700 4.98%
2002....................... 146,000 7.04 -- --
2003....................... 235,000 5.60 200,000 5.08
2007....................... 180,000 7.42 -- --
2008....................... 310,000 5.53 310,000 5.53
-------- ----------
$871,000.. 6.19% $1,123,700 5.15%
======== ==== ========== ====
During the fourth quarter of 1999 the Bank sold $199.0 million of FHLB
advances. The sales resulted in a gain of $6.7 million, which was reported as an
extraordinary item. During the year 2000,
83
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 14: ADVANCES FROM THE FHLB (CONTINUED)
the Bank did not sell any FHLB advances. Certain of these FHLB advances are
subject to call provisions. FHLB advances totaling $290.0 million were called
and refinanced in January 2000.
NOTE 15: OTHER BORROWINGS
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. The line was repaid in July 2000 and matured in November 2000. The
average interest rate for the loan was 12.1%, during the year 2000. A commitment
fee of $50,000 was paid for the loan, of which $45,000 was amortized during 2000
and $5,000 was amortized during 1999.
On November 21, 2000, the Bank established a uncommitted $5.0 million
Federal Funds line with Wells Fargo Bank. This is an uncommitted line intended
to support short-term liquidity.
NOTE 16: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
NOTES OF THE COMPANY
On July 26, 2000, PBOC Capital Trust I, 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 PBOC Capital
Trust I 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.
NOTE 17: INCOME TAXES
The Company, including the Bank and its subsidiaries (except for People's
Preferred Capital Corporation ("PPCC")), file a consolidated federal tax return.
The Company entered into a tax sharing agreement with the Bank, whereby the Bank
computes and pays taxes based upon Bank's tax position assuming that a separate
tax return was filed.
PPCC has elected to be treated as a Real Estate Investment Trust ("REIT")
for Federal income tax purposes and intends to comply with the provisions of the
Internal Revenue Code of 1986 (the "IRC"), as amended. Accordingly, PPCC will
not be subject to Federal income tax to the extent it distributes its income to
shareholders (other than Bank) and as long as certain asset, income and stock
ownership tests are met in accordance with the IRC. As PPCC expects to qualify
as a REIT for Federal income tax purposes, no provision for income taxes is
included for the earnings of PPCC that will be distributed to outside
shareholders.
84
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 17: INCOME TAXES (CONTINUED)
The income tax provision (benefit) for the years ended December 31, 2000,
1999, and 1998 consist of the following (dollars in thousands):
2000 1999 1998
-------- -------- --------
Current:
Federal....................................... $ 204 $ 244 $ --
State......................................... 18 17 8
-------- ------- --------
Total current............................... 222 261 8
-------- ------- --------
Deferred:
Federal....................................... (19,784) (4,761) (16,398)
-------- ------- --------
Total income tax benefit.................... $(19,562) $(4,500) $(16,390)
======== ======= ========
Deferred tax assets are initially recognized for net operating loss and tax
credit carryforwards and differences between the financial statement carrying
amount and the tax bases of assets and liabilities which will result in future
deductible amounts. A valuation allowance is then established to reduce that
deferred tax asset to the level at which "it is more likely than not" that the
tax benefits will be realized. A taxpayer's ability to realize the tax benefits
of deductible temporary differences and operating loss or credit carryforwards
depends on having sufficient taxable income of an appropriate character within
the carryback and carryforward periods. Sources of taxable income that may allow
for the realization of tax benefits include (i) taxable income in the current
year or prior years that is available through carryback, (ii) future taxable
income that will result from the reversal of existing taxable temporary
differences, and (iii) future taxable income generated by future operations.
Based on the 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, 2000.
Below is a reconciliation of the expected federal income taxes (benefit) to
the consolidated effective income taxes (benefit) for the noted periods:
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Statutory federal income tax rate........................... 35% 35% 35%
======== ======= ========
Expected federal income taxes / (benefits).................. $ 5,418 $ 9,021 $ (783)
Increases (reductions) in income taxes resulting from:
State franchise tax, net of federal benefit................. 12 11 4
Adjustments to deferred taxes due to extraordinary items.... -- 2,337 --
Change in valuation allowance............................... (25,388) (15,870) (15,569)
PPCC nontaxable earnings.................................... (159) 8 (79)
Non-deductible goodwill..................................... 542 -- --
Other....................................................... 13 (7) 37
-------- ------- --------
$(19,562) $(4,500) $(16,390)
======== ======= ========
85
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 17: INCOME TAXES (CONTINUED)
The Company had the following total Federal and State deferred tax assets
and liabilities computed at the Federal statutory income tax rate and the
California statutory franchise tax rate for the noted periods:
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Provision for losses on loans and real estate............. $ 13,003 $ 13,802
Tax gains on sales of loans, net of deferred gains........ 1,163 2,635
Recognition of interest on nonperforming loans for tax.... 256 142
Accrued interest on deposits recognized for book but
deferred for tax.......................................... 712 949
REMIC Income.............................................. 6,270 6,133
Miscellaneous temporary deductible differences............ 2,715 3,080
Available NOL carryforwards............................... 52,200 55,770
AMT tax credit carryforwards.............................. 2,030 1,593
-------- --------
Total deferred tax assets............................... 78,349 84,104
-------- --------
Deferred tax liabilities:
Stock dividends from FHLB................................. (6,354) (6,000)
Miscellaneous temporary taxable differences............... (186) (186)
Federal tax effect of state temporary differences......... (2,339) (2,844)
-------- --------
Total deferred tax liabilities.......................... (8,879) (9,030)
-------- --------
Deferred tax assets, net of deferred tax liabilities.... 69,470 75,074
Less deferred tax asset valuation allowances............ (15,466) (40,854)
-------- --------
Net deferred tax assets................................. $ 54,004 $ 34,220
======== ========
The Federal tax net operating loss carryforwards expire as follows (dollars
in thousands):
YEAR TOTAL
---- --------
2003............................................ $ 17,170
2004............................................ 26
--------
Pre-1992 originated net operating losses.................... 17,196
2008............................................ 5,917
2009............................................ 14,706
2010............................................ 78,436
2011............................................ 9,181
2018............................................ 8,772
--------
Pre May, 1998 originated net operating losses............... 117,012
2018............................................ 14,936
--------
Post May, 1998 originated net operating losses.............. 14,936
--------
Total........................................... $149,144
========
86
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
The Company had Federal and California alternative minimum tax credit
carryforwards of approximately $2.0 million as of December 31, 2000 and $
1.6 million as of December 31, 1999. These carryforwards are available to reduce
future regular federal income taxes and California franchise taxes, if any, over
an indefinite period.
In 1992, issuance of preferred stock resulted in a change in control as
defined under Internal Revenue Code Section 382. As a result, any usage of net
operating loss carryforwards created in 1992 and prior years is limited to
approximately $7.7 million per year. The total net operating loss carryforwards
created in 1992 and prior years is approximately $17.2 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 2001
and thereafter is approximately $17.2 million.
During May of 1998, the IPO resulted in a second change in control as
defined under Internal Revenue Code Section 382. As a result, any usage of net
operating loss carryforwards created prior to May, 1998 (but post 1992) is
limited to approximately $21.3 million per year. The total net operating loss
carryforwards created prior to May, 1998 (but post 1992) is approximately
$117.0 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 2001 is approximately $54.3 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.
NOTE 18: STOCKHOLDER'S EQUITY AND EARNINGS PER SHARE
Prior to consummation of the IPO 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 IPO, the
Outstanding Preferred Stock was exchanged for shares of Common Stock. An
aggregate of 3,152,065 shares of Common Stock was outstanding prior to
consummation of the IPO, 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 IPO.
