SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
COMMISSION FILE NO.: 0-24215
PBOC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0220233
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5900 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA, 90036
(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (323) 938-6300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of March 9, 1999, the aggregate value of the 19,846,166 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
602,539 shares held by all directors and executive officers of the Registrant as
a group, was approximately $189.8 million. This figure is based on the last
known trade price of $9.5625 per share of the Registrant's Common Stock on March
9, 1999.
Number of shares of Common Stock outstanding as of March 9, 1999: 20,448,705
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1999 Annual Meeting of
Stockholders are incorporated into Part III.
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PBOC HOLDINGS, INC.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS ......................................................... 3
General ...................................................... 3
Lending Activities ........................................... 6
Investment Activities ........................................ 11
Sources of Funds ............................................. 12
Competition .................................................. 14
Asset Quality ................................................ 14
Subsidiaries ................................................. 16
Regulation ................................................... 17
Regulation of Savings and Loan Holding Companies ............. 17
Regulation of Federal Savings Banks .......................... 18
Taxation ..................................................... 22
Description of Capital Stock ................................. 24
Common Stock ................................................. 25
Preferred Stock .............................................. 25
Restrictions on Acquisition of the Company ................... 26
ITEM 2. PROPERTIES ........................................................ 29
ITEM 3. LEGAL PROCEEDINGS ................................................. 31
The Goodwill Litigation ...................................... 31
The Shareholder Rights Agreement ............................. 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 37
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ............................................. 38
ITEM 6. SELECTED FINANCIAL DATA ........................................... 39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ....................................... 42
General ...................................................... 42
Financial Condition .......................................... 42
Results of Operations ........................................ 54
Average Balances, Net Income, Yields Earned and Rates Paid ... 56
Rate / Volume Analysis ....................................... 57
Asset and Liability Management ............................... 61
Liquidity and Capital Resources .............................. 65
Asset Quality ................................................ 66
Year 2000 .................................................... 67
Recent Accounting Pronouncements ............................. 68
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ......... 69
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................... 70
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE ...................................................... 107
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ................ 108
ITEM 11. EXECUTIVE COMPENSATION ............................................ 108
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ...................................................... 108
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................... 108
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K ........................................................ 108
2
WHEN USED IN THIS FORM 10-K OR FUTURE FILINGS BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC"), IN THE COMPANY'S PRESS RELEASES OR
OTHER PUBLIC OR STOCKHOLDER COMMUNICATIONS, OR IN ORAL STATEMENTS MADE WITH AN
APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS OR PHRASES "WOULD BE",
"WILL ALLOW", "INTENDS TO", "WILL LIKELY RESULT", "ARE EXPECTED TO", "WILL
CONTINUE", "IS ANTICIPATED", "ESTIMATE", "PROJECT", OR SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE LITIGATION REFORM ACT OF 1995.
THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY
SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE, AND TO
ADVISE READERS THAT VARIOUS FACTORS, INCLUDING REGIONAL AND NATIONAL ECONOMIC
CONDITIONS, SUBSTANTIAL CHANGES IN LEVELS OF MARKET INTEREST RATES, CREDIT AND
OTHER RISK OF LENDING AND INVESTMENT ACTIVITIES AND COMPETITIVE AND REGULATORY
FACTORS, COULD AFFECT THE COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE THE
COMPANY'S 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 from the Federal Savings and Loan
Insurance Corporation ("FSLIC") in connection with its conversion from mutual to
stock form. (Unless the context otherwise requires, references herein to the
Company include the Bank and its other subsidiaries.) The Company owns 100% of
the Common Stock of the Bank, which is its primary investment. The Bank is a
federally chartered savings bank which was originally organized in 1887 under
California law and conducts business from its executive offices located in Los
Angeles, California and 20 full-service branch offices located primarily in Los
Angeles County as well as Orange and Ventura Counties in Southern California. In
addition, the Company currently operates 43 automated teller machines ("ATMs"),
20 of which are in stand-alone facilities, Southern California. At December 31,
1998, the Company had total assets of $3.3 billion, net loans receivable of $2.1
billion, total deposits of $1.5 billion and total stockholders' equity of $180.6
million.
In May 1998, the Company along with (i) the Trustees of the Estate of
Bernice Pauahi Bishop, also known as Kamehameha Schools Bernice Pauahi Bishop
Estate (the "Bishop Estate"), a charitable educational trust established under
Hawaii law, (ii) BIL Securities (Offshore) Limited ("BIL Securities"), a wholly
owned subsidiary of Brierley Investments Limited, a New Zealand corporation, and
(iii) Arbur, Inc. ("Arbur"), a Delaware corporation (collectively, the "Material
Stockholders") consummated a public offering of the Company's Common Stock (the
"Offering"). In the Offering, the Company issued 10,196,667 shares of Common
Stock at $13.75 per share and received net proceeds of $129.6 million.
Additionally, the Material Stockholders sold 4,370,000 shares of Common Stock at
$13.75 per share and received $56,183,950 in return. Upon consummation of the
Offering, the Bishop Estate, BIL Securities and Arbur owned 21.76%, 8.74% and
2.91%, respectively, of the Common Stock outstanding. Such continuing ownership
of the Common Stock, coupled with provisions which are contained in a 1998
Stockholders' Agreement which permit the Material Stockholders to nominate up to
three of the seven directors of the Company so long as they are Material
Stockholders, will permit the Material Stockholders to continue to influence the
election of directors, and thereby the policies of the Company and its
subsidiaries. See "The Stockholders' Agreement" in the Company's Proxy Statement
dated March 22, 1999, which is incorporated by reference into ITEM 10. hereof.
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 the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") which
provided, among other things, that savings institutions such as the Bank were no
longer permitted to include goodwill in their regulatory capital (subject to a
gradual phaseout which expired on December 31, 1994). Consequently, the Bank was
required to write-off its goodwill (subject to the phaseout), which resulted in
the Bank failing to comply with its minimum regulatory capital requirements
during 1990 and 1991. The balance of the Bank's GAAP goodwill was written off as
unrealizable in 1992. The Company, the Bank and certain current and former
stockholders of the Company have sued the U.S. Government with respect to the
required write-off of its Capital Credit and supervisory goodwill in a lawsuit
entitled SOUTHERN
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CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION, ET AL. V. UNITED STATES, No.
93-52-C, which seeks damages for breach of contract and for deprivation of
property without just compensation and without due process of the law. In
connection with the Offering, the Company, the Bank and each of the Material
Stockholders individually entered into a Shareholder Rights Agreement whereby
each Material Stockholder received one Contingent Goodwill Participation Right
("Right") for each share of Common Stock held by the Material Stockholder. Each
Right entitles such Material Stockholder to receive 0.0009645% of the Litigation
Recovery (as defined herein), or 95% of the Litigation Recovery by all Material
Stockholders on an aggregate basis. As defined herein, the Litigation Recovery
is the amount, if any, recovered by the Company and/or the Bank as a result of a
settlement or judgment with respect to such litigation, net of certain expenses,
income taxes and other payments. The remaining 5% of such Litigation Recovery,
if any, will be retained by the Company and/or the Bank. See "The Goodwill
Litigation" and "The Shareholder Rights Agreement" in ITEM 3. hereof.
1992 AND 1995 RECAPITALIZATIONS. In July and August 1992, the Company
issued $48.0 million of senior notes and, after payment of the transaction fees
and expenses, contributed $43.5 million of the net proceeds from such sale to
the Bank (the "1992 recapitalization"). As a result of the 1992
recapitalization, the Bank was able to satisfy its minimum regulatory capital
requirements. Notwithstanding the 1992 recapitalization, due to the required
write-off of the Bank's Capital Credit and supervisory goodwill, the Bank's
capital was not sufficient to absorb the significant credit losses which the
Bank continued to recognize. Such credit losses were due in large part to the
continued deterioration in the Southern California economy which had begun with
the national recession at the start of the decade and the decline in market
values of real estate resulting in part from the Northridge earthquake of 1994.
As a result, the Bank experienced dramatically increased levels of
non-performing assets and troubled debt restructurings and, therefore, a loss of
interest income, increased operating expenses and substantially higher
provisions for losses. As a result of the foregoing, during 1994, the Bank again
fell out of compliance with its regulatory capital requirements. In June 1995,
the senior notes issued in the 1992 recapitalization were contributed to the
capital of the Bank and the Material Stockholders invested $10.0 million in new
senior notes and $48.5 million in preferred stock of the Company, substantially
all of the proceeds of which were also contributed to the Bank in order to
satisfy the Bank's minimum regulatory capital requirements (the "1995
recapitalization"). In connection with the consummation of the Offering, the
senior notes of the Company were prepaid, and the various outstanding series of
preferred stock of the Company were exchanged for Common Stock. See "The
Stockholders' Agreement" in the Company's Proxy Statement, dated March 22, 1999,
which is incorporated by reference into ITEM 10. hereof.
NEW MANAGEMENT AND BUSINESS STRATEGY. In connection with the 1995
recapitalization, the Bank replaced its former senior managers with a new
management team with considerable experience in commercial banking and problem
asset resolution. The new management team includes Rudolf P. Guenzel, President
and Chief Executive Officer, J. Michael Holmes, Executive Vice President and
Chief Financial Officer and William W. Flader, Executive Vice President, all of
whom worked together at BancFlorida Financial Corp. ("BancFlorida"), and each of
whom has more than 20 years experience in the banking industry.
The Company under its new management has changed the name of the Company
from SoCal Holdings, Inc. to PBOC Holdings, Inc. and the name of the Bank from
Southern California Federal Savings and Loan Association to People's Bank of
California, in each case to reflect the new emphasis placed on providing
customers with full banking services. In its efforts to rehabilitate the Bank,
the new management team adopted a business strategy designed to reduce problem
assets, increase net interest income, reduce operating expenses and cost of
funds and maximize profitability while limiting interest rate and credit risk.
Since the 1995 recapitalization, management's attention has been focused on the
foregoing initiatives. As the Company has improved its problem assets and with
the Company's return to profitability in 1996 and 1997, the Bank has been
increasingly redirecting its emphasis to its core lending functions. New
management's business strategy is based on the following key elements:
- REDUCE NON-PERFORMING ASSETS. The Bank has organized its loan review
function through the implementation of an internal asset review
system. The Bank created an internal asset review committee and
established loan review and special assets departments in order to
focus on the early identification of potential problem assets and the
administration, rehabilitation or liquidation of the Bank's
non-performing assets. As a result of the foregoing and improved
economic conditions in California, non-performing assets and troubled
debt restructurings have declined from $78.7 million or 4.6% of total
assets at December 31, 1994 to $14.8 million
4
or 0.4% of total assets at December 31, 1998. Decreases in the Bank's
non-performing assets have resulted in reductions in provisions for
losses, which have contributed to the Company's improved operating
results.
- IMPROVE OPERATING EFFICIENCY. Since the change in the Company's
management, the Bank has emphasized improving the Bank's operating
efficiency. New management centralized the Bank's underwriting
functions which, in the opinion of management, has allowed the Bank to
underwrite and approve loans faster and more efficiently. The Bank has
also significantly reduced its operating expenses through the
consolidation of certain of its operations and, to a lesser extent,
staff reductions. The ratio of the Company's operating expenses to
average total assets has steadily decreased, from 2.14% during the
year ended December 31, 1994 to 1.55% and 1.67% (1.12% excluding
one-time IPO-related expenses) during the years ended December 31,
1997 and 1998, respectively. Despite the Bank's recent cost-cutting
efforts, management believes that it has significant operating
leverage and, therefore, continued incremental growth will not cause
the Company's ratio of operating expenses to average total assets to
increase by a corresponding amount.
- REDUCE FUNDING COSTS. The Bank has reduced its overall cost of funds
by promoting retail deposit growth (particularly transaction
accounts), allowing its out-of-market, institutional jumbo
certificates of deposit to run off as they mature and replacing higher
cost, short-term Federal Home Loan Bank ("FHLB") advances with lower
cost, intermediate-term reverse repurchase agreements and FHLB
advances. Prior to 1995, the Bank relied to a large extent on
wholesale sources of funds, such as out-of-market, institutional jumbo
certificates of deposits and FHLB advances, which resulted in a high
cost of funds and reduced margins. As a result of the foregoing
changes, the Bank's transactional accounts (passbook, NOW and money
market accounts) have increased from $183.2 million or 13.2% of total
deposits at December 31, 1994 to $433.0 million or 28.1% of total
deposits at December 31, 1998. Over such period, the Bank eliminated
out-of-market, institutional jumbo certificates of deposit totaling
$122.2 million.