Authorized but unissued shares of common stock reserved for stock options
were 396,016 at December 31, 2000. Options to purchase 1,616,196 shares of
common stock were outstanding at December 31, 2000, but were not included in the
computation of diluted earnings per share because the exercise price of the
options was greater than the average market price of the common stock during the
period. The outstanding 1,616,196 options at December 31, 2000, included, 98,946
shares of restricted common stock which were issued to the Bank's Senior
Management with an assigned value of zero. These restricted stock awards vest
upon meeting certain contingencies. The contingencies had not occurred at
December 31, 2000, and therefore, the contingently issuable shares have not been
included in the computation of diluted earnings per share.
87
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 19: 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 1,020,390
common stock options to key officers and key employees of the Company. Options
under the 1999 Plan have a life of 10 years and vest over 3 years. During
January 1999, 985,500 common stock options were granted. At December 31, 2000,
940,000 common stock options were outstanding and 45,500 options under the 1999
Plan were forfeited.
In September 1999, the Board of Directors of the Company approved the 2000
Stock Option Plan (the "2000 Plan"), which authorized for granting up to 991,822
common stock options to key officers and key employees of the Company. In
September 1999, 479,250 common stock options were granted. In April 2000, the
stockholders of the Company approved the 2000 Plan. Options under the 2000 Plan
have a life of 10 years and vest over one year. During the year 2000, the
Company granted 298,946 options and 102,000 options under the 2000 Plan were
forfeited. Of the 298,946 options granted, 98,946 options were issued as
restricted common stock with a strike price of zero. These restricted stock
awards vest upon meeting certain contingencies. The contingencies had not
occurred at December 31, 2000.
As of December 31, 2000, 402,250 options under the 2000 Plan were
exercisable.
The following is a summary of transactions in 2000:
NUMBER OF OPTION PRICE WEIGHTED AVERAGE
SHARES RANGE OPTION PRICE
--------- --------------------- ----------------
Options outstanding, January 1, 1999............... -- -- --
Options granted.................................... 1,465,750 $ 9.00 -- $13.75 $12.20
Options outstanding, December 31, 1999............. 1,464,750 9.00 -- 13.75 12.20
Options granted(1)................................. 298,946 0.00 -- 10.00 6.38
Options forfeited.................................. 147,500 9.00 -- 13.75 10.63
--------- --------------------- ------
Options outstanding, December 31, 2000............. 1,616,196 $ 0.00 -- $13.75 $11.27
========= ===================== ======
- ------------------------
(1) Includes, 98,946 restricted common stock option grants.
Financial data pertaining to outstanding stock options were as follows:
WEIGHTED-
AVERAGE NUMBER OF
NUMBER REMAINING EXERCISABLE WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL LIFE WEIGHTED OPTIONS AVERAGE PRICE
EXERCISE DECEMBER 31, OPTIONS AVERAGE DECEMBER 31, OF EXERCISABLE
PRICE 2000 OUTSTANDING EXERCISE PRICE 2000 OPTION SHARES
- ------------------- ------------ ---------------- -------------- ------------ --------------
$0.00--9.00 576,196 8.8 $ 7.45 402,250 $9.00
9.25--10.00 100,000 9.1 9.81 -- --
13.75 940,000 8.0 13.75 -- --
- ------------------- --------- ---- ------ ------- -----
$0.00--$13.75 1,616,196 8.4 $11.27 402,250 $9.00
=================== ========= ==== ====== ======= =====
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
88
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 19: STOCK OPTIONS (CONTINUED)
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 (2000 excludes 98,946 restricted common stock
option grants). (Dollars in thousands, except per share amounts).
2000 1999
-------- --------
Net earnings:
As reported............................................... $31,567 $33,475
Pro forma................................................. 29,899 32,627
Earnings per share basic & diluted:
As reported............................................... $ 1.59 $ 1.63
Pro forma................................................. $ 1.50 $ 1.59
The fair value of each option granted in 2000 and 1999 was estimated on
December 31, 2000 and 1999, using the Black-Scholes option-pricing model, and
was computed based on the following weighted average assumptions.
2000 1999
--------- ---------
Dividend yield.............................................. 0.00% 0.00%
Expected volatility......................................... 54.4% 39.0%
Risk-free interest rate..................................... 5.457% 6.435%
Expected life at December 31, 2000.......................... 5 years 5 years
Remaining contractual life at December 31, 2000............. 8.5 years 9.3 years
Number of options outstanding at December 31, 2000.......... 1,616,196 1,464,750
NOTE 20: 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 years ended December 31, 2000 and 1999, the Company
repurchased 64,800 shares and 1,100,200 shares, respectively, pursuant to the
previous authorizations for a total purchase price of $621,000 and
$10.4 million, respectively.
89
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 21: DERIVATIVES AND HEDGING ACTIVITIES
Hedging costs, net, for each of the years ended December 31, 2000, 1999 and
1998 consists of the following (dollars in thousands):
2000 1999 1998
-------- -------- --------
Amortization of cost of caps, floors and corridors, net of
interest received......................................... $79 $146 $214
=== ==== ====
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 three-month LIBOR. A summary of
corridor contracts and average interest rate ranges at December 31, 2000 is as
follows (dollars in thousands):
WEIGHTED WEIGHTED
CONTRACT AMOUNT AVERAGE STRIKE PRICE AVERAGE LIMIT RATE
--------------- -------------------- ------------------
2001................................ $20,000 6.64% 8.24%
On January 1, 2001, the Company adopted SFAS 133, which did not have a
material impact on the Company's financial position and results of operations.
The three remaining interest rate corridors with an aggregate contract amount of
$20.0 million will mature during the first half of 2001 and management expects
not to adopt hedge accounting, thereafter. Had the Company adopted SFAS 133 at
December 31, 2000, the impact to earnings would have been $(19,000).
NOTE 22: 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 no longer earn
additional defined benefits for future services; however, future service may be
counted toward vesting of benefits accumulated based on past service. The Bank's
funding policy has been to contribute annually the minimum amount that can be
deducted for Federal income tax purposes.
90
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 22: BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the Plan and amounts
recognized in the Bank's consolidated statements of financial condition at
December 31, 2000 and 1999 (dollars in thousands):
2000 1999
-------- --------
CHANGE IN BENEFIT OBLIGATION:
Projected benefit obligation, beginning of year........... $5,422 $6,248
Interest cost............................................. 432 419
Amendments................................................ -- (246)
Benefits paid............................................. (124) (120)
Actuarial loss (gain)..................................... 379 (879)
------ ------
Projected benefit obligation, end of year................. 6,109 5,422
------ ------
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year............................ 6,214 5,716
Actual return on plan assets.............................. (23) 618
Employer contribution..................................... 155 --
Benefits paid............................................. (124) (120)
------ ------
Plan assets, end of year.................................. 6,222 6,214
------ ------
Funded status............................................. 113 793
Unrecognized prior service costs.......................... (231) (246)
Unrecognized (gain) loss.................................. 1,091 131
------ ------
Net amount recognized..................................... 973 678
====== ======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Prepaid benefit cost (accrued benefit liability).......... 155 678
Accumulated comprehensive income.......................... -- --
------ ------
Net amount recognized..................................... 155 678
------ ------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Interest cost on projected benefit obligation............. 432 419
Expected return on Plan assets............................ (558) (505)
Amortization of unrecognized prior service cost........... (15) --
Amortization of unrecognized (gain)/loss.................. -- 34
------ ------
Pension income............................................ $ (141) $ (52)
====== ======
THE ASSUMPTIONS USED IN THE ACCOUNTING WERE:
Discount rate............................................. 7.50% 8.00%
Expected long-term rate of return on assets............... 9.00% 9.00%
Pension income was approximately $87,000, $52,000 and $25,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
The Company adopted a 401(k) plan effective January 1, 1991. The 401(k) plan
covers employees with 90 days 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
91
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 22: BENEFIT PLANS (CONTINUED)
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 twelve investment alternatives,
including the Company's stock, in trust for the benefit of the participants. The
Bank incurred approximately $223,000, $191,000 and $76,000 of expense related to
the 401(k) plan, with no discretionary contributions in each of the years ended
December 31, 2000, 1999 and 1998, respectively.