- REVISE INVESTMENT POLICY. Since June 1995, the Bank has been replacing
relatively illiquid securities with more liquid U.S. Government agency
obligations and U.S. Government agency mortgage-backed securities. The
securities disposed of included collateralized mortgage obligations
and other mortgage derivative products, which did not qualify as
collateral with respect to borrowings or other obligations of the
Bank, while the U.S. Government agency obligations and U.S. Government
agency mortgage-backed securities increase the credit quality of the
Bank's assets, require less capital under risk-based regulatory
capital requirements and may be used to collateralize borrowings or
other obligations of the Bank. In 1998, the Bank invested in
investment-grade corporate trust preferred securities, primarily
adjustable rate, as a means of mitigating the prepayment and call risk
of mortgage-backed securities and to manage interest-rate risk. At
December 31, 1998, the Bank held $590.8 million of mortgage-backed
securities, $501.1 million of which were secured by loans with
adjustable rates, $37.0 million of U.S. Government and agency
obligations and $325.0 million of corporate trust preferred
securities. The adjustable-rate nature of the loans underlying the
Bank's mortgage-backed securities has assisted the Bank in managing
its interest rate risk exposure.
- REVISE INTEREST RATE RISK POLICY. Management's strategy is to match
asset and liability balances within maturity categories to limit the
Bank's exposure to earnings variations as well as variations in the
value of assets and liabilities as interest rates change over time.
The Bank under prior management hedged its interest rate exposure
externally through the use of various interest rate contracts, such as
interest rate swaps, corridors, caps and floors. The Bank's current
strategy is to hedge internally through the use of core transaction
deposit accounts, FHLB advances and reverse repurchase agreements,
together with an emphasis on investing in shorter-term or
adjustable-rate assets. At December 31, 1998, the Company had $1.7
billion in assets maturing or repricing within one year and $1.4
billion in liabilities maturing or repricing within one year. As of
such date, the Company's one-year interest rate sensitivity gap as a
percent of total assets amounted to 8.05%.
- EXPAND COMMERCIAL BUSINESS AND CONSUMER LENDING. Since June 1995, the
Bank has hired over 20 individuals with significant expertise in
commercial and consumer lending. The increase in staffing has enabled
the Bank to increase its commercial business and consumer loan
originations. During the years ended December 31, 1998 and 1997, the
Bank originated in the aggregate $94.0 million and $32.6 million of
commercial business and consumer loans (including loans secured by
deposits), which amounted to 15.5% and 20.3% of total loan
5
originations, respectively. Management intends to continue to place
increased emphasis on building these portfolios. Commercial business
and consumer loans generally have shorter terms and higher interest
rates than single-family residential loans but are generally
considered to have a higher level of credit risk.
- INCREASE INTEREST-EARNING ASSETS. The Bank has and will continue to
pursue a policy of utilizing its existing infrastructure to grow its
loan and securities portfolios as well as its retail franchise. During
1997, the Bank established People's Preferred Capital Corporation
("PPCCP"), an operating subsidiary of the Bank and a real estate
investment trust ("REIT") for federal income tax purposes under the
Internal Revenue Code of 1986, as amended (the "Code"), to acquire,
hold and manage primarily mortgage assets. In connection therewith,
the Bank has leveraged the $35.7 million of net proceeds raised in a
public offering of preferred stock of PPCCP through wholesale
purchases of an aggregate of $408.8 million of adjustable-rate
single-family residential loans, which were funded by short- to
intermediate-term FHLB advances. Because these loans were purchased
during the initial teaser rate period, the initial weighted average
interest rate and yield were significantly less than the fully indexed
rate and yield. As these loans adjust to their fully indexed rate and
yield during the balance of 1998 and early 1999, it is anticipated
that the weighted average interest rate and weighted average yield of
such loans will significantly increase. Such loan purchases
significantly increased the size of the Bank's residential mortgage
portfolio.
Similarly, in 1998, the Company leveraged the $129.6 million of net
proceeds raised from the Offering, primarily through $876.9 million
wholesale purchases of primarily single-family residential loans which
were funded by increases in deposits, intermediate-term reverse
repurchase agreements and FHLB advances, consistent with management's
asset and liability management strategies. As the Bank is able to grow
its deposit accounts and increase its loan originations, management's
strategy is to replace, over time, such wholesale borrowings with core
deposits and replace its wholesale loan purchases with internally
originated loans.
- EXPAND THE BANK'S FRANCHISE. Management of the Company is attempting
to enhance the Bank's branch franchise by opening new offices in
strategic markets and pursuing branch acquisitions within its market
area when appropriate. As of December 31, 1998, the Bank operated out
of 20 full-service branch offices located primarily in Los Angeles
County as well as Orange and Ventura counties in Southern California.
In addition, the Company currently operates 43 ATMs, 20 of which are
in stand-alone facilities in various locations throughout Southern
California. The Company may also consider whole bank acquisition
opportunities.
REGULATION. The Bank, as a federally chartered savings bank, is subject to
comprehensive regulation and examination by the Office of Thrift Supervision
("OTS"), as its chartering authority and primary regulator, and by the Federal
Deposit Insurance Corporation ("FDIC"), which administers the Savings
Association Insurance Fund ("SAIF"), which insures the Bank's deposits to the
maximum extent permitted by law. The Bank is a member of the FHLB of San
Francisco, which is one of the 12 regional banks which comprise the FHLB System.
The Bank is further subject to regulations of the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") governing reserves required to
be maintained against deposits and certain other matters. See "Regulation."
LENDING ACTIVITIES
GENERAL. The Company is focused on increasing the Bank's lending
activities. With the reduction in the Company's non-performing assets and the
Company's return to profitability in 1996, the Bank is again actively
originating and purchasing loans. Total loan originations and purchases have
increased from $61.7 million during the year ended December 31, 1996 to $666.4
million during the year ended December 31, 1997 and to $1.5 billion during the
year ended December 31, 1998.
At December 31, 1998, the Bank's total loans receivable amounted to $2.1
billion, which represented 64% 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, 1998, such loans constituted $1.5 billion and $366.6 million, or
69.6 % and 17.1%, 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
6
Department of Veterans Affairs. The Bank has also historically originated to a
much lesser extent commercial real estate loans, which amounted to $206.4
million or 9.6% of the total loan portfolio at December 31, 1998. At December
31, 1998, commercial business and consumer loans (including loans secured by
deposits) amounted to $62.7 million and $57.4 million, respectively.
The Bank has general authority to originate and purchase loans secured by
real estate located throughout the United States. Notwithstanding this
nationwide lending authority, the Bank's primary market area for originations is
Los Angeles County and, to a lesser extent, Orange and Ventura Counties in
Southern California. The Bank intends from time to time to purchase additional
loans to supplement its loan origination activity, which may include loans
secured by properties outside of the Bank's primary market area in California as
well as in other states.
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the Bank
are subject to the written, non-discriminatory underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. Loan originations are obtained by a variety of sources, including
referrals from real estate brokers, existing customers, walk-in customers and
advertising. In its present marketing efforts, the Bank emphasizes its community
ties, customized personal service, competitive rates, and an efficient
underwriting and approval process. With an orientation under new management to
make the branch office network more responsive to customers needs, loan
applications now are taken at all of the Bank's branch offices. The Bank's
centralized underwriting department supervises the obtaining of credit reports,
appraisals and other documentation involved with a loan. Property valuations are
performed by the Bank's staff as well as by independent outside appraisers
approved by the Bank's Board of Directors. The Bank requires title, hazard and,
to the extent applicable, flood insurance on all security property.
Mortgage loan applications are initially processed by loan officers who
have approval authority up to designated limits. Senior officers of the Bank who
serve on the Credit Committee acting together have additional approval
authority. All loans in excess of such designated limits are referred to the
Bank's Credit Committee, comprised of the Bank's Senior Credit Officer, the
Senior Lending Officer, the Chief Financial Officer and the Executive Vice
President of Retail Banking, which has approval authority for all loans in
excess of $1.0 million and up to $5.0 million. Any loans exceeding $5.0 million
must be approved by the Board of Directors of the Bank.
The Bank's commercial loan officers have approval authority up to
designated limits. The commercial loan officers do all of the underwriting
associated with an application and prepare the credit authorization for
submission to the Senior Commercial Lending Officer for verification. Loans in
excess of $100,000 are referred directly to the Senior Commercial Lending
Officer who has authority to approve loans up to $500,000. The Bank's Senior
Lending Officer or Senior Credit Officer can approve loans up to $1.0 million.
Loans in excess of such amounts fall under the jurisdiction of the Credit
Committee or the Board of Directors, based on the loan amounts set forth above.
Applications for consumer loans, as well as the Bank's smaller "business
express" loans, which range between $5,000 and $50,000, are taken in the Bank's
branches and submitted to the Vice President, Manager of the Bank's Business
Center, who has authority to approve consumer loans up to $300,000. Other
consumer loan officers have approval authority up to lesser designated amounts.
In order to improve the Bank's balance sheet as well as due to asset and
liability management considerations, during the year ended December 31, 1997,
the Bank sold $85.2 million of single-family residential mortgage loans tied to
the FHLB 11th District Cost of Funds ("COFI") and reinvested $59.0 million of
such proceeds in one year adjustable-rate single-family residential mortgage
loans. Management used the balance of the sale proceeds to purchase $4.8 million
and $5.0 million of multi-family residential loans and a land loan,
respectively. In addition, during the last quarter of 1997, management leveraged
the capital raised in the PPCCP offering by purchasing in two transactions an
aggregate of $408.8 million of adjustable-rate single-family residential
mortgage 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.
In 1998, the Bank leveraged the capital raised from the Offering primarily
through purchases of single-family residential loans totaling $821.7 million.
Such loans were generally underwritten in accordance with the Bank's
underwriting guidelines for direct originations, and were a mix of adjustable
and fixed-rate loans.
7
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, 1998, the Bank's regulatory limit
on loans-to-one borrower was $29.3 million and its five largest loans or groups
of loans-to-one borrower, including related entities, aggregated $15.0 million,
$13.1 million, $7.8 million $7.3 million and $5.0 million. All of these five
largest loans or loan concentrations were secured by commercial real estate and
multi-family residential properties, except that the $15 million loan is secured
by marketable securities and the $7.8 million loan is unsecured. All of these
loans or loan concentrations were performing in accordance with their terms at
December 31, 1998.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank has historically
concentrated its lending activities on the origination of loans secured by first
mortgage liens on existing single-family residences. At December 31, 1998, $1.49
billion or 68% of the Bank's gross loan portfolio consisted of such loans. The
single-family residential loans originated by the Bank are generally made on
terms, conditions and documentation except for non-conforming loan size which
would permit the sale of loans to the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA") and other
institutional investors in the secondary market.
Although the Bank has historically originated its single-family residential
loans internally, in an effort to enhance its ability to originate greater
volumes of loans without increasing its staff, during 1997, the Bank entered
into agreements with various mortgage brokers with respect to the origination of
single-family residential loans. Under the terms of such agreements, the
mortgage brokers originate loans on behalf of the Bank using the Bank's loan
documents. Such loans (which generally conform except for the size of the loans
with FHLMC and FNMA resale requirements) are originated and underwritten in
accordance with the Bank's underwriting policies. Currently, the Bank originates
approximately 50% of its single-family residential loans pursuant to such
mortgage broker relationships. The Bank currently utilizes approximately 51
mortgage brokers and management believes that its single-family loan
originations are of high quality based on its scoring results (average FICO
score as of December 31, 1998 over 700). Substantially all of the single-family
residential loans originated by the Bank (either internally or through mortgage
brokers) are secured by properties located within the Bank's market area.
Although the Bank had not been an active purchaser of single-family
residential loans, during 1997, the Bank established PPCCP as a REIT and
leveraged the capital generated from two transactions through wholesale
purchases of an aggregate of $408.8 million of adjustable-rate (based upon a
weekly average yield on U.S. Treasury securities adjusted to a constant
comparable maturity of one year) single-family residential loans, which were
funded by short- to intermediate-term FHLB advances. Such purchases
significantly increased the size of the Bank's residential mortgage portfolio.