NOTE 23: COMMITMENTS AND CONTINGENCIES
THE SHAREHOLDER LITIGATION
Following the Company's public announcement of the proposed acquisition of
the Company by FBOP Corporation, three purported class action lawsuits were
filed by stockholders of the Company against the Company, the Bank, FBOP and
certain present and former directors of the Company in the Court of Chancery of
the State of Delaware (the "Shareholder Litigation"). The three lawsuits have
been consolidated under the caption IN RE PBOC HOLDINGS, INC. SHAREHOLDERS
LITIGATION, Cons. C.A. No. 18543 (the "Consolidated Action"). In addition to the
Consolidated Action, another purported class action lawsuit was filed on
March 1, 2001 by a stockholder of the Company, against the Company, the Bank,
FBOP and certain present and former directors of the Company in the Court of
Chancery of the State of Delaware under the caption ELLIOT WOLFSON V. PBOC
HOLDINGS, INC., ET AL. THE ("Wolfson Action"). The complaints in the
Consolidated Action and the Wolfson Action generally allege that the directors
of the Company, aided and abetted by FBOP, breached their fiduciary duties in
connection with their approval of the proposed acquisition. Plaintiffs purport
to seek, among other things, (i) an order enjoining the proposed acquisition;
(ii) rescission of the acquisition in the event that it is consummated; and/or
(iii) damages. The plaintiffs in the Wolfson Action also have filed a motion for
a preliminary injunction to stop the proposed merger from going forward. The
defendants in the Consolidated Action and the Wolfson Action intend to defend
the actions vigorously.
OTHER
The Company is also 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 28 for a discussion
related to the Company's goodwill litigation.
92
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 24: 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, 2000 and 1999 (dollars in thousands):
2000 1999
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
FINANCIAL ASSETS:
Cash and cash equivalents................... $ 157,621 $ 157,621 $ 21,582 $ 21,582
Securities available-for-sale............... 502,608 502,608 771,864 771,864
Mortgage-backed securities
held-to-maturity............................ 3,761 3,796 4,326 4,274
Loans receivable, net....................... 2,474,699 2,474,419 2,462,837 2,407,999
FHLB stock.................................. 53,355 53,355 66,643 66,643
FINANCIAL LIABILITIES:
Deposits.................................... 2,033,195 2,037,121 1,647,337 1,643,102
Securities sold under agreements to
repurchase.................................. 133,061 135,557 381,109 380,641
Advances from the FHLB...................... 871,000 883,583 1,123,700 1,107,045
Other borrowings(1)......................... 10,000 10,000 4,621 4,621
FINANCIAL INSTRUMENTS:
Interest rate corridors..................... 19 (19) 120 (72)
- ------------------------
(1) For the year ended December 31, 2000 it reflects $10.0 million of
Company-obligated mandatorily redeemable preferred securities of a
subsidiary trust solely junior subordinated deferrable interest notes of the
Company (See Note 16 to the Financial Statements). For the year ended
December 31, 1999 it reflects $4.6 million line of credit (See Note 15 to
the Financial Statements).
The following methods and assumptions were used to estimate the fair value
of each type of financial instrument:
- Cash and Cash Equivalents--The carrying amount approximates the fair value
for cash and short-term investments.
- Securities Available-for-Sale--Fair value is based on quoted market prices
or dealer quotes.
- Mortgage-Backed Securities--Fair value is based on quoted market prices or
dealer quotes.
93
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 24: FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)
- Loans Receivable--For residential real estate loans, fair value is
estimated by discounting projected future cash flows at the current market
interest rates for mortgage-backed securities collateralized by loans of
similar coupon, duration and credit risk, adjusted for differences in
market interest rates between loans and securities. The fair value of
multifamily and commercial real estate loans is estimated by discounting
the future cash flows using the current interest rates at which loans with
similar terms would be made on property and to borrowers with similar
credit and other characteristics and with similar remaining terms to
maturity. Impaired loans are valued based upon the fair value of
underlying collateral, if collateral dependent or alternatively, the
present value of expected cash flows using the loan's original implicit
loan interest rate.
- FHLB Stock--The carrying amount of FHLB Stock approximates its fair value.
- Deposit--The fair values of Checking accounts, passbook accounts and money
market accounts withdrawable on demand without penalty are, by definition,
equal to the amount withdrawable on demand at the reporting date, which is
their carrying amount. The fair value of term certificates of deposit, all
of which are fixed maturity bearing a fixed-rate of interest, is estimated
by discounting future projected cash flows at interest rates approximating
interest rates currently offered by the Bank for similar types of
certificates of deposit for similar remaining terms to maturity.
- Securities Sold under Agreements to Repurchase--The fair value is
estimated by discounting projected future cash flows at the current
interest rates available to the Bank for Securities Sold Under Agreements
to Repurchase with similar terms for similar remaining terms to maturity.
- Other Borrowings--The carrying amount of other borrowings approximates its
fair value.
- Advances from the FHLB--The fair value is estimated by discounting
projected future cash flows at the current advance interest rates
available to the Bank for FHLB advances with similar terms for similar
remaining terms to maturity.
- Interest Rate 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.
NOTE 25: 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
94
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 25: REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
defined in the regulations) to adjusted tangible assets (as defined) and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 leverage capital (as defined) to adjusted tangible assets (as
defined). Management believes, as of December 31, 2000, that the Bank met all
capital adequacy requirements to which it is subject.
As of December 31, 2000, 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
$116.0 million of regulatory capital at December 31, 2000. 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, 2000, 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.
95
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 25: REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
At December 31, 2000 and 1999, 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, 2000
------------------------------------------------
TANGIBLE TIER 1 TIER 1 TOTAL RISK-
WITHOUT ADDITIONAL ASSISTANCE AGREEMENT CAPITAL CAPITAL LEVERAGE RISK-BASED BASED CAPITAL
- ----------------------------------------------- -------- -------- ---------- -------------
Stockholders' equity/GAAP capital................ $219,785 $219,785 $219,785 $219,785
Adjustment for unrealized losses on securities
available-for-sale............................. 35,427 35,427 35,427 35,427
Deduction for disallowed deferred tax assets..... (41,949) (41,949) (41,949) (41,949)
Deduction for intangible assets.................. (22,949) (22,949) (22,949) (22,949)
Minority interest in subsidiary.................. 33,250 33,250 33,250 33,250
-------- -------- -------- --------
Total Tier 1 capital............................. 223,564 223,564 223,564 223,564
Includable allowance for loan losses............. -- -- -- 20,753
-------- -------- -------- --------
Total capital.................................. 223,564 223,564 223,564 244,317
Minimum capital requirement...................... 49,164 131,105 85,174 170,349
-------- -------- -------- --------
Regulatory capital excess........................ $174,400 $ 92,459 $138,390 $ 73,968
======== ======== ======== ========
Capital ratios:
Regulatory as reported......................... 6.82% 6.82% 10.50% 11.47%
Minimum capital ratio.......................... 1.50 4.00 4.00 8.00
-------- -------- -------- --------
Regulatory capital excess...................... 5.32% 2.82% 6.50% 3.47%
======== ======== ======== ========
WITH ADDITIONAL ASSISTANCE AGREEMENT CAPITAL
- -------------------------------------------------
Regulatory capital as adjusted................... $339,564 $339,564 $339,564 $360,317
Minimum capital requirement (per above).......... 49,164 131,105 85,174 170,349
-------- -------- -------- --------
Regulatory capital excess........................ $290,400 $208,459 $254,390 $189,968
======== ======== ======== ========
96
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 25: REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
REGULATORY CAPITAL/STANDARD AS OF DECEMBER 31, 1999
----------------------------------------------------
TANGIBLE TIER 1 TIER 1 TOTAL RISK-
WITHOUT ADDITIONAL ASSISTANCE AGREEMENT CAPITAL CAPITAL LEVERAGE RISK-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
======== ======== ======== ========
NOTE 26: CONDENSED FINANCIAL INFORMATION OF PBOC HOLDINGS, INC.
The condensed unconsolidated balance sheets of the Company at December 31,
2000 and 1999, were as follows:
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash.................................................. $ 3,648 $ 148
Investment in subsidiaries............................ 220,094 184,108
Other assets.......................................... 780 2
-------- --------
Total assets........................................ $224,522 $184,258
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued expenses and other liabilities.............. $ 584 $ 180
Other borrowings--line of credit -- 4,621
Intercompany junior subordinated note............... 10,309 --
-------- --------
Total liabilities................................. 10,893 4,801
Total stockholders' equity............................ 213,629 179,457
-------- --------
Total liabilities and stockholder's equity.......... $224,522 $184,258
======== ========
97
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
The condensed unconsolidated statements of operations of the Company for the
years ended December 31, 2000, 1999 and 1998, are as follows:
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
INCOME:
Cash dividends from subsidiary................. $ 15 $ 5,000 $ 200
Interest income................................ 65 11 259
------- ------- -------
80 5,011 459
EXPENSE:
Interest on other borrowings................... 378 19 445
Interest on intercompany junior subordinated
note......................................... 496 -- --
General and administrative expenses............ 462 537 284
Other expense.................................. -- 6 64
------- ------- -------
1,336 562 793
Earnings (loss) before income tax benefit and
undistributed earnings of subsidiaries....... (1,256) 4,449 (334)
Income tax benefit............................. (426) -- --
------- ------- -------
Earnings (loss) before undistributed earnings
of subsidiaries.............................. (830) 4,449 (334)
Equity in undistributed earnings of
subsidiaries................................. 32,397 29,026 11,237
------- ------- -------
Net earnings................................... $31,567 $33,475 $10,903
======= ======= =======
The Company relies upon the Bank for dividends to support its operations.
Absent these dividends, the Company must rely upon borrowings from third parties
or 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.
98
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
The condensed unconsolidated statements of cash flows of the Company for the
years ended December 31, 2000, 1999 and 1998 are as follows (dollars in
thousands):
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATIONS ACTIVITIES:
Net earnings................................. $ 31,567 $ 33,475 $ 10,903
Adjustment to reconcile net loss to net cash
used in operating activities:
Increase in net deferred tax asset......... (462) -- --
Increase (decrease) increase in accrued
expenses................................. (136) (325) 544
Increase in accrued interest payable....... 487 3 257
Increase in other assets................... (317) (2) --
Equity in undistributed (earnings) of
subsidiary............................... (32,397) (29,026) (11,237)
-------- -------- --------
Net cash provided by (used in) operating
activities............................. (1,258) 4,125 467
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Offering....................... -- -- 129,611
Net change in other borrowings............... (4,621) 4,621 (11,370)
Net increase in intercompany subordinated
note....................................... 10,309 -- --
Capital investment in subsidiary............. (309) -- (89,307)
Purchases of treasury stock.................. (621) (10,402) (8,308)
Retirement of preferred stock................ -- -- (5)
Dividends paid............................... -- -- (19,439)
-------- -------- --------
Net cash provided by (used in) financing
activities............................... 4,758 (5,781) 1,182
-------- -------- --------
Net decrease (increase) in cash and cash
equivalents................................ 3,500 (1,656) 1,649
Cash and cash equivalents at beginning of
year....................................... 148 1,804 155
-------- -------- --------
Cash and cash equivalents at end of year..... $ 3,648 $ 148 $ 1,804
======== ======== ========
99
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 27: QUARTERLY RESULTS OF OPERATIONS--UNAUDITED
The following table presents the unaudited results of operations by quarter
for 2000 and 1999:
QUARTERS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000
Total interest income............................. $ 63,112 $64,686 $63,794 $60,680
Total interest expense............................ 43,167 45,364 46,924 42,507
-------- ------- ------- -------
Net interest income............................... 19,945 19,322 16,870 18,173
Provision for loan losses......................... 1,500 1,500 2,500 3,500
-------- ------- ------- -------
Net interest income after provision for loan
losses.......................................... 18,445 17,822 14,370 14,673
Gain (loss) on sale of investment securities,
net............................................. 127 -- (8,330) (15)
Other income...................................... 985 991 839 1,627
Operating expenses................................ 11,401 11,434 11,207 12,011
-------- ------- ------- -------
Earnings (loss) before income taxes (benefit)..... 8,156 7,379 (4,328) 4,274
Income taxes (benefit)............................ (25,000) 3,009 807 1,622
-------- ------- ------- -------
Earnings (loss) before minority interest.......... 33,156 4,370 (5,135) 2,652
Minority interest................................. (869) (869) (869) (869)
-------- ------- ------- -------
Net earnings (loss) available to common
stockholders.................................... $ 32,287 $ 3,501 $(6,004) $ 1,783
======== ======= ======= =======
Earnings (loss) per common share, basic and
diluted......................................... $ 1.62 $ 0.18 $ (0.30) $ 0.09
======== ======= ======= =======
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 before income tax benefit................ 6,197 6,815 7,817 4,944
Income taxes (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
======== ======= ======= =======
100
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
NOTE 28: GOODWILL LITIGATION AND SHAREHOLDER RIGHTS AGREEMENT
As discussed in Note 25 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.
101
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Bylaws of the Company presently authorize up to fifteen but not less
than seven directors. The Bylaws also presently provide that the Board of
Directors shall consist of nine persons. There presently is one (1) vacancy on
the Board of Directors.
The Certificate of Incorporation of the Company provides that the Board of
Directors of the Company shall be divided into three classes as nearly equal in
number as possible, with one class to be elected annually. Stockholders of the
Company are not permitted to cumulate their votes for the election of directors.
No director or executive officer of the Company is related to any other
director or executive officer of the Company by blood, marriage or adoption.
The following tables present information concerning directors of the
Company.
DIRECTORS WHOSE TERMS EXPIRE IN 2001
PRINCIPAL OCCUPATION DURING DIRECTOR
NAME AGE(1) PAST FIVE YEARS SINCE
- ---- -------- ------------------------------------------------------ --------
Rudolf P. Guenzel 60 Director; Director of the Bank since 1995; President 1998
since 1995 and President and Chief Executive Officer
of the Company since 1998 and President and Chief
Executive Officer of the Bank since March 1995. In
1991, Mr. Guenzel was hired as President and Chief
Executive Officer of BancFlorida and its wholly-owned
subsidiary, BancFlorida, FSB. He served in this
capacity until it was acquired by First Union
Corporation in August 1994. Following the acquisition,
Mr. Guenzel worked as a consultant in the area of bank
profitability analysis until being hired by the
Company.
102
PRINCIPAL OCCUPATION DURING DIRECTOR
NAME AGE(1) PAST FIVE YEARS SINCE
- ---- -------- ------------------------------------------------------ --------
J. Michael Holmes 54 Director; Director of the Bank since 1998; Executive 1998
Vice President and Chief Financial Officer of the Bank
since March 1995, Chief Financial Officer and
Secretary of the Company since 1995, Executive Vice
President, Chief Financial Officer and Secretary of
the Company since 1998 and Senior Executive Vice
President, Chief Financial Officer and Secretary of
the Company since January 2000. Mr. Holmes previously
served as Secretary, Treasurer and Chief Financial
Officer of BancFlorida between 1985 and August 1994.
Richard Delaney 57 Director; Director of the Bank since August 2000. 2000
Mr. Delaney has been a self-employed consultant since
1999. Prior to that, he was a partner with Grant
Thornton LLP, Accountants and Consultants for 25
years.
DIRECTORS WHOSE TERMS EXPIRE IN 2002
John F. Davis 54 Director; Director of People's Preferred Capital 1998
Corporation since 1997; Director of the Bank since
1998; Chief Operating Officer of First Fidelity
Bancorp, Irvine, California from August 1998 through
December 1999; Mr. Davis has served as a legal
consultant for two local financial institutions since
1993 and 1995, respectively, during which he was
actively involved in troubled real estate work-outs,
foreclosed real estate disposition and related
litigation and with one of such institutions, a
reorganization and recapitalization.