Similarly, in 1998, the Bank leveraged the proceeds raised from the Offering
through wholesale purchases of $821.7 of single-family residential loans. As the
Bank is able to increase its loan originations, management intends to, over
time, replace its wholesale loan purchases with loans which have been originated
internally.
The Bank currently offers fixed-rate single-family residential loans with
terms of 15 or 30 years. Such loans are amortized on a monthly basis with
principal and interest due each month. In addition to these traditional
products, the Bank offers a fixed bi-weekly pay option, which results in 26
payments per year, thereby permitting a customer to pay off the loan faster than
would otherwise be the case. At December 31, 1998, the Bank had $1.2 billion or
77% of fixed rate single-family residential loans in its single-family
residential portfolio.
Since the 1980's, the Bank has also offered a variety of adjustable rate
single-family residential mortgage loans. Such loans generally have up to 30
year terms. Presently, the Bank offers a "5/1 Product," in which the loan is
fixed at origination for a five year period, after which the interest rate
adjusts every year in accordance with a designated index (the weekly average
yield on U.S. Treasury securities adjusted to a constant comparable maturity of
one year, as made available by the Federal Reserve Board). Such loans currently
have a 2% cap on the amount of any increase or decrease in the interest rate per
year, and a 6% limit on the amount by which the interest rate can increase or
decrease over the life of the loan. In addition, the Bank's adjustable rate
loans are currently not convertible into fixed rate loans and do not contain
prepayment penalties. Approximately 23% of the single-family residential loans
in the Bank's single-family residential loan portfolio at December 31, 1998 had
adjustable interest rates.
8
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, 1998, 51% of the
Bank's adjustable rate single-family loans were tied to COFI.
Adjustable rate mortgage loans decrease but do not eliminate the risks
associated with changes in interest rates. Because periodic and lifetime caps
limit the interest rate adjustments, the value of adjustable rate mortgage loans
also fluctuates inversely with changes in interest rates. In addition, as
interest rates increase, the required payments by the borrower increase, thus
increasing the potential for default.
The Bank previously offered a variety of adjustable rate programs, which
provided for interest rates which adjusted periodically based on COFI. However,
to protect borrowers from unlimited interest rate and payment increases, the
majority of these adjustable rate loans have a maximum interest rate change
("interest rate cap") from the initial reduced interest rate period and/or over
the life of the loan. In certain loan programs, these protections for borrowers
can result in monthly payments which are greater or less than the amount
required to amortize the loan by its maturity at the interest rate in effect in
any particular month. In the event that the monthly payment is not sufficient to
pay the interest accruing during the month, the deficiency is added to the
loan's principal balance ("negative amortization"). In the event that a loan
incurs significant negative amortization, there is an increased risk that the
market value of the underlying collateral on the loan may be insufficient to
fully satisfy the outstanding principal and interest. While the outstanding
balance of the loan may increase because of negative amortization, the risk of
default may be decreased as borrowers have a lower debt service burden or a debt
service requirement that increases more slowly than fully amortizing loans. In
the event that the monthly payment exceeds the amount necessary to pay the
interest accruing during the month, the excess is applied to reduce the loan's
principal balance, which would result in an earlier payoff of the loan. At
December 31, 1998, the Bank had approximately $84.1 million of single-family
residential loans with negative amortization features.
The Bank is permitted under applicable law to lend up to 100% of the
appraised value of the real property securing a residential loan (referred to as
the loan-to-value ratio). However, if the amount of a residential loan
originated or refinanced exceeds 90% of the appraised value, the Bank is
required by federal regulations to obtain private mortgage insurance on the
portion of the principal amount that exceeds 80% of the appraised value of the
security property. Pursuant to underwriting guidelines adopted by the Board of
Directors, the Bank will generally lend up to 90% of the appraised value of the
property securing a single-family residential loan. However, the Bank generally
obtains private mortgage insurance on the principal amount that exceeds 80% of
the appraised value of the security property. For properties with an appraised
value in excess of $400,000, the Bank will generally not lend in excess of 80%.
At December 31, 1998, $19.0 million or 12.1% 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
67.1%.
In 1997, the Bank sold the servicing rights both with respect to
substantially all of its residential mortgage loans as well as the residential
mortgage loans which the Bank was servicing for others to Temple Inland Mortgage
Corporation (the "Residential Servicing Agent"), a wholly owned subsidiary of
Guaranty Federal Bank, F.S.B., which is wholly owned by Temple-Inland Inc., an
unrelated third party. The sale of loan servicing was predicated upon new
management's determination that it was costly and inefficient for the Bank to
service a varied collection of loan products which it no longer offered. The
Bank recognized a gain on sale of $3.2 million during the year with respect to
the Bank's loans serviced for others and an additional $5.3 million, related to
the Bank's mortgage loans, which was deferred and is being recognized over the
period of the lives of the 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 will
service substantially all of such residential mortgage loans. The Bank
terminated the Forward Production Servicing Purchase and Sale Agreement with the
Residential Servicing Agent in early 1998, and the Bank began servicing all of
the residential mortgage loans it originated after February 20, 1998.
9
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LOANS. At December 31, 1998, the
Bank had an aggregate of $366.6 million and $206.4 million invested in
multi-family and commercial real estate loans, respectively, or 17% and 9% of
the gross loan portfolio, respectively. The Bank has generally targeted higher
quality, smaller commercial real estate loans with principal balances of up to
$1.0 million. In originating such loans, the Bank relies on relationships it has
developed with brokers, correspondents and mortgage brokers.
The Bank's multi-family loans are secured by multi-family properties of
five units or more, while the Bank's commercial real estate loans are secured by
industrial, warehouse and self-storage properties, office buildings, office and
industrial condominiums, retail space and strip shopping centers, mixed-use
commercial properties, mobile home parks, nursing homes, hotels and motels.
Substantially all of these properties are located in California. The Bank will
presently originate these loans for terms of up to 10 years based upon a 20 to
25 year loan amortization period and up to 15 years for loans amortized over a
period of 15 years or less. The Bank will originate these loans on both a
fixed-rate or adjustable-rate basis, with the later based on the one year U.S.
Treasury index of constant comparable maturities. Adjustable rate loans may have
an established ceiling and floor, and the maximum loan-to-value for these loan
products is 75%. As part of the criteria for underwriting commercial real estate
loans, the Bank generally requires a debt coverage ratio (the ratio of net cash
from operations before payment of debt service to debt service) of 1.20 or more.
It is also the Bank's general policy to seek additional protection to mitigate
any weaknesses identified in the underwriting process. Additional coverage may
be provided through secondary collateral and personal guarantees from the
principals of the borrowers.
Commercial real estate lending entails different and significant risks when
compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. The Bank attempts to minimize its
risk exposure by limiting the extent of its commercial real estate lending
generally. In addition, the Bank imposes stringent loan-to-value ratios,
requires conservative debt coverage ratios, and continually monitors the
operation and physical condition of the collateral.
Originations of multi-family and commercial real estate loans increased
from an aggregate of $14.8 million during the year ended December 31, 1996 to
$40.0 million during the year ended December 31, 1997 and to $124.1 million
during the year ended December 31, 1998. The Bank began making purchases of
multi-family and commercial real estate loans during the year ended December
31, 1997. Such loan purchases aggregated $17.7 million in 1997 and $23.5
million in 1998.
COMMERCIAL BUSINESS AND CONSUMER LOANS. The Bank is placing increased
emphasis on the development of a commercial business and consumer-lending
program within the areas serviced by its branches. Toward that end, the Bank
during 1998 hired over 20 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, 1998 and 1997, the Bank originated
$94.0 million and $32.6 million, respectively, of commercial business and
consumer loans, which amounted to 15.5% and 20.3% of total originations during
such respective periods.
The Bank is making and intends to make commercial business loans including
working capital lines of credit, inventory and accounts receivable loans,
equipment financing (including equipment leases), term loans and loans
guaranteed by the Small Business Administration ("SBA"). Depending on the
collateral pledged to secure the extension of credit, maximum loan-to-value
ratios are 75% or less. Loan terms may vary from one to 7 years. The interest
rates on such loans are generally variable and are indexed to the WALL STREET
JOURNAL Prime Rate, plus a margin.
The Bank intends to grow its SBA lending business, on which loans are
guaranteed up to certain levels by the SBA. The SBA-guaranteed loans bear
adjustable rates tied to the lowest published New York prime rate, adjusted
monthly, plus a margin, which depends on the term of the loan. The loans
generally have amortization schedules of seven to 25 years, depending on the
purpose of the loan. Each loan is reviewed by the SBA and, depending on the size
of the loan and the proposed use of proceeds, the SBA establishes what
percentage of the loan it will guarantee. The guarantee cannot exceed 80% of the
loan or $750,000, whichever is less. The guarantee applies not only to the
10
principal, but also covers accrued interest, foreclosure costs, legal fees and
other expenses. The plans to obtain preferred lender status, which will permit
it to underwrite and close such loans much more promptly. At December 31, 1998,
approximately $12.0 million of the Bank's $62.7 million in commercial business
loans were comprised of SBA loans.
The Bank is authorized to make loans for a wide variety of personal or
consumer purposes but had not engaged in any lending other than loans secured by
deposits for most of the 1990s. The Bank began originating home equity loans and
lines of credit and automobile loans in August 1996 in order to provide a wide
range of products and services to its customers. The Bank also offers overdraft
protection and unsecured lines of credit. At December 31, 1998, home equity
loans and lines amounted to $5.6 million. On owner-occupied homes, these loans
and lines are originated by the Bank for up to 80% of the first $350,000 of
appraised value plus up to 50% of the remainder, less the amount of any prior
liens on the property. For non-owner occupied properties, the Bank will lend up
to 75% of the first $250,000 of appraised value plus 50% of the remainder, less
the amount of existing liens on the property. Home equity loans and lines of
credit have a maximum term of 25 years and carry variable interest rates. The
Bank will secure each of these types of loans with a mortgage on the property
(generally a second mortgage).
The Bank also originates loans secured by new and used automobiles,
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 with respect to a used luxury car loan. For all other models,
the maximum term is 72 months for new vehicles and 60 months for used vehicles.
The Bank will lend up to 100% of the purchase price on new car loans with a
purchase price of $25,000 or more, and up to 80% for new and used vehicles (up
to five years). On used vehicles, the Bank will finance up to 80% of the lower
of the total purchase price or 100% of the National Automobile Dealers'
Association Wholesale Blue Book Value. The Bank requires all borrowers to
maintain automobile insurance with the Bank named as loss payee. At December 31,
1998, the Bank had $41.9 million of indirect automobile loans and $2.2 million
of direct automobile loans in portfolio.
Commercial business and consumer loans generally have shorter terms and
higher interest rates than mortgage loans but generally involve more credit risk
than mortgage loans because of the type and nature of the collateral. In
addition, consumer lending collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness and personal bankruptcy. The Bank
believes that the generally higher yields earned on commercial business and
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.
INVESTMENT ACTIVITIES
The Bank's securities portfolio is managed by the Executive Vice President
and Chief Financial Officer in accordance with a comprehensive written
Investment Policy which addresses strategies, types and levels of allowable
investments and which is reviewed and approved annually by the Board of
Directors of the Bank. The management of the securities portfolio is set in
accordance with strategies developed by the Bank's Asset/Liability Management
Committee.
The Bank's Investment Policy authorizes the Bank to invest in U.S. Treasury
obligations (with a maturity of up to five years), U.S. agency obligations (with
a maturity of up to five years), U.S. Government agency mortgage-backed
securities (limited to no more than 50% of the Bank's total assets), bankers'
acceptances (with a maturity of 180 days or less), FHLB overnight deposits,
investment-grade 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, 1998, the Bank's securities portfolio consisted of $590.8
million of mortgage-backed securities, $584.5 million of which were classified
as available-for-sale and $6.3 million of which were classified as
held-to-maturity, $37 million of U.S. Government agency obligations, $325
million of investment-grade trust preferred securities and $58.5 million of SBA
certificates. Of the Bank's total investment in mortgage-backed securities at
11
December 31, 1998, $95.5 million consisted of Government National Mortgage
Association ("GNMA") certificates, $262.2 million consisted of FNMA
certificates, $153.9 million consisted of non-agency certificates and $79.2
million consisted of FHLMC certificates. Of the $590.8 million of
mortgage-backed securities at December 31, 1998, $90 million consisted of
fixed-rate securities and $501.1 million consisted of adjustable-rate
securities. Of the Bank's $37 million of U.S. Government and federal agency
obligations at December 31, 1998, none were scheduled to mature within one
through five years thereof, $37 million were scheduled to mature after five
through ten years thereof and none were scheduled to mature after ten years. Of
the Bank's $974.2 million of mortgage-backed and other securities
available-for-sale as well as held-to-maturity at December 31, 1998, none were
scheduled to mature within one year thereof, $59.6 million were scheduled to
mature after one through five years thereof, $192.6 million were scheduled to
mature after five through ten years thereof and $722.0 million were scheduled to
mature after ten years.