Murray Kalis 61 Director; Director of the Bank since December 1998; 1998
Mr. Kalis is Chairman and Creative Director of Kalis
and Savage Advertising, Los Angeles, California, which
he founded in 1995; prior to 1995, Mr. Kalis was
President of Coen/Kalis Advertising, Los Angeles,
California.
C. Stephen 61 Director; Director of the Bank since August 2000. 2000
Mansfield Mr. Mansfield is a Lecturer on Accounting and has
served on the Boards of several California Financial
Institutions. He was Senior Partner with Deloitte &
Touche in Orange County, California until 1990.
DIRECTORS WHOSE TERMS EXPIRE IN 2003
Robert W. MacDonald 53 Director; Director of the Bank since 1992 and Chairman 1998
of the Board since January 2000. Managing Director of
William E. Simon & Sons, a merchant banking firm since
1991.
103
PRINCIPAL OCCUPATION DURING DIRECTOR
NAME AGE(1) PAST FIVE YEARS SINCE
- ---- -------- ------------------------------------------------------ --------
Carl LoBue 55 Director; Director of the Bank since May 2000. 2000
Mr. LoBue is Chairman, President and Chief Executive
Officer of LoBue Associates, Inc., which he founded in
1981. LoBue Associates, Inc. provides a broad range of
consulting services to the financial services industry
in more than 30 countries.
- ------------------------
(1) As of December 31, 2000.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Set forth below is information with respect to the principal occupations
during the last five years for the senior executive officers of the Company and
the Bank who do not serve as directors of the Company. No executive officer is
related to any director or other executive officer of the Company by blood,
marriage or adoption, and there are no arrangements or understandings between a
director of the Company and any other person pursuant to which such person was
elected an executive officer.
WILLIAM W. FLADER. Mr. Flader has served as Senior Executive Vice President
and Chief Operating Officer for the Bank since January 2000. From March 1995 to
January 2000, Mr. Flader served as Executive Vice President of Retail Banking
for the Bank. Before joining the Bank, Mr. Flader was employed by Banc Florida,
FSB from October 1980 to August 1994 in various capacities. Mr. Flader served as
Senior Vice President of Retail Banking for BancFlorida from December 1989 to
August 1994. Mr. Flader has worked in banking for over 20 years and at
BancFlorida managed a 46 branch network. In addition, Mr. Flader was responsible
for the sale of alternative investment products, marketing and residential
lending.
DOREEN J. BLAUSCHILD. Ms. Blauschild came to the Bank as Associate Counsel
in 1988 and was promoted to Vice President, General Counsel in 1989. In 1991,
Ms. Blauschild was promoted to Senior Vice President, General Counsel.
Ms. Blauschild also has served as the Bank's Secretary since 1989.
WILLIAM G. CARROLL. Mr. Carroll has served as Executive Vice President for
the Bank since December 1999. From January 1998 to December 1999, Mr. Carroll
served as Senior Vice President in charge of Corporate Financial Services
(including branch operations). He joined the Bank in March 1997 as Vice
President with the same responsibilities. Prior to joining the Bank,
Mr. Carroll served as Vice President of Preferred Bank in Los Angeles,
California, from September 1996 through February 1997. From 1991 through 1996,
Mr. Carroll served as Regional Vice President of Metrobank/ Comerica and from
1982 through 1991, Mr. Carroll was employed as Senior Vice President in the
commercial banking division at California Federal Bank.
JAY P. HUNDLEY. Mr. Hundley had served as the Bank's Executive Vice
President from December 1999 until his resignation on October 31, 2000. From
November 1998 to December 1999, Mr. Hundley served as the Bank's Senior Vice
President and Senior Lending Officer. Mr. Hundley's responsibilities included
business development and origination of commercial real estate, SBA, commercial,
indirect automobile loans and accounts receivable financing. From 1994 to
November 1998, Mr. Hundley was a financial consultant for the Bank of Beverly
Hills, California and for an agency of the U.S. Government. Prior to that, he
served as Senior Vice President at two commercial banks, First Florida Bank from
1991 to 1993 and Riggs National Bank from 1993 to 1994.
104
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of certain information concerning
the compensation information with respect to the Chief Executive Officer of the
Company and the other four most highly compensated officers of the Company and
the Bank whose total compensation exceeded $100,000 for services rendered in all
capacities during the fiscal year ended December 31, 2000.
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------------ ---------------------------------------
AWARDS PAYOUTS
----------------------- ----------
OTHER SECURITIES
NAME AND FISCAL ANNUAL RESTRICTED UNDERLYING LTIP
PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION STOCK OPTIONS PAYOUTS
- ------------------------- -------- --------- -------- ------------- ---------- ---------- ----------
Rudolf P. Guenzel........ 2000 $348,000 -- -- -- -- $ 417,598(7)
President and 1999 348,000 $417,600(3) -- -- 445,000(4) --
Chief Executive Officer 1998 325,000 243,750(5) -- -- -- --
J. Michael Holmes........ 2000 $230,000 -- -- -- -- $ 229,952(7)
Senior Executive Vice 1999 219,000 $229,950(3) -- -- 273,750(4) --
President and Chief 1998 200,000 150,000(5) -- -- -- --
Financial Officer
William W. Flader........ 2000 $190,000 -- -- -- -- $ 168,754(7)
Senior Executive Vice 1999 180,000 $168,750(3) -- -- 226,000(4) --
President of the 1998 170,000 127,500(5) -- -- -- --
Company and the Bank
Doreen J. Blauschild..... 2000 $164,109 $ 22,000 -- -- -- --
Senior Vice President and 1999 156,000 17,000 -- -- 30,000(4) --
General Counsel of the 1998 150,000 15,000 -- -- -- --
Bank
Jay P. Hundley........... 2000 $145,120 $ -- -- -- -- --
Executive Vice President 1999 156,000 17,000 -- -- 100,000(4) --
and Senior Lending 1998 29,917(6) 5,000 -- -- -- --
Officer of the Bank
NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION
- ------------------------- -------------
Rudolf P. Guenzel........ $ 5,250
President and 5,000
Chief Executive Officer 3,717,466(2)
J. Michael Holmes........ $ 5,250
Senior Executive Vice 5,000
President and Chief 2,957,790(2)
Financial Officer
William W. Flader........ $ 5,250
Senior Executive Vice 5,000
President of the 2,957,790(2)
Company and the Bank
Doreen J. Blauschild..... $ 5,250
Senior Vice President and 3,479
General Counsel of the 3,312
Bank
Jay P. Hundley........... $ --
Executive Vice President --
and Senior Lending --
Officer of the Bank
- ------------------------------
(1) Does not include amounts attributable to miscellaneous benefits received by
the named officers. The costs to the Company of providing such benefits to
the named officers during the year ended December 31, 2000, 1999 and 1998
did not exceed the lesser of $50,000 or 10% of the total of annual salary
and bonus reported.
(2) An aggregate of $3,712,466, $2,952,790 and $2,952,790 of the other
compensation for Messrs. Guenzel, Holmes and Flader, respectively, were
payments made at the time of the Company's initial public offering in
May 1998, which resulted from the termination of each of the employment
agreements entered into by Messrs. Guenzel, Holmes and Flader in connection
with the Bank's 1995 recapitalization. The remainder represents the
employers' contribution on behalf of the employee to the 401(k) Plan.
(3) Bonuses for 1999 were paid in 2000.
(4) An aggregate of 390,000, 240,000, 198,000, 38,000 and 18,500 options were
granted to Messrs. Guenzel, Holmes, Flader and Hundley and Ms. Blauschild
under the 1999 Stock Option Plan ("1999 Option Plan") and the remainder were
granted under the 2000 Incentive Plan.
(5) Amounts were accrued in 1998 and paid in 1999.
(6) Mr. Jay P. Hundley joined the Bank as Executive Vice President and Senior
Lending Officer on November 2, 1998 and resigned on October 31, 2000.
(7) Value of awards of 50,618, 27,873 and 20,455 shares of restricted stock to
Messrs. Guenzel, Holmes and Flader at $8.25 per share, which was the
Company's stock price on February 28, 2000, the date of the award. The
restricted share awards are restricted for a five year period, but may
become immediately vested and all related restrictions shall terminate and
expire upon a "Change in Control" of the Company, as defined in the 2000
Incentive Plan, or upon the attainment of predesignated regulatory
standards.
There were no options granted to the executive officers named in the Summary
Compensation Table in 2000.
105
The following table sets forth, with respect to the executive officers named
in the Summary Compensation Table, information with respect to the aggregate
amount of options exercised during the last fiscal year, any value realized
thereon, the number of unexercised options at the end of the fiscal year
(exercisable and unexercisable) and the value with respect thereto under
specified assumptions.
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED ON VALUE OPTIONS AT IN THE MONEY OPTIONS AT
NAME EXERCISE REALIZED FISCAL YEAR END(1) FISCAL YEAR END(2)
- ---- ----------- -------- --------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Rudolf P. Guenzel............ -- -- 185,000 260,000 $29,150 --
J. Michael Holmes............ -- -- 113,750 160,000 17,887 --
William W. Flader............ -- -- 94,000 132,000 14,840 --
Doreen J. Blauschild......... -- -- 17,667 12,333 6,095 --
Jay P. Hundley............... -- -- -- -- -- --
- ------------------------
(1) Shares are exercisable at the rate of 33 1/3% per year on each annual
anniversary of the date the options were granted for options granted
January 25, 1999 and are fully exercisable in one year for options granted
September 20, 1999.
(2) Based on a per share market price of $9.53 at December 31, 2000.
EMPLOYMENT AGREEMENTS
The Company and the Bank (the "Employers") entered into new employment
agreements with the Messrs. Guenzel, Holmes and Flader (individually, the
"Executive" and collectively, the "Executives") in 1998. These 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. As of
January 1, 2000, salaries were increased to $348,000, $230,000 and $190,000 for
Messrs. Guenzel, Holmes, and Flader, respectively. The Executives' compensation
and expenses are to be paid by the Company and the Bank in the same proportion
as the time and services actually expended by the Executives on behalf of each
respective Employer. The employment agreements 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. In May 2000, the
Employment Agreements were reviewed and extended for an additional year. Under
the agreements, the term of the Executives' employment agreements may be
extended after the second anniversary of the agreement, for additional one-year
periods upon the approval of the Employers' Boards of Directors, unless either
party elects, not less than 30 days prior to the annual anniversary date, not to
extend the employment term.
Each of the employment agreements is terminable with or without cause by the
Employers. The Executives have no right to compensation or other benefits
pursuant to the employment agreements for any period after voluntary termination
or termination by the Employers for cause, disability or retirement. The
agreements provide for certain benefits in the event of the Executive's death.
In the event that (i) the Executive terminates his or her employment because of
failure to comply with any material provision of the employment agreement or the
Employers change the executive's title or duties or (ii) the employment
agreement is terminated by the Employers other than for cause, disability,
retirement or death or by the Executive as a result of certain adverse actions
which are taken with respect to the executive's employment following a change in
control of the Company, as defined, the Executives will be entitled to a cash
severance amount equal to the two times the Executive's five year average total
compensation, excluding the one-time bonuses paid in connection with the
Company's Initial Public Offering in May 1998. In the event that the Company was
required to make cash
106
severance payments to the Executives because of the occurrence of any of the
aforementioned circumstances, Messrs. Guenzel, Holmes and Flader would be
entitled to receive $1.1 million, $700,000 and $580,000, respectively.
The employment agreements with the Executives provide that, in the event
that any of the payments to be made thereunder or otherwise upon termination of
employment are deemed to constitute "excess parachute payments" within the
meaning of Section 280G of the Internal Revenue Code, then such payments and
benefits received thereunder shall be reduced by the amount which is the minimum
necessary to result in the payments not exceeding three times the recipient's
average annual compensation from the employer which was includable in the
recipient's gross income during the most recent five taxable years. Recipients
of excess parachute payments are subject to a 20% excise tax on the amount by
which such payments exceed the base amount, in addition to regular income taxes,
and payments in excess of the base amount are not deductible by the employer as
compensation expense for federal income tax purposes.
A change in control is generally defined in the employment agreements to
include any change in control of 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 employment agreements provide that
any additional purchase of Common Stock by the Bishop Estate or BIL Securities
(Offshore) Limited ("BIL Securities") shall not be deemed to constitute a change
of control for purposes of such agreements. To the extent that the merger
agreement with FBOP is consummated, a "change in control" would have occurred
for purposes of the employment agreements.
In April 1995, the Bank entered into an employment agreement with Doreen J.
Blauschild. In the event the Bank terminates Ms. Blauschild's employment without
cause or following her resignation due to an unauthorized reduction in
compensation, the employment agreement provides that Ms. Blauschild shall be
entitled to certain benefits including (i) four months base salary and payment
of accrued and unpaid vacation, (ii) a $25,000 lump sum payment,
(iii) continued coverage under the Bank's group health, dental, life and
disability plans for a period of six months from termination or until
Ms. Blauschild becomes eligible for comparable group benefit coverages,
whichever is earlier, and (iv) continued benefit of the Company's
indemnification obligations and director and officer insurance policy. In
addition, Ms. Blauschild is also entitled to a payment equal to 0.25% of the
amount by which any net recovery (i.e., gross amount less attorneys' fees
incurred by the Bank) by and payable to the Bank relating to the Goodwill
Litigation, whether by judgment or settlement, exceeds $150.0 million. The
employment agreement generally defines "cause" as termination because of
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order or material breach of any
provision of the employment agreement.
DIRECTORS' COMPENSATION
Members of the Company's Board of Directors, except for Messrs. MacDonald,
Guenzel and Holmes, receive a retainer fee of $20,000 per year plus $1,000 and
$500 for attendance at each meeting of the Board of Directors and each Committee
meeting, respectively.
BENEFITS
SAVINGS PLUS PLAN. The Bank maintains a 401(k) profit sharing plan (the
"Savings Plus Plan"). The Savings Plus Plan is designed to promote the future
economic welfare of the employees of the
107
Bank and to encourage employee savings. Employee deferrals of salary and
employer contributions made under the Savings Plus Plan, together with the
income thereon, are accumulated in individual accounts maintained in trust on
behalf of the employee participants, and is made available to the employee
participants upon retirement and under certain other circumstances as provided
in the Savings Plus Plan. Since employee deferrals of salary and employer
contributions made under the Savings Plus Plan are made on a tax deferred basis,
employee participants are able to enjoy significant income tax savings by
participating in the Savings Plus Plan. Employees are also permitted to direct
the investment of their accounts among eleven separate funds, including various
fixed income and equity investment funds.
An employee of the Bank becomes eligible to participate in the Savings Plus
Plan on the entry date (January 1, April 1, July 1 or October 1) nearest the
date he or she completes 90 days of service. Participants may elect to defer
amounts up to 15% of their annual compensation under the Savings Plus Plan,
subject to certain limits imposed by law. The Bank matches 50% of compensation
deferred up to 6% and may make additional discretionary matching contributions.
During the years ended December 31, 2000, 1999 and 1998, the Bank contributed
$223,000, $191,000 and $76,000, respectively, to the Savings Plus Plan on behalf
of its employees.
1999 AND 2000 OPTION PLANS. The company's stockholders approved the 1999
Option Plan at the April 26, 1999 Annual Meeting of Stockholders and the 2000
Stock Incentive Plan at the April 24, 2000 meeting. The Plans were designed to
improve the growth and profitability of the Company and its subsidiaries by
providing employees with a proprietary interest in the Company as an incentive
to contribute to the success of the Company and its subsidiaries. The Plans
provide for the grant of incentive stock options intended to comply with the
requirements of Section 422 of the Code ("Incentive Stock Options"),
non-qualified stock options and stock appreciation rights (collectively
"Awards"). Options to acquire shares of Common Stock will be awarded to officers
and key employees of the Company and the Bank with an exercise price in excess
of the fair market value of the Common Stock on the date of grant.