Under new management, the Bank has significantly increased its purchases of
primarily adjustable-rate mortgage-backed securities with interest rate
adjustments tied to the U.S. Treasury index of constant comparable maturity. The
Bank's aggregate securities portfolio, net of repayments and prepayments and
sales, increased by $67.6 million or 13.2% between 1996 and 1997 and increased
by $430.4 million or 74.1% during 1998. At December 31, 1998, such portfolio
amounted to $1.0 billion.
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 $240,000. 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.
SOURCES OF FUNDS
SENIOR DEBT OF THE COMPANY. In June 1995, the Company issued $10.0 million
aggregate principal amount of unsecured senior notes in conjunction with the
1995 recapitalization. The senior notes contain an initial pay rate and accrual
rate of 7% and 10.75%, respectively, and the accrual rate increased to 11.15% on
June 30, 1996. The difference between the pay rate and accrual rate is deferred
and compounded annually at the accrual rate commencing on June 30,
12
1996. Interest of approximately $1.8 million, calculated at the pay rate of 7%,
was paid on September 30, 1997 for the period from issuance of the senior notes
to that date. Beginning with the quarter ended December 31, 1997, interest at
the pay rate was payable quarterly. The Company repaid the outstanding balance,
plus accrued interest, in connection with the Offering.
THE BANK'S SOURCES OF FUNDS GENERALLY. The Bank will consider various
sources of funds to fund its investing and lending activities and evaluates the
available sources of funds in order to reduce the Bank's overall funding costs,
subject to the Bank's asset and liability management policies. Deposits, reverse
repurchase agreements, advances from the FHLB of San Francisco, and sales,
maturities and principal repayments on loans and securities have been the major
sources of funds for use in the Bank's lending and investing activities, and for
other general business purposes. Management of the Bank closely monitors rates
and terms of competing sources of funds on a daily basis and utilizes the source
which it believes to be the most cost effective, consistent with the Bank's
asset and liability management policies. Products are priced each week through
the Bank's Asset Liability Management Committee.
DEPOSITS. The Bank attempts to price its deposits in order to promote
deposit growth and offers a wide array of deposit products in order to satisfy
its customers' needs. The Bank's current deposit products include passbook
accounts, negotiable order of withdrawal ("NOW") accounts, money market deposit
accounts, fixed rate, fixed-maturity retail certificates of deposit ranging in
terms from 90 days to five years, individual retirement accounts, and non-retail
certificates of deposit consisting of jumbo (generally greater than $100,000)
certificates and public deposits.
The Bank's retail deposits are generally obtained from residents in its
primary market area. The principal methods currently used by the Bank to attract
deposit accounts include offering a wide variety of products and services and
competitive interest rates. The Bank utilizes traditional marketing methods to
attract new customers and savings deposits, including various forms of
advertising. Although the Bank has in the past utilized the services of deposit
brokers to attract out-of-market, institutional certificates of deposit, the
Bank has allowed such brokered deposits to run off as they mature and is not
accepting any new brokered deposits.
The Bank currently operates a total of 43 ATMs, of which 20 are in
stand-alone facilities. The Bank recently began to operate 20 of such ATMs
within a chain of health clubs located in Southern California. The Bank also has
an option to install and operate up to an additional three ATMs within such
chain of health clubs. As of June 30, 1998, after giving effect to the
consolidation activity in California, the Bank ranked seventh in terms of thrift
deposit market share in Los Angeles, Orange and Ventura Counties.
BORROWINGS. The Bank obtains both fixed and variable rate long- and
short-term advances from the FHLB of San Francisco upon the security of certain
of its residential first mortgage loans and other assets, provided certain
standards related to creditworthiness of the Bank have been met. FHLB of San
Francisco advances are available for general business purposes to expand lending
and investing activities. Borrowings have generally been used to fund the
purchase of mortgage-backed and investment securities or lending activities and
have been collateralized with a pledge of loans, securities in the Bank's
portfolio or any mortgage-backed or investment securities purchased.
Advances from the FHLB of San Francisco are made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. At December 31, 1998, the Bank had total FHLB of San Francisco
advances of $1.2 billion at a weighted average interest rate of 5.38%, $14
million of which matures in 1999, $185 million of which matures in 2000, $25
million of which matures in 2001, $139 million of which matures in 2002, $525 of
which matures in 2003 and the remaining $310 million of which matures in 2008.
FHLB advances increased by $726 million during 1998, as the Bank leveraged the
capital raised in the Company's Offering. The Bank used such FHLB advances to
fund the wholesale purchase of $464.5 million of adjustable-rate single-family
residential mortgage loans and $357.2 million of fixed rate single-family
residential mortgage loans.
Since 1996, the Bank has increasingly relied on obtaining funds from the
sale of securities to investment dealers under reverse repurchase agreements. At
December 31, 1998, reverse repurchase agreements amounted to $364 million, as
compared to $340.8 million and $192.4 million at December 31, 1997 and 1996,
respectively. As of December 31, 1998, the weighted average remaining term to
maturity of the Bank's reverse repurchase agreements was 3.73 years compared to
2.71 years at December 31, 1997, and such reverse repurchase agreements had a
weighted average interest
13
rate of 5.61% compared to 5.76% and 5.49% at December 31, 1997 and 1996,
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
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.
COMPETITION
The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans.
The Bank competes with other thrift institutions, commercial banks,
insurance companies, credit unions, thrift and loan associations, money market
mutual funds and brokerage firms in attracting and retaining deposits.
Competition for deposits from large commercial banks is particularly strong.
Many of the nation's thrift institutions and many large commercial banks have a
significant number of branch offices in the areas in which the Bank operates.
In addition, there is strong competition in originating and purchasing real
estate and consumer loans, principally from other savings and loan associations,
commercial banks, mortgage banking companies, insurance companies, consumer
finance companies, pension funds and commercial finance companies. The primary
factors in competing for loans are the quality and extent of service to
borrowers and brokers, economic factors such as interest rates, interest rate
caps, rate adjustment provisions, loan maturities, loan-to-value ("LTV") ratios,
loan fees, and the amount of time it takes to process a loan from receipt of the
loan application to date of funding. The Bank's future performance is dependent
on its ability to originate a sufficient volume of loans in its local market
areas. There can be no assurance that the Bank will be able to effect such
actions on satisfactory terms.
ASSET QUALITY
GENERAL. During 1995 and 1996, the Bank's new management reorganized the
Bank's loan review function through the implementation of an internal asset
review system. The Bank created an internal asset review committee and
established loan review and special assets departments and revised its loan
underwriting, credit, collection and monitoring procedures. New management
initiated a policy to take title to non-performing assets as promptly as
practicable and improve the properties' physical condition where appropriate so
that marketing efforts may be commenced. In the case of commercial properties,
management takes steps to enhance net operating income with respect to its
properties in order to command a better sales price. The Bank's future results
of operations will be significantly affected by its ability to continue to
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
14
loans.
Under the Bank's management team, the accounts are monitored on a weekly
basis by the servicing department. With respect to commercial loans, a trial
balance is updated weekly, and those accounts that are identified as being past
the due date are assigned to staff to begin the collection process. With respect
to commercial loans, delinquent reports and a listing of those accounts for
which a Notice has been issued are sent to senior management and the Special
Assets Department to provide advance information as to potential problems which
may fall under their Department in the coming quarter. Generally when an account
becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.
NON-PERFORMING ASSETS. With respect to residential mortgage loans, as
described under "--Single-family Residential Real Estate Loans," the Residential
Servicing Agent or other servicers services a substantial amount of the Bank's
loan portfolio. The Bank began servicing all of the residential mortgage loans
it originated after February 20, 1998. The Bank began servicing all of the
residential mortgage loans it originated after February 20, 1998. The
Residential Servicing Agreement requires the Residential Servicing Agent to
foreclose upon or otherwise comparably convert the ownership of properties
securing such residential mortgage loans as come into and continue in default
and as to which no satisfactory agreements can be made for collection of
delinquent payments. When residential mortgage loans handled by the Residential
Servicing Agent go into non-accrual status, the Bank may request that they be
transferred back to the Bank. All loans serviced by the Residential Servicing
Agent which become real estate owned are automatically transferred to the Bank.
All commercial loans held in the Bank's portfolio are reviewed on a regular
basis to determine any potential problems. Monthly committee meetings are held
to identify problem assets and to set forth a strategy for the mitigation of
loss and the resolution of the problem. Loans are placed on non-accrual status
if management has substantive doubts about payment in full of both principal and
interest, or if principal and interest is contractually in default for a period
of 90 days or more. The Bank provides an allowance for the loss of previously
accrued but uncollected interest on all non-accrual loans. Typically, after a
collection problem has necessitated the issuance of a Notice, the Special Assets
Department will review and recommend the selection and an appointment of a
receiver. The Bank's current policy is to have a receiver appointed at the
expiration of the Notice, which is 10 days after issuance, unless some type of
formal, written agreement with the borrower has been arranged.
The receiver has specific criteria to fulfill with respect to the
management of the property on behalf of the Bank. The first responsibility is to
gain control of the cash generated from the property. The receiver is
responsible for all collection activity. In addition, the receiver is required
to prepare forward forecasting with respect to occupancy and potential rent
collections. Approximately 30 to 60 days after a receiver is appointed, the Bank
will order a third party appraisal report. The information pertaining to the
property operations will be supplied to the appraiser by the receiver. The
in-house appraisal department reviews the third party appraisal report for
accuracy and reasonableness of assumptions.
The receiver and the Bank work together in preparing a budget for potential
repairs and maintenance, as well as capital expenditure items needed at the
property. It is the policy of the Bank to instruct the receiver to utilize all
net operating income available to restore the property or units of current
vacancy to "lease ready" condition.
A review of the collateral value is performed to determine if sufficient
equity exists to repay the indebtedness in the event of a foreclosure and
subsequent sale of the property. The valuation is prepared by the account
officer assigned to review the credit facility. The valuation is performed under
two scenarios. First, a review of the current market conditions of similar
properties within the collateral property's market is completed to ascertain
comparable rent and sale data. Second, a discounted cash flow analysis is
prepared, utilizing current investor return requirements and capitalization
rates. Once a value 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
15
who call and express an interest in the property prior to the Bank taking title.
Once title is transferred, the Bank will then begin the process of contacting
those entities that previously expressed an interest to confirm that interest
and proceed with the qualification stage.
REAL ESTATE OWNED. Real estate acquired through foreclosure is carried at
the estimated fair value less estimated selling expenses at the date of
transfer. A loan charge-off is recorded for any writedown in the loan's carrying
value to fair value at the date of transfer. Real estate loss provisions are
recorded if the properties' estimated fair value subsequently declines below the
value determined at the recording date. In determining the fair value at
acquisition, costs relating to development and improvement of property are
considered. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
In preparing a real estate owned property to be marketed for sale, certain
repairs are undertaken and other repair items are left as negotiating points
pertaining to the sale contract. The Bank may offer to adjust the sale price for
such minor repair items, or may offer to deliver the property in a repaired
state. As part of the disposition strategy, the Bank may offer financing at
current market terms to qualified buyers of the real estate owned. Generally,
the Bank requires that the purchaser/borrowing entity provide a minimum of 20%
cash toward the purchase of the property. Terms offered are similar to terms
being offered on other new originations and at comparable rates. The Special
Assets Department makes great efforts to ensure that the underwriting for a loan
to facilitate is comparable to other new loan production, and that the
transactions are done at arms-length and reflect fair market.
TROUBLED DEBT RESTRUCTURING. A loan constitutes a troubled debt
restructuring ("TDR") if the Bank, for economic or legal reasons related to the
borrower's financial difficulties, grants a concession to the 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 these, as well as
non-accrual loans. Currently, the Bank's TDR's consist of loans collateralized
by single- and multi-family residential properties. The majority of these
restructurings were entered into during the early 1990's when economic
conditions in California were severely depressed or in conjunction with damage
to the collateral properties caused by the Northridge earthquake. Management's
decision to provide such restructurings was based upon both an internal
assessment of the situation and a consensus of other lenders in California who
believed that this resolution would be the most effective mitigating measure.
Management considers all loans formerly treated as TDRs to be impaired loans in
the year of restructuring. Generally, such loans, as well as those previously
placed on non-accrual status, are returned to accrual status when the borrower
has had a period of repayment performance for twelve consecutive months.
Under the Bank's new management, the Bank has aggressively focused on
problem asset rehabilitation, and has undertaken a number of initiatives in this
area. The Bank has established an Internal Asset Review Committee, which is
comprised of the Chief Executive Officer, the Chief Financial Officer, the
Senior Lending Officer, the Senior Credit Officer, and the Vice President and
Loan Review Officer. The Committee meets at least monthly and monitors the
Bank's assets to ensure proper classification. All multi-family and commercial
assets in excess of $500,000, regardless of performance, are reviewed at least
once each year. Assets that are classified as special mention are reviewed every
six months and those assets classified as substandard are reviewed every three
months and, if collateral dependent, a market value analysis is performed on the
property to determine whether valuation allowances are required. Loans that are
non-performing, subject to workout or forbearance or classified substandard are
monitored and managed through the Senior Credit Officer. Assets that are
foreclosed and become real estate owned continue to be managed by the Senior
Credit Officer through resolution.
SUBSIDIARIES
The Bank is permitted to invest up to 2% of its assets in the capital stock
of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
primarily for community development purposes. In addition, the Bank is permitted
to make an unlimited investment in one or more operating subsidiaries, which are
permitted to engage only in activities that the Bank may undertake directly.
PPCCP is such an operating subsidiary of the Bank. As of December 31, 1998, the
Bank maintained one operating subsidiary,
16
four direct service corporations and one indirect service corporation subsidiary
consisting of SoCal Mortgage Corporation ("SMC"), Direct Investment Company of
Southern California ("DIC"), SCP Investments, Inc. ("SCP"), Continental
Development of California, Inc. ("CDC") and SCS Insurance Services, Inc.
("SCS"). At December 31, 1998, the Bank's investment in its five service
corporation subsidiaries amounted to $39.6 million in the aggregate.
PPCCP was established as an operating subsidiary of the Bank in 1997 to
acquire, hold and manage primarily mortgage assets and to operate in a manner so
as to quality as a REIT for federal income tax purposes under the Code,
commencing with its taxable year ending December 31, 1997. In October 1997,
PPCCP commenced its operations upon consummation of a public offering of
1,426,000 shares of its 9.75% Noncumulative Exchangeable Preferred Stock, Series
A (the "Series A Preferred Shares"), at a liquidation preference of $25.00 per
share. The Series A Preferred Shares are traded on the Nasdaq National Market
under the symbol "PPCCP."
SMC is an inactive corporation which was formed in 1987 to originate
mortgage loans. However, SMC has never conducted any business since it was
organized. DIC was formed in 1987 to acquire, develop, construct and sell real
estate developments and is currently inactive. DIC owns 100% of the capital
stock of SCP which was formed in 1989 to invest in various real estate
development projects. In 1998 SCP sold the Bank's last remaining real estate
development project consisting of 62 acres of vacant land located in Corona,
California.
CDC was formed in 1969 for the purpose of acquiring, developing,
constructing and selling real estate developments. CDC does not currently hold
any real estate and CDC's sole operation consists of acting as trustee under the
Bank's deeds of trust with respect to its mortgage lending.
SCS was formed in 1984 in order to sell, through the Bank's branch offices,
annuities and various other investments as well as other insurance products to
the Bank's account holders and members of the general public. During the years
ended December 31, 1998, 1997 and 1996, SCS recognized net earnings of $434,000,
$362,000 and $336,000, respectively.
REGULATION
The Bank is a federally chartered and insured stock savings bank subject to
extensive regulation and supervision by the OTS, as the primary federal
regulator of savings associations, and the FDIC, as the administrator of the
SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Company or the Bank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals.
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.
17
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.
AFFILIATE RESTRICTIONS. Transactions between a savings association and its
"affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not make
a loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings association
may not purchase or invest in securities of an affiliate other than shares of a
subsidiary; a savings association and its subsidiaries may not purchase a
low-quality asset from an affiliate; and covered transactions and certain other
transactions between a savings association or its subsidiaries and an affiliate
must be on terms and conditions that are consistent with safe and sound banking
practices. With certain exceptions, each loan or extension of credit by a
savings association to an affiliate must be secured by collateral with a market
value ranging from 100% to 130% (depending on the type of collateral) of the
amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of transactions with affiliates.
REGULATION OF FEDERAL SAVINGS BANKS
As a federally insured savings bank, lending activities and other
investments of the Bank must comply with various statutory and regulatory
requirements. The Bank is regularly examined by the OTS and must file periodic
reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the SAIF, up to applicable limits.
FEDERAL HOME LOAN BANKS. The Bank is a member of the FHLB System. Among
other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal at least 1% of its aggregate unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each calendar
year or 5% of its advances from the FHLB, whichever is greater.
LIQUID ASSETS. Under OTS regulations, for each calendar month, a savings
bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable deposit accounts and borrowings payable in one year or less. This
liquidity requirement,
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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 11.48%, its leverage capital
ratio was 6.30% and its total risk-based capital ratio was 12.36% at December
31, 1998.
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
19
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, 1998, 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.
Under the current regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has not
been notified by the OTS that it is in need of more than normal supervision (a
"Tier 1 association") may, after prior notice to but without the approval of the
OTS, make capital distributions during a calendar year up to the higher of: (i)
100% of its net income to date during the calendar year plus 50% of its surplus
capital ratio at the beginning of the calendar year, or (ii) 75% of its net
income over the most recent four-quarter period. A Tier 1 association may make
capital distributions in excess of the above amount if it gives notice to the
OTS and the OTS does not object to the distribution. A savings association that
meets its regulatory capital requirements both before and after a proposed
distribution but does not meet its fully phased-in capital requirement (a "Tier
2 association") is authorized, after prior notice to the OTS but without OTS
approval, to make capital distributions in an amount up to 75% of its net income
over the most recent four-quarter period, taking into account all prior
distributions during the same period. Any distribution in excess of this amount
must be approved in advance by the OTS. A savings association that does not meet
its current regulatory capital requirements (a "Tier 3 association") cannot make
any capital distribution without prior approval from the OTS, unless the capital
distribution is consistent with the terms of a capital plan approved by the OTS.
At December 31, 1998, the Bank qualified as a Tier 1 association for
purposes of the capital distribution rule. The OTS may prohibit a proposed
capital distribution that would otherwise be permitted if the OTS determines
that the distribution would constitute an unsafe or unsound practice. The
requirements of the capital distribution regulation supersede less stringent
capital distribution restrictions in earlier agreements or conditions.
In January 1999, the OTS amended its capital distribution regulation to
bring such regulations into greater conformity with the other bank regulatory
agencies. Under the regulation, certain savings associations would not be
required to file notice with the OTS. Specifically, savings associations that
are well capitalized following a capital distribution would not be subject to
any requirement for notice or application unless the total amount of all capital
distributions, including any proposed capital distribution, for the applicable
calendar year would exceed an amount equal to the savings association's net
income for that year to date plus the savings association's retained net income
for the preceding two years. However, because the Bank is a subsidiary of a
savings and loan holding company, the Bank is required to give the OTS at least
30 days notice prior to any capital distribution.
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
20
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 Internal Revenue Code as a "domestic building and loan
association." The Bank is a domestic building and loan association as defined in
the Code.
FDIC ASSESSMENTS. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
Under FDIC regulations, institutions are assigned to one of three capital
groups for insurance premium purposes -- "well capitalized," "adequately
capitalized" and undercapitalized" -- which are defined in the same manner as
the regulations establishing the prompt corrective action system, as discussed
above. These three groups are then divided into subgroups which are based on
supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Effective January 1, 1997,
assessment rates for both SAIF-insured institutions and BIF-insured institutions
ranged from 0% of insured deposits for well-capitalized institutions with minor
supervisory concerns to .27% of insured deposits for undercapitalized
institutions with substantial supervisory concerns. In addition, an additional
assessment of 6.4 basis points and 1.3 basis points is added to the regular
SAIF-assessment and the regular BIF-assessment, respectively, until December 31,
1999 in order to cover Financing Corporation debt service payments.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF has achieved the
required reserve ratio, and as a result, the FDIC reduced the average deposit
insurance premium paid by BIF-insured banks to a level substantially below the
average premium previously paid by savings institutions. Banking legislation was
enacted on September 30, 1996 to eliminate the premium differential between
SAIF-insured institutions and BIF-insured institutions. The legislation provided
that all insured depository institutions with SAIF-assessable deposits as of
March 31, 1995 pay a special one-time assessment to recapitalize the SAIF.
Pursuant to this legislation, the FDIC promulgated a rule that established the
special assessment necessary to recapitalize the SAIF at 65.7 basis points of
SAIF-assessable deposits held by affected institutions as of March 31, 1995.
However, as a result of the Bank's financial condition, the Bank made
application to the FDIC for an exemption from this one-time special assessment,
which exemption was approved on October 5, 1996. As a result, the Bank was
exempt from paying the special one-time assessment and instead, paid subsequent
assessments at the assessment rate schedule in effect as of June 30, 1995.
However, upon consummation of the Offering, the Bank used $4.5 million of the
proceeds from the Offering to pay the FDIC the special assessment which the Bank
had previously received permission from the OTS to defer.
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
21
actions by the OTS, as well as other federal regulatory agencies and the
Department of Justice.
NEW SAFETY AND SOUNDNESS GUIDELINES. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
CHANGE OF CONTROL. Subject to certain limited exceptions, no company can
acquire control of a savings association without the prior approval of the OTS,
and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Under recent legislation, companies subject to the Bank Holding Company Act
of 1956, as amended, that acquire or own savings associations are no longer
defined as savings and loan holding companies under the HOLA and, therefore, are
not generally subject to supervision and regulation by the OTS. OTS approval is
no longer required for a bank holding company to acquire control of a savings
association, although the OTS has a consultative role with the FRB in
examination, enforcement and acquisition matters.
TAXATION
FEDERAL TAXATION. The Company is subject to those rules of federal income
taxation generally applicable to corporations under the Code. The following
discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax
rules applicable to the Company and the Bank.
The Company reports its earnings on a consolidated basis with the Bank and
is subject to federal income taxation in the same general manner as other
corporations with some exceptions discussed below. The Bank has entered into an
agreement with the Company whereby the Bank computes and pays taxes based upon
the Bank's tax position assuming that a separate tax return was filed. However,
while the senior notes issued by the Company in connection with the 1995
recapitalization remains outstanding, Company's payment to the Bank is limited
to the amount of consolidated taxes. The Company prepaid the $10.0 million of
senior notes (plus accrued interest) in connection with the Offering.
METHOD OF ACCOUNTING. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns.
BAD DEBT RESERVES. The Small Business Job Protection Act of 1996 (the "1996
Act") eliminated the use of the reserve method of accounting for bad debt
reserves by savings institutions, effective for taxable years beginning after
1995 and provided for recapture of a portion of the reserves existing at the
close of the last taxable year beginning before January 1, 1996 for institutions
such as the Bank. Prior to the 1996 Act, the Bank was permitted to establish a
reserve for bad debts and to make annual additions to the reserve. These
additions could, within specified formula limits, be deducted in arriving at the
Bank's taxable income. For the tax year 1995, the Bank had a bad debt deduction
of $73 million.
As a further result of the 1996 Act, the Bank must use the specific
chargeoff method in computing its bad debt deduction beginning with its 1996
Federal tax return. Under this method, deductions may be claimed only and to the
extent that loans become wholly or partially worthless.
22
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. NOLses 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,
1998, the Bank had an alternative minimum tax credit carryforward of
approximately $1.4 million.