A total of 1,020,390 and 991,822 shares of Common Stock have been reserved
for issuance pursuant to the 1999 and 2000 Plans, respectively. The Plans are
administered and interpreted by a committee appointed by the Board of Directors
("Committee") that is comprised solely of two or more non-employee directors.
Unless sooner terminated, the 1999 Option Plan shall continue in effect for a
period of ten years from January 25, 1999, the date the 1999 Option Plan was
adopted by the Board of Directors. The 2000 Stock Incentive Plan shall continue
in effect for 10 years from September 20, 1999, the date adopted by the Board.
Under the Plans, the Committee determines which officers and employees will be
granted options, whether such options will be incentive stock options or
non-qualified options, the number of shares subject to each option, the exercise
price of each option, whether such options may be exercised by delivering other
shares of Common Stock and when such options become exercisable. The per share
exercise price of both an incentive stock option and a non-qualified stock
option shall at least equal the fair market value of a share of Common Stock on
the date the option is granted. Subject to certain exceptions, options granted
under the Plans shall become vested and exercisable in the manner specified by
the Committee.
PENSION PLAN. The Bank maintains a defined benefit pension plan ("Pension
Plan") covering all employees who were Pension Plan participants as of
December 31, 1990. All Pension Plan benefits were frozen as of December 31,
1990. In general, the Pension Plan provides for annual benefits payable monthly
upon retirement at age 65 in an amount equal to 4.1% of an employee's average
annual salary for the five consecutive years as of December 31, 1990 ("Five Year
Average Compensation") plus 0.65% of Five Year Average Compensation multiplied
by his number of years of service, not in excess of 10 years. Under the Pension
Plan, an employee's benefits are 20% vested after three years of service and
fully vested after seven years of service. A year of service is any year in
which an employee works a minimum of 1,000 hours. Benefits under the Pension
Plan are payable for ten years certain and life
108
thereafter commencing at age 65 and are not subject to Social Security offsets.
The Bank incurred a net periodic pension (benefit) of $(87,000), (52,000) and
$(25,000) in 2000, 1999 and 1998, respectively.
The following table illustrates annual pension benefits for retirement at
age 65 under various levels of compensation and years of service. The figures in
the table assume that the Pension Plan continues in its present form and that
the participant elect a straight life annuity form of benefit.
FIVE YEAR AVERAGE 5 YEARS OF 10 YEARS OF OVER 10 YEARS
COMPENSATION SERVICE SERVICE OF SERVICE
----------------- ---------- ----------- -------------
$80,000......................... $18,610 $37,220 $37,220
100,000......................... 23,360 46,720 46,720
120,000......................... 28,110 56,220 56,220
140,000......................... 32,860 65,720 65,720
160,000......................... 37,610 75,220 75,220
180,000......................... 42,360 84,720 84,720
200,000......................... 47,110 94,220 94,220
Over 200,000.................... 47,110 94,220 94,220
The maximum annual compensation which may be taken into account under the
Code (as adjusted from time to time by the Internal Revenue Service) for
calculating contributions under qualified defined benefit plans currently is
$160,000 and the maximum annual benefit permitted under such plans currently is
$130,000.
Ms. Blauschild has three years of credited service and her final
compensation earned under such plan as of December 31, 1990 was $95,000.
Messrs. Guenzel, Holmes, Flader, Hundley and Carroll are not participants in the
Pension Plan and have no credited service or plan benefits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee was at any time during the
fiscal year ended December 31, 2000, or at any other time, an officer or
employee of the Company.
REPORT OF THE COMPENSATION COMMITTEE
The members recognize that the Company must attract, retain and motivate the
best people to achieve its business objectives. To do so, it must compensate its
executives fairly and competitively in the markets in which it competes. The
competitive market for executives is primarily banks of a similar asset size
located in the Southern California area. The current compensation program
permits recognition of individual contribution, business unit results, and
overall corporate results. Currently, executive compensation comprises base
salary and bonuses.
BASE SALARY. The Compensation Committee establishes base salaries for
executives of the Company by conducting an annual review utilizing salary survey
data provided by an external compensation consultant. It is the intention of the
Committee to pay base salaries at the average salary paid by competitive banks.
BONUSES. The bonus portion of the executives' total compensation program is
tied to the achievement of specific individual and group corporate results.
Because it is the committee's intention to link a significant portion of
executive pay to changes in shareholder value, the annual incentive bonus will
include annual financial measures that are highly correlated to market
indicators, such as Net Income, Earnings per Share, Cash Flow and Return on
Equity. Also, the Committee's intention is to offset base salaries which are
somewhat more conservative with greater upside potential through annual
incentives and stock plans to provide for above average total remuneration in
years when the Company has outstanding performance.
109
TAX DEDUCTIBILITY. At this point, and for the foreseeable future, the
Company does not anticipate problems with tax deductibility of executive
compensation. If, in the future, this becomes a concern, the Compensation
Committee will revisit the issue.
STOCK OPTION GRANTS. Restricted stock and stock options to purchase Common
Stock were granted to key personnel under the Company's Option Plans. Grants
were made to executive officers at an option price in excess of the market value
on the date of the grant. The Company's philosophy in granting stock options is
primarily to increase executive officer ownership in the Company and as a
vehicle for additional compensation. Executive officers are provided with
incentives to manage with a view toward maximizing long-term stockholder value.
In determining the total number of options to be granted to all recipients,
including the executive officers, the Committee considered dilution, number of
shares of Common Stock outstanding and the performance of the Company during the
immediately preceding year. The Committee sets guidelines for the number of
shares available for the granting of stock options to each executive officer
based on the total number of options available, an evaluation of competitive
data for grants by the comparison group as discussed under the "Base Salary"
section above, and the executive officer's salary and position. These stock
option grants provide incentive for the creation of stockholder value since the
full benefit of the grant to each executive officer can only be realized with an
appreciation in the price of the Company's Common Stock.
CHIEF EXECUTIVE OFFICER'S COMPENSATION. The Committee considered the
following factors in determining the base salary for 2000 for Rudolf P. Guenzel,
President and Chief Executive Officer of the Company: the Company's success in
attaining its profit plan for 2000 as discussed below and the comparative data
for comparable bank and thrift holding companies. Based on these factors, the
Committee established Mr. Guenzel's base salary at $348,000, which was the same
as his 1999 salary level. This placed Mr. Guenzel's base salary below the middle
of the peer group.
For 2000, Mr. Guenzel was eligible to earn a cash bonus of up to 100% of his
base salary based on specific measurable and subjective performance goals. The
measurable performance goal set for Mr. Guenzel was the attainment of the
Company's profit plan. The Committee also considered the subjective assessment
of his ability to identify and develop key personnel as well as expressing the
leadership and vision to continue the long-term growth of the Company. While the
Committee did not assign specific relative weights to those goals, the level of
annual bonus is more heavily dependent upon the attainment of the profit plan.
For 2000, the Company's earnings decreased from 1999. No bonus has been paid for
2000.
In February 2000, Mr. Guenzel was awarded 50,618 shares of Restricted Stock
of the Company. This award was made in accordance with the guidelines of the
Committee referenced above, including specifically the Company's increase in its
year-to-date earnings for 1999 and comparison of Mr. Guenzel's overall
compensation package with similar positions within the peer group as discussed
above.