NET OPERATING LOSS CARRYFORWARDS. The Code allows net operating losses
("NOLs") for tax years beginning before August 5, 1997 to be carried back and
deducted from taxable income for the three preceding taxable years and carried
forward and deducted from taxable income for the fifteen succeeding years
taxable years. For taxable years beginning after August 5, 1997, NOLs can be
carried back and deducted from taxable income for the two preceding taxable
years and carried forward and deducted from taxable income for the twenty
succeeding taxable years. The Company has federal and state tax NOLs of
approximately $166.4 million at December 31, 1998.
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 1992 recapitalization resulted in the 1992 Ownership Change. The 1992
Ownership Change resulted in an annual Section 382 limitation on the Company's
ability to utilize its NOLs in any one year of approximately $7.7 million. That
annual limitation has increased due to unused limitations from previous years,
and amounts to approximately $42.3 million as of the beginning of 1999. There
are $42.3 million of pre-change losses carried over to 1999 that are subject to
this limitation (the "1992 limited NOLs").
The Offering resulted in the 1998 Ownership Change. The actual annual
Section 382 limitation from the 1998 Ownership Change equals the sum of (i) the
fair market value of the stock of the Company immediately before the Offering
and (ii) the fair market value of the Company's and the Bank's goodwill claim
with respect to the Goodwill Litigation, multiplied by the applicable long-term
tax-exempt rate. The annual Section 382 limitation from the 1998 Ownership
Change is estimated to be approximately $21.3 million. The assumed annual
Section 382 limitation resulting from the 1998 Ownership Change is based on the
sum of the (i) fair market value of the stock of the Company immediately before
the Offering (valued at an initial public offering price of $13.75 per share)
and (ii) the unamortized balance of the Company's and the Bank's goodwill with
respect to the Goodwill Litigation as of December 31, 1989 (which amounted to
$261.3 million as of such date and which in no way reflects all of the claims
which may be asserted by the Plaintiffs in the Goodwill Litigation or any of the
theories as to damages which may be asserted in connection with the Goodwill
Litigation), multiplied by 5.05%, the applicable federal long-term tax-exempt
rate for ownership changes occurring in May 1998 (used for illustration purposes
only). The actual annual Section 382 limitation from the 1998 Ownership Change
at the time of the Offering may differ from the $21.3 million estimated as a
result of an increase or decrease in the actual fair market value of the
Company's and the Bank's goodwill claim with respect to the Goodwill Litigation
from the assumed unamortized balance of $261.3 million at December 31, 1989. All
$147.3 million
23
of the NOLs carried over to 1998 (including the $42.3 million that are 1992
limited NOLs), plus $6.5 million of NOLs for 1998 that are attributable to the
period before the 1998 Ownership Change, are subject to this limitation.
Furthermore, the Section 382 limitation from the 1998 Ownership Change would be
significantly lower than estimated if the Rights were considered other than as
stock in the Company. Consequently, the 1992 Ownership Change in combination
with the 1998 Ownership Change could result in the Company being unable to fully
utilize its NOLs in future years. Such inability of the Company to utilize such
tax benefits could have a material adverse effect on the net income and
prospects of the Company.
If the Section 382 limitation for the 1998 Ownership Change is greater than
the Section 382 limitation for the 1992 Ownership Change for 1998 or any year
thereafter, the amount of taxable income in that year will first be offset by
1992 limited NOLs up to the amount of the Section 382 limitation for the 1992
Ownership Change. Any remaining taxable income will be offset by 1998 limited
NOLs that are not also 1992 limited NOLs by an amount equal to the Section 382
limitation for the 1998 Ownership Change for that year minus the amount of 1992
limited NOLs already used to offset taxable income in that year.
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 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. 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 IRS and no assurance can be made that the IRS will treat the
Shareholder Rights Agreement as stock of the Company for federal income tax
purposes. If the Shareholder Rights Agreement is treated other than as stock in
the Company (i.e., debt of the Company), the value of the Shareholder Rights
Agreement would reduce the value of the Company's stock, and, correspondingly,
the amount of the Section 382 Limitation with respect to the 1998 Ownership
Change. Such a reduction in the amount of the Section 382 Limitation would
significantly impair the ability of the Bank to use its NOLs existing at the
time of the 1998 Ownership Change. Whether the Shareholder Rights Agreement will
be treated as equity for federal income tax purposes depends on the totality of
the facts and circumstances, including the intent of the parties to the
Shareholder Rights Agreement, the extent to which the Shareholder Rights
Agreement will obligate the Company to pay the Material Stockholders a portion
of the Litigation Recovery and the position that the Shareholder Rights
Agreement will give the Material Stockholders in relation to the Company's
creditors and stockholders existing on and after the execution of the
Shareholder Rights Agreement.
STATE TAXATION. The California franchise tax rate applicable to the Bank
equals the franchise tax rate applicable to corporations generally plus an "in
lieu" rate approximately equal to personal property taxes and business license
taxes paid by such corporation (but generally not paid by banks or financial
corporations such as the Bank); however, the total rate cannot exceed 10.84%.
Under California regulations, bad debt deductions are available in computing
California franchise taxes using a three or six year weighted average loss
experience method. The Bank had no state tax NOLs at December 31, 1998.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 100,000,000 shares of capital stock, of
which 75,000,000 are shares of Common Stock, par value $.01 per share, and
25,000,000 are shares of preferred stock, par value $.01 per share. Upon
consummation of the Offering, no shares of preferred stock were outstanding.
Prior to consummation of the Offering and the exchange of preferred stock for
Common Stock, there were outstanding 85,000 shares of Series C Preferred Stock,
68,000 shares of Series D Preferred Stock and 332,000 shares of Series E
Preferred Stock, all of which were owned by the Material Stockholders. In
connection with the Offering, the Outstanding Preferred Stock was exchanged for
shares of Common Stock. An aggregate of 21,876,205 shares of Common Stock was
outstanding following consummation of the Offering, which gives effect to the
conversion of the Outstanding Preferred Stock into Common Stock. See "The
Stockholders' Agreement" in the Company's Proxy Statement dated March 22, 1999
which is incorporated by reference into ITEM 10. herein. On September 2, 1998
PBOC Holdings, Inc. announced an initial stock repurchase program of up
24
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. Through December 31, 1998, the Company
repurchased 835,000 shares pursuant to this program for a total purchase price
of $8.3 million. After repurchases of 835,000 shares of Common Stock of an
aggregate of 21,041,205 shares of Common Stock was outstanding. Each share of
Common Stock has the same relative rights as, and is identical in all respects
with, each other share of Common Stock. The Common Stock is not subject to call
for redemption.
COMMON STOCK
DIVIDENDS. The Company can pay dividends if, as and when declared by its
Board of Directors, subject to compliance with limitations which are imposed by
law. See "ITEM 1. BUSINESS--Regulation Of Federal Savings Banks--Capital
Distribution Regulation." The holders of Common Stock of the Company are
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Company out of funds legally available therefor.
If the Company issues preferred stock in the future, the holders thereof may
have a priority over the holders of the Common Stock with respect to dividends.
VOTING RIGHTS. The holders of Common Stock of the Company possess exclusive
voting rights in the Company. They elect the Company's Board of Directors and
act on such other matters as are required to be presented to them under Delaware
law or the Company's Certificate of Incorporation or as are otherwise presented
to them by the Board of Directors. As of the consummation of the Offering, each
holder of Common Stock will be entitled to one vote per share and each holder of
Common Stock does not have any right to cumulate votes in the election of
directors. Although there are no present plans to do so, if the Company issues
preferred stock in the future, holders of the preferred stock may also possess
voting rights. For information with respect to a possible issuance of preferred
stock under certain limited circumstances pursuant to the Shareholder Rights
Agreement, see "The Shareholder Rights Agreement."
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as the sole holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon), all assets of the Bank available for distribution. In the event of any
liquidation, dissolution or winding up of the Company, the holders of its Common
Stock would be entitled to receive, after payment or provision for payment of
all its debts and liabilities, all of the assets of the Company available for
distribution. If preferred stock is issued, the holders thereof may have a
priority over the holders of the Common Stock in the event of liquidation or
dissolution. See "The Shareholder Rights Agreement."
PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company generally are
not entitled to preemptive rights with respect to any shares which may be issued
in the future.
PREFERRED STOCK
Prior to consummation of the Offering and the exchange of preferred stock
for Common Stock, there were outstanding 85,000 shares of Series C Preferred
Stock, 68,000 shares of Series D Preferred Stock and 332,000 shares of Series E
Preferred Stock, all of which were owned by the Selling Stockholders. In
connection with the Offering, the Outstanding Preferred Stock was exchanged for
shares of Common Stock. See "The Stockholders' Agreement" in the Company's Proxy
Statement dated March 22, 1999, which is incorporated by reference into ITEM 10.
hereof. Consequently, following consummation of the Offering, the Company had no
shares of preferred stock issued or outstanding.
The Board of Directors of the Company is authorized to issue preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares and the qualifications, limitations and
restrictions thereof. The preferred stock may be issued in distinctly designated
series, may be convertible into Common Stock and may rank prior to the Common
Stock as to dividend rights, liquidation preferences, or both.
The authorized but unissued shares of preferred stock (as well as the
authorized but unissued and unreserved shares of Common Stock) are available for
issuance in future mergers or acquisitions, in a future public offering or
private placement or for other general corporate purposes. Except as otherwise
required to approve the transaction in
25
which the additional authorized shares of preferred stock would be issued,
stockholder approval generally would not be required for the issuance of these
shares. Depending on the circumstances, however, stockholder approval may be
required pursuant to the requirements for listing the Common Stock on the Nasdaq
Stock Market or any exchange on which the Common Stock may then be listed, if
any.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS. A
number of provisions of the Company's Amended and Restated Certificate of
Incorporation ("Certificate of Incorporation"), and Bylaws ("Bylaws"), which
became effective upon consummation of the Offering, deal with matters of
corporate governance and certain rights of stockholders. The following
discussion is a general summary of certain provisions of the Company's
Certificate of Incorporation and Bylaws which might be deemed to have a
potential "anti-takeover" effect. Reference should be made in each case to such
Certificate of Incorporation and Bylaws. Notwithstanding the foregoing, under
certain circumstances, the Company may be subject to Section 2115 of the
California Corporation Code (as a foreign corporation) which may have the effect
of superseding certain provisions of the Company's Certificate of Incorporation
and Bylaws as interpreted by Delaware law, particularly those provisions
providing for a staggered board of directors and eliminating cumulative voting.
However, management believes that such provisions of the California Corporation
Code do not apply to the Company because its securities is listed on the Nasdaq
National Market and there are at least 800 shareholders and, as such, the
Company is exempt from the provisions of Section 2115.
BOARD OF DIRECTORS. Article VI of the Certificate of Incorporation and
Article IV of the Bylaws of the Company contain provisions relating to the Board
of Directors and provides, among other things, that the Board of Directors shall
be divided into three classes as nearly equal in number as possible with the
term of office of one class expiring each year. Cumulative voting in the
election of directors is prohibited by Article VI of the Certificate of
Incorporation. Directors may be removed only with cause at a duly constituted
meeting of stockholders called expressly for that purpose. Any vacancy occurring
in the Board of Directors for any reason (including an increase in the number of
authorized directors) may be filled by the concurring vote of a majority of the
Directors then in office, though less than a quorum of the Board, and a director
appointed to fill a vacancy shall serve for the remainder of the term to which
the director has been elected, and until his successor has been elected and
qualified.
The Bylaws govern nominations for election to the Board, and provide that
nominations for election to the Board of Directors may be made at a meeting of
stockholders by or at the direction of the Board of Directors or by any
stockholder eligible to vote at an annual meeting of stockholders who has
complied with specified notice requirements. Written notice of a stockholder
nomination must be delivered to, or mailed to and received at, the Company's
principal executive offices no later than (i) ninety days prior to the
anniversary date of the mailing of proxy materials by the Company in connection
with the immediately preceding annual meeting, provided, however, that, with
respect to the 1999 annual meeting, which is expected to be held on the fourth
Monday of April 1999, nominations by the stockholder must be so delivered or
received no later than the close of business on the fourth Monday of January
1999, notwithstanding a determination by the Company to schedule such annual
meeting at a date later than the fourth Monday of April 1999 and (ii) with
respect to an election to be held at a special meeting of stockholders for the
election of directors, the close of business on the tenth day following the date
on which notice of such meeting is first given to stockholders. Each such notice
shall set forth: (a) the name and address of the stockholder who intends to make
the nomination and of the person or persons to be nominated; (b) a
representation that the stockholder is a holder of record of stock of the
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(c) a description of all arrangements or understandings between the stockholder
and each nominee and any arrangements or understandings between the stockholder
and each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by such
stockholders; (d) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the SEC; and (e) the consent of each nominee to
serve as a director of the Company if so elected.