Robert W. MacDonald--Chairman
John F. Davis
Murray Kalis
C. Stephen Mansfield
110
PERFORMANCE GRAPH
Pursuant to the rules and regulations of the SEC, the graph below compares
the performance of the Company's common stock with that of the Nasdaq Composite
Index (U.S. Companies) and the Nasdaq Financial Index (U.S. banks and thrifts)
from May 13, 1998, the date the Company's common stock began trading on the
Nasdaq National Market, through December 31, 2000. The graph is based on the
investment of $100 in the Company's common stock at its closing price on
May 13, 1998.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
5/13/98 6/30/98 12/31/98 6/30/99 12/31/99 6/30/00 12/31/00
PBOC Holdings, Inc. 100 96.93 71.93 70.18 66.23 59.65 66.89
NASDAQ - Total US* 100 101.24 118.72 145.64 220.62 215.27 132.74
NASDAQ Financial Index* 100 96.83 91.05 99.83 90.44 78.68 98.83
111
ITEM 12. 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 February 23, 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. For a discussion
of a potential change in control of the Company, see Item 1. Business--General.
AMOUNT AND NATURE OF
NAME OF BENEFICIAL BENEFICIAL OWNERSHIP AS OF PERCENT OF OUTSTANDING
OWNER OR NUMBER OF PERSONS GROUP FEBRUARY 23, 2001 (1) COMMON STOCK
- ------------------------------------------------ -------------------------- ----------------------
Trustees of the Estate of Bernice Pauahi 4,759,848 (2) 22.9%
Bishop........................................
(the "Bishop Estate")
567 South King Street, Suite 200
Honolulu, HI 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) *
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 persons).................................. 1,459,305 (15) 7.0%
- ------------------------
* 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.
112
(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. See Item 1,
"Business--General."
(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.
(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.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
In accordance with applicable laws and regulations, the Bank offers mortgage
loans to its directors, officers and employees as well as members of their
immediate families for the financing of their primary residences and certain
other loans. These loans are generally made on substantially the same terms as
those prevailing at the time for comparable transactions with non-affiliated
persons. It is the belief of management that these loans neither involve more
than the normal risk of collectibility nor present other unfavorable features.
All such loans to directors and executive officers were current as of
December 31, 2000.
Section 22(h) of the Federal Reserve Act generally provides that any credit
extended by a savings institution, such as the Bank, to its executive officers,
directors and, to the extent otherwise permitted, principal stockholder(s), or
any related interest of the foregoing, must be on substantially the same terms,
including interest rate and collateral, as those prevailing at the time for
comparable transactions by the savings institution with non-affiliated parties,
unless the loans are made pursuant to a benefit or compensation program that
(i) is widely available to employees of the institution and (ii) does not give
preference to any director, executive officer or principal stockholder, or
certain affiliated interests of
113
either, over the employees of the savings institution, and must not involve more
than the normal risk of repayment or present other unfavorable features.
The Bank utilizes Kalis and Savage Advertising for routine and customary
marketing services of which Murray Kalis, a director of the Company, is Chairman
and Creative Director. A total of $140,401 was paid as commissions and charges
to that firm by the Bank in 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBIT INDEX
(a) Document filed as part of this Report.
(1) The Consolidated Financial Statements are contained herein
as listed on the "Index" on page 55 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.
(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.( 4/)
4 Stock Certificate of PBOC Holdings, Inc.(2/)
10.1 Employment Agreement between PBOC Holdings, Inc., People's
Bank of California and Rudolf P. Guenze1(1/)
10.1.1 Amendment to Employment Agreement between PBOC Holdings,
Inc., People's Bank of California and Rudolf P. Guenzel(4/)
10.2 Employment Agreement between PBOC Holdings, Inc., People's
Bank of California and J. Michael Holmes.(1/)
10.1.2 Amendment to Employment Agreement between PBOC Holdings,
Inc., People's Bank of California and J. Michael Holmes(4/)
10.2 Employment Agreement between PBOC Holdings, Inc., People's
Bank of California and William W. Flader(1/)
10.3.1 Amendment to Employment Agreement between PBOC Holdings,
Inc., People's Bank of California and William W. Flader(4/)
10.4 Employment Agreement between the People's Bank of California
and Doreen J. Blauschild(2/)
10.5 Deferred Compensation Plan(1/)
114
NO. DESCRIPTION
- --- -----------
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 Agreement and Plan of Merger between PBOC Holdings, Inc.,
People's Bank of California, BYL Bancorp and BYL Bank Group,
dated November 1, 2000.(5/)
10.11 Agreement and Plan of Merger between PBOC Holdings, Inc.,
FBOP Corporation and FBOP Acquisition Company, dated
December 8, 2000.(6/)
21 Subsidiaries of the Registrant -- Reference is made to "Item
1. Business" for the required information
23.1 Consent of KPMG LLP
99.1 Charter of the Audit Committees of the Board of Directors of
PBOC Holdings, Inc. and People's Bank of California.
99.2 Consolidated and amended class action complaint -- In Re
PBOC Holdings, Inc. Shareholders Litigation, Delaware Court
of Chancery Consol. C.A. No. 18543
- ------------------------
(1/) Incorporated by reference from the 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 Proxy Statement on Schedule 14A as
filed on March 22, 1999 (File No.000-24215)
(4/) Incorporated by reference from the Form 10-Q for the six months ended
June 30, 2000, as filed on August 11, 2000 (File No. 000-24215)
(5/) Incorporated by reference from the Form 8-K, as filed on November 3, 2000
(File No. 000-24215).
(6/) Incorporated by reference from the Form 8-K, as filed on December 12, 2000
(File No. 000-24215).
(3)(b) Reports filed on Form 8-K.
A current report on Form 8-K dated December 8, 2000, was filed with the
Securities and Exchange Commission and reported that the Company had entered
into an Agreement and Plan of Merger with FBOP Corporation. See Note 2 to the
Notes to the Financial Statements, herein.
115
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
-----------------------------------------
Name: Rudolf P. Guenzel
Title: 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.
NAME TITLE DATE
---- ----- ----
President and Chief
/s/ RUDOLF P. GUENZEL Executive Officer and
------------------------------------------- Director (Principal March 20, 2001
Rudolf P. Guenzel Executive Officer)
Senior Executive Vice
President and Chief
/s/ J. MICHAEL HOLMES Financial Officer
------------------------------------------- (Principal Financial and March 20, 2001
J. Michael Holmes Accounting Officer) and
Director
/s/ MURRAY KALIS
------------------------------------------- Director March 20, 2001
Murray Kalis
/s/ ROBERT W. MACDONALD
------------------------------------------- Director, Chairman of the March 20, 2001
Robert W. MacDonald Board
/s/ JOHN F. DAVIS
------------------------------------------- Director March 20, 2001
John F. Davis
/s/ RICHARD DELANEY
------------------------------------------- Director March 20, 2001
Richard Delaney
/s/ CARL LOBUE
------------------------------------------- Director March 20, 2001
Carl LoBue
/s/ C. STEPHEN MANSFIELD
------------------------------------------- Director March 20, 2001
C. Stephen Mansfield
116
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.
SIGNATURE CAPACITY DATE
--------- -------- ----
President and Chief Executive
/s/ RUDOLF P. GUENZEL, Officer and Director
------------------------------------------- (Principal Executive
Rudolf P. Guenzel Officer) March 20, 2001
Senior Executive Vice
President and Chief
/s/ J. MICHAEL HOLMES Financial Officer
------------------------------------------- (Principal Financial and
J. Michael Holmes Accounting Officer) and
Director March 20, 2001
/s/ MURRAY KALIS
------------------------------------------- Director
Murray Kalis March 20, 2001
/s/ ROBERT W. MACDONALD
------------------------------------------- Director, Chairman of the
Robert W. MacDonald Board March 20, 2001
/s/ JOHN F. DAVIS
------------------------------------------- Director
John F. Davis March 20, 2001
/s/ RICHARD DELANEY
------------------------------------------- Director
Richard Delaney March 20, 2001
/s/ CARL LOBUE
------------------------------------------- Director
Carl LoBue March 20, 2001
/s/ C. STEPHEN MANSFIELD
------------------------------------------- Director
C. Stephen Mansfield March 20, 2001
117