LIMITATION OF LIABILITY. Article VIII of the Company's Certificate of
Incorporation provides that the personal liability of the directors and officers
of the Company for monetary damages shall be eliminated to the fullest extent
permitted by the DGCL as it exists on the effective date of the Certificate of
Incorporation or as such law may be
26
thereafter in effect. Section 102(b)(7) of the DGCL currently provides that
directors (but not officers) of corporations that have adopted such a provision
will not be so liable, except (i) for any breach of the director's duty of
loyalty to the corporation or its shareholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) for the payment of certain unlawful dividends and the making of
certain stock purchases or redemptions, or (iv) for any transaction from which
the director derived an improper personal benefit.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. Article IX of
the Company's Certificate of Incorporation provides that the Company shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person is or was a director, officer, employee or agent of the Company or
any predecessor of the Company, or is or was serving at the request of the
Company or any predecessor of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding to the fullest extent authorized
by Section 145 of the DGCL, provided that the Company shall not be liable for
any amounts which may be due in connection with a settlement of any action, suit
or proceeding effected without its prior written consent or any action, suit or
proceeding initiated by any person seeking indemnification thereunder without
its prior written consent.
The Company's Certificate of Incorporation also provides that reasonable
expenses (including attorneys' fees) incurred by a director, officer, employee
or agent of the Company in defending any civil, criminal, administrative or
investigative action, suit or proceeding described above shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
as authorized by the Board of Directors upon receipt of an undertaking by or on
behalf of such person to repay such amount if it shall ultimately be determined
that the person is not entitled to be indemnified by the Company.
SPECIAL MEETINGS OF STOCKHOLDERS AND STOCKHOLDER PROPOSALS. The Company's
Bylaws provide that special meetings of the Company's stockholders, for any
purpose or purposes, may only be called by the affirmative vote of a majority of
the Board of Directors then in office.
The Company's Bylaws provide that only such business as shall have been
properly brought before an annual meeting of stockholders shall be conducted at
the annual meeting. In order to be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors or (b) otherwise
properly brought before the meeting by a stockholder who has given timely notice
thereof in writing to the Company. For stockholder proposals to be included in
the Company's proxy materials, the stockholder must comply with all the timing
and informational requirements of Rule 14a-8 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). With respect to stockholder proposals to
be considered at the annual meeting of stockholders but not included in the
Company's proxy materials, the stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Company not less
than 90 days prior to the anniversary date of the mailing of proxy materials by
the Company in connection with the immediately preceding annual meeting;
provided, however, that with respect to the 1999 annual meeting, which is
expected to be held on the fourth Monday of April 1999, such written notice must
be received by the Company not later than the close of business on the fourth
Monday of January 1999, notwithstanding a determination by the Company to
schedule such annual meeting at a date later than the fourth Monday of April
1999. A stockholder's notice shall set forth as to each matter the stockholder
proposes to bring before the annual meeting (a) a brief description of the
business desired to be brought before the annual meeting, (b) the name and
address, as they appear on the Company's books, of the stockholder proposing
such business, (c) the class and number of shares of the Company which are
beneficially owned by the stockholder, and (d) any material interest of the
stockholder in such business. The presiding officer of an annual meeting shall
determine and declare to the meeting whether the business was properly brought
before the meeting in accordance with the provisions of the Bylaws and any such
business not properly brought before the meeting shall not be transacted.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Article X of the
Company's Certificate of Incorporation generally provides that any amendment of
the Certificate of Incorporation must be first approved by a majority of the
Board of Directors and, to the extent required by law, then by the holders of a
majority of the shares of
27
the Company entitled to vote in an election of directors, except that the
approval of 75% of the shares of the Company entitled to vote in an election of
directors is required for any amendment to Articles VI (directors), VII
(meetings of stockholders and bylaws), VIII (limitation on liability of
directors and officers), IX (indemnification) and X (amendment), unless any such
proposed amendment is approved by a vote of 80% of the Board of Directors then
in office.
The Bylaws of the Company may be amended by a majority of the Board of
Directors or by the affirmative vote of a majority of the total shares entitled
to vote in an election of directors, except that the affirmative vote of at
least 75% of the total shares entitled to vote in an election of directors shall
be required to amend, adopt, alter, change or repeal any provision inconsistent
with certain specified provisions of the Bylaws, unless any such proposed
amendment is approved by a vote of 80% of the Board of Directors then in office.
OTHER RESTRICTIONS ON ACQUISITION OF THE COMPANY. Several provisions of the
DGCL could affect the acquisition of Common Stock or control of the Company.
Section 203 of the DGCL generally provides that a Delaware corporation shall not
engage in any "business combination" with an "interested stockholder" for a
period of three years following the date that such stockholder became an
interested stockholder unless (1) prior to such date the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; or (2)
upon consummation of the transaction which resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for this purpose, shares owned by persons who are directors
and also officers and shares owned by employee stock ownership plans in which
employee participants do not have the right to determine confidentially whether
the shares held subject to the plan will be tendered in a tender offer or
exchange offer; or (3) on or subsequent to such date, the business combination
is approved by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. The
three-year prohibition on business combinations with an interested stockholder
does not apply under certain circumstances, including business combinations with
a corporation which does not have a class of voting stock that is (i) listed on
a national securities exchange, (ii) authorized for quotation on an inter-dealer
quotation system of a registered national securities association, or (iii) held
of record by more than 2,000 stockholders, unless in each case this result was
directly or indirectly caused by the interested stockholder.
An "interested stockholder" generally means any person that (i) is the
owner of 15% of more of the outstanding voting stock of the corporation or (ii)
is an affiliate or associate of the corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder; and the affiliates
and associates of such a person. The term "business combination" is broadly
defined to include a wide variety of transactions, including mergers,
consolidations, sales of 10% or more of a corporation's assets and various other
transactions which may benefit an interested stockholder.
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings association unless the OTS has been given 60 days' prior
written notice. The HOLA provides that no company may acquire "control" of a
savings association without the prior approval of the OTS. Any company that
acquires such control becomes a savings and loan holding company subject to
registration, examination and regulation by the OTS. See "ITEM 1.
BUSINESS--Regulation Of Savings And Loan Holding Companies."
28
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the Company's
offices at December 31, 1998.
Net Book Value of
Lease/Owned Property at Total Deposits at
Office Location Lease Expiration Date December 31, 1998 December 31, 1998
--------------- --------------------- ----------------- -----------------
(Dollars in thousands)
EXECUTIVE OFFICE (AND BRANCH):
LOS ANGELES Leased $ 1,988 $ 8,522
5900 Wilshire Blvd. 04/2006
15th and 16th Floors Option: 1 - 5 years
Los Angeles, CA 90036
BRANCH OFFICES:
BEVERLY HILLS Leased 166 135,921
9100 Wilshire Blvd. 03/2000
Beverly Hills, CA 90212 Option: 2 - 10 years
ORANGE Leased 145 100,714
216 E Chapman Avenue 01/2001
Orange, CA 92866-1506 Option: 2 - 5 years
PACIFIC PALISADES Leased 222 71,671
15305 Sunset Blvd. 12/2006
Pacific Palisades, CA 90272 Option: 1 - 10 years
MONTEBELLO Leased 219 103,812
1300 W Beverly Blvd. 08/2003
Montebello, CA 90640 Option: 1 - 10 years
GARDEN GROVE Owned 169 84,469
12112 Valley View
Garden Grove, CA 92845
SIMI VALLEY Leased 165 102,863
1445 Los Angeles Ave. 07/1999
Simi Valley, CA 93065 Option: 2 - 30 months
followed by 3 - 5 years
SYLMAR Leased 172 51,264
13831 Foothill Blvd. 09/2002
Sylmar, CA 91342 Option: 2 - 10 years
BUENA PARK Leased 150 28,172
5470 Beach Blvd. 12/2004
Buena Park, CA 90621 Option: 3 - 5 years
NORTH HOLLYWOOD Leased 126 92,422
12848 Victory Blvd. 05/2000
North Hollywood, CA 91606
29
Net Book Value of
Lease/Owned Property at Total Deposits at
Office Location Lease Expiration Date December 31, 1998 December 31, 1998
--------------- --------------------- ----------------- -----------------
(Dollars in thousands)
BEVERLY/SERRANO Leased 196 43,698
4500 W. Beverly Blvd. 01/2006
Los Angeles, CA 90004 Option: 2 - 5 years
TARZANA Leased 226 83,369
19500 Ventura Blvd. 10/2002
Tarzana, CA 91356
BURBANK Leased 426 168,798
240 North San Fernando Road 09/2000
Burbank, CA 91502 Option: 2 - 5 years
SANTA CLARITA Owned 170 68,843
26425 Sierra Highway
Santa Clarita, CA 91321
VENTURA Leased 129 67,513
996 South Seaward Ave. 10/2001
Ventura, CA 93001 Option: 1 - 3 years
CALABASAS Leased 188 71,387
23642 Calabasas Road, Bldg 2 03/2007
Calabasas, CA 91302
IRVINE Leased 253 66,280
15475 Jeffrey Road 10/2005
Irvine, CA 92620-4102
FAIRFAX Leased 144 82,918
145 South Fairfax Avenue 01/2003
Los Angeles, CA 90036 Option: 1 - 5 years
WESTMINSTER Leased 220 17,745
15555 Brookhurst Street 09/2000
Westminster, CA 92683 Option: 2 - 5 years
SAN PEDRO Owned 813 91,781
28110 South Western Avenue
San Pedro, CA 90732
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$ 6,287 $1,542,162
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In addition to the foregoing branch of office locations, the Bank currently
operates 43 ATMs, of which 20 are within a chain of health clubs located in
Southern California. The Bank also has an option to install and operate an
additional three ATMs within such chain of health clubs.
The Company in 1997 also obtained regulatory approval to install remote
automated loan machines, which can take an application for a loan of up to
$10,000, underwrite the loan and extend funds to applicants which have been
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approved. The Company believes it is the first institution to receive approval
to operate these units at remote locations, nine of which have been placed in
operation.
ITEM 3. LEGAL PROCEEDINGS
Except with respect to the Goodwill Litigation and the Ancillary
Litigation, each of which is defined and discussed below, neither the Company
nor the Bank is involved in any legal proceedings which are material to the
Company. The Bank is involved in routine legal proceedings from time to time
which arise in the normal course of its business.
THE GOODWILL LITIGATION
GENERAL. On January 28, 1993, the Company, the Bank and certain current and
former stockholders of the Company (collectively, the "Plaintiffs") filed a
complaint against the United States in the United States Court of Federal Claims
("Court of Claims") seeking damages for breach of contract and for deprivation
of property without just compensation and without due process of law. The
allegations in the complaint arose out of the abrogation of certain contractual
promises made to the Company, to certain of its current and former common
stockholders and to the Bank, by the Federal Home Loan Bank Board (the
predecessor to the OTS) and the FSLIC (the federal fund which previously insured
the deposits of savings institutions) in exchange for the Company's agreement to
acquire and to operate the Bank which was then a failed thrift institution. One
of the current stockholders of the Company (Arbur) is also a plaintiff in the
case, which is entitled SOUTHERN CALIFORNIA FEDERAL SAVINGS AND LOAN
ASSOCIATION, ET AL. V. UNITED STATES, No. 93-52C (the "Goodwill Litigation").
The Plaintiffs' claims arose from changes, mandated by FIRREA, with respect to
the rules for computing the Bank's regulatory capital. As discussed below, the
Goodwill Litigation was stayed pending the resolution on appeal of several cases
which present issues similar to those presented by the Goodwill Litigation.
In connection with the Company's acquisition of the Bank in April 1987, the
Bank was permitted to include in its regulatory capital and recognize as
supervisory goodwill $217.5 million of cash assistance provided to the Bank by
the FSLIC (the "Capital Credit"), as well as $79.7 million of goodwill which was
recorded by the Bank under GAAP. In August 1989, Congress enacted FIRREA which
provided, among other things, that savings institutions such as the Bank were no
longer permitted to include goodwill in their regulatory capital (subject to a
gradual phaseout which expired on December 31, 1994). Consequently, the Bank was
required to write-off its goodwill subject to a regulatory phase-out, which
resulted in the Bank failing to comply with its minimum regulatory capital
requirements during 1990 and 1991. The balance of the Bank's GAAP goodwill was
written off as unrealizable in 1992.
The Plaintiffs allege that the enactment of FIRREA constituted a breach by
the United States of its contractual commitment regarding the treatment of the
Capital Credit and supervisory goodwill and an unlawful taking of the Bank's
property rights in the Capital Credit and supervisory goodwill. The Plaintiffs
seek damages and restitution of all benefits conferred on the United States by
the alleged contract. As discussed below, no conclusive determination has been
made as to the type or amount of damages sought.
RELATED CASES. On July 1, 1996, the United States Supreme Court issued its
opinion for UNITED STATES V. WINSTAR CORPORATION, No. 95-865, which affirmed the
decisions of the United States Court of Appeals for the Fourth Circuit and the
United States Court of Federal Claims in various consolidated cases (the
"Winstar Cases") granting summary judgment to the plaintiff thrift institutions
on the liability portion of their breach of contract claims against the United
States. The Supreme Court held that the U.S. Government breached certain express
contracts when Congress enacted FIRREA, and the Supreme Court remanded the
proceedings for a determination of the appropriate measure and amount of
damages, which have not been finally litigated.
The United States Court of Federal Claims issued a Case Management Order
("CMO") in all of the Winstar Cases, including the Goodwill Litigation. The CMO
sets forth procedures for all of the plaintiffs and the defendant, the United
States, to follow relating to the exchange of documents, filing of partial
summary judgment motions with respect to liability only, discovery on damages
issues and the timing of all of the Winstar Cases being set for trial. Pursuant
to the CMO, the Plaintiffs filed a motion for partial summary judgment as to the
Government's liability to the Plaintiffs for breach of contract. The
Government's response thereto appears to concede that there was a contract
allowing the
31
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.
In February 1998, the Government sent the Bank a letter inviting the Bank
to commence negotiations to settle the Capital Credit claim portion of the
Goodwill Litigation. In March 1998, the Chief Judge issued an order in all of
the Winstar Cases ordering the Government and the committee representing all of
the plaintiffs, each through a designated representative, to negotiate to
develop a settlement framework or structure to settle these cases. Assuming a
settlement is not reached and based upon the status of the proceedings in the
Winstar Cases and the CMO, the Goodwill Litigation is not expected to be set for
trial for at least two years. The amount of damages the Plaintiffs have suffered
as a result of the Government's breach of contract has not yet been determined.
In addition, although the decision of the Supreme Court in the Winstar Cases has
been rendered, there can be no assurance that the court will not reach a
different conclusion in the Goodwill Litigation. To date, there have been no
material substantive settlement discussions to resolve the Goodwill Litigation
by and among the Company, the Bank and the Government and no trial date has been
set.
THIRD PARTY LAWSUIT RELATED TO THE GOODWILL LITIGATION. In August 1997,
Ariadne Financial Services Pty. Ltd. and Memvale Pty Ltd. (collectively,
"Ariadne") filed a request with the Court of Claims in the Goodwill Litigation
for leave to file a motion to intervene as a plaintiff in the Goodwill
Litigation. The motion to intervene is based on Ariadne's claim as a former
stockholder of the Company that intervention is necessary to protect their
interests and alleged right to participate in any recovery against the
Government in the Goodwill Litigation. The court has not yet ruled on Ariadne's
motion. Ariadne had previously filed its own action in the Court of Claims in
April 1996 against the Government which has been dismissed (and which dismissal
has been upheld on appeal) based on the statute of limitations. In February
1998, Ariadne petitioned the Circuit Court of Appeals for a rehearing, and in
March 1998, Ariadne's petition was denied.
In May 1997, Ariadne filed a lawsuit against the Company, the Bank, the
Company's former stockholders and Arbur seeking damages and a constructive trust
based upon causes of action for breach of contract; anticipatory breach of
contract; breach of fiduciary duty; fraud; negligent misrepresentation, and
mistake of fact. Ariadne was a preferred stockholder in the Company and the Bank
which subordinated its interest as part of the 1992 recapitalization of the
Company to the new investors, the 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 affiliated of BIL Securities as defendents in this
lawsuit. The Company and the Bank intend to defend this action vigorously. For
purposes of the Shareholder Rights Agreement, discussed below, the Ariadne
lawsuit against the Company and the Bank, among others, is considered to be
"Ancillary Litigation."
DAMAGES. Although the Company and the Bank have conducted preliminary
reviews of the damages allegedly suffered by the Company and the Bank, no
conclusive determination has been made regarding the amount or type of such
damages. Moreover, the Company and the Bank believe that there are no generally
recognized precedents on how to assess damages in cases such as the Goodwill
Litigation. In addition, the Government may argue that some or all of the
damages proffered by the Plaintiffs are too speculative to permit a recovery.
Therefore, even if the Plaintiffs prevail in establishing the liability of the
United States, there can be no assurances as to the amount, if any, and type of
damages that they may recover. Without limiting the generality of the foregoing,
there can be no assurance that the Plaintiffs will obtain any cash recovery in
the Goodwill Litigation. Furthermore, assuming that there is a cash recovery, it
is impossible to predict the amount of the Litigation Recovery (as defined
below) because the fees, costs 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.
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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 Offering, whereby each Material Stockholder received one
Contingent Goodwill Participation Right (each a "Right" and collectively, the
"Rights") for each share of Common Stock held by the Material Stockholder as of
the date of the Shareholder Rights Agreement.
Each Right entitles the Material Stockholders to receive 0.0009645% of the
Litigation Recovery, if any (as defined below) and all of the Rights to be owned
by the Material Stockholders will entitle the Material Stockholders to receive
in the aggregate 95% of the Litigation Recovery (such portion of the Litigation
Recovery, the "Recovery Payment"). The remaining 5.0% of the Litigation Recovery
will be retained by the Company and/or the Bank in consideration for the time
and effort incurred previously and hereafter by the Company, the Bank and
management of the Company and the Bank with respect to prosecuting the Goodwill
Litigation.
None of the Material Stockholders have paid any cash or other consideration
to the Company and/or the Bank in connection with their entering into the
Shareholder Rights Agreement. Any successor to the Company and/or the Bank shall
assume the rights and obligations of the Company and/or the Bank with respect to
the Shareholder Rights Agreement. In addition, to the extent that the Company
enters into a definitive agreement providing for the acquisition, merger or
consolidation of the Company or the Bank in which the Company or the Bank is not
the surviving entity, the Company (or any successor thereto) is required to
create a statutory business trust under Delaware law (the "Litigation Trust")
with five trustees (the "Litigation Trustees") designated by the Material
Stockholders. The Litigation Trustees shall have the same authority, identical
to and succeeding that of the Litigation Committee of the Board of Directors,
which has the responsibility to make all decisions on behalf of the Company and
the Bank with respect to the Goodwill Litigation and any Ancillary Litigation.
LITIGATION RECOVERY. The Litigation Recovery will equal the cash p ayment
(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).
THE RECOVERY PAYMENT. Within five days of receipt by the Company and/or the
Bank of any Litigation Recovery, or the liquidation by the Company and/or the
Bank of any non-cash proceeds (which does not include nonmarketable assets or
assets which are unable to be sold or liquidated ("Non-Cash Proceeds")) received
in connection with the Litigation Recovery, the Company shall deliver to each
Material Stockholder a written notice (the "Payment
33
Notice") (i) specifying that a Litigation Recovery has been paid, (ii)
describing the amount of cash proceeds received, (iii) describing the type and
amount of any Non-Cash Proceeds received, the amounts received by the Company
and/or the Bank upon liquidation of such Non--Cash Proceeds and the financial
and other documentation supporting such liquidation value, and (iv) specifying
the date and method by which the Company will redeem the Rights by payment of
the Recovery Payment. To the extent the Company and/or the Bank receives all or
a portion of the Litigation Recovery in the form of Non-Cash Proceeds, the
Company and the Bank shall liquidate the Non-Cash Proceeds. The Company shall
provide to each Material Stockholder financial and other documentation
reasonably suffi-cient to support the liquidation value of such Non-Cash
Proceeds. In no event shall the Bank be required to distribute to the Company or
the Company be required to distribute any amounts to the Material Stockholder in
connection with any liquidation of Non-Cash Proceeds which exceed the amounts
received by the Company and/or the Bank upon liquidation of such Non-Cash
Proceeds.
To the extent all or any portion of the Litigation Recovery is received by
the Bank, the Bank shall distribute such Litigation Recovery to the Company
("Bank Distribution"). To the extent any Litigation Recovery is paid to the Bank
in installments, the distribution to the Company shall be made in similar
installments. Any cash proceeds received in connection with the Litigation
Recovery is required by the Shareholder Rights Agreement to be so distributed
within five days of their receipt, independently of the need for liquidation by
the Bank of any Non-Cash Proceeds. The liquidation value of any such Non-Cash
Proceeds received in connection with the Litigation Recovery shall be
distributed within five days of their liquidation, independently of the
distribution of any cash proceeds.
The Shareholder Rights Agreement provides that no later than five days
following the date of the Payment Notice, the Company shall redeem all of the
outstanding Rights of each Material Stockholder by payment of the Recovery
Payment. To the extent the Litigation Recovery is paid to the Company and/or the
Bank in installments, the redemption of the Rights and the distribution of the
Recovery Payment shall be paid in similar installments. Notwithstanding the
foregoing, however, the Company may not redeem any portion of the Rights less
than one-year from the date of an "ownership change" of the Company and/or the
Bank within the meaning of Section 382(g) of the Code, unless the Company
obtains an opinion from an independent accounting firm which states that the
redemption should not materially affect the Company's and/or the Bank's
limitation under Section 382 of the Code with respect to such ownership change.
The Material Stockholders shall be entitled to receive any actual interest
earned by the Company and/ or the Bank which is attributable to its investment
of the Recovery Payment for the period of time between the date on which the
Company and/or the Bank receives any Litigation Recovery in connection with the
Goodwill Litigation and the date on which the Company either redeems the Rights
or issues Recovery Payment Preferred (as defined below).
CONVERSION OF RIGHTS TO PREFERRED STOCK. In the event that applicable laws,
rules, regulations, directives or the terms of any judgment or settlement limit
or prevent the Bank from distributing the Bank Distribution and/or the Company
from redeeming the Rights and distributing all or a portion of the Recovery
Payment, the Bank shall only distribute such portion of the Bank Distribution
and the Company shall only redeem those Rights (on a pro rata basis) and
distribute such portion of the Recovery Payment (on a pro rata basis), to the
extent not otherwise restricted. While the Bank has a continuing obligation to
distribute the balance of any Bank Distribution which it has been precluded from
paying as soon as permissible, and the Company has a continuing obligation to
redeem the balance of the Rights and distribute the balance of any Recovery
Payment which it has been precluded from paying as soon as permissible, in no
event, however, will the Company's redemption of the Rights result in an
aggregate distribution of an amount greater than the Recovery Payment.
To the extent the Company is prohibited from distributing the Recovery
Payment, or any portion thereof, or cannot do so because the Bank is prohibited
from making the Bank Distribution to the Company, the Company shall, upon the
written request of any 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 as discussed herein
shall be set forth in Certificate of Designations and Preferences filed as a
supplement to the Company's Amended and Restated Certificate of Incorporation.
The Company shall issue the Recovery Payment Preferred upon surrender to the
Company of such Material Stockholder's Rights.
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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.
So long as any Recovery Payment Preferred remains outstanding: (i) no
dividend shall be declared or paid upon or set apart for payment, and no
distribution shall be ordered or made in respect of the Company's Common Stock,
or (ii) any other class of stock or series thereof; and (b) no shares of Common
Stock and no shares of any other class of stock or series thereof shall be
redeemed or purchased by the Company; and (c) no moneys, funds or other assets
shall be paid to or made available for a sinking fund for the redemption or
purchase of any shares of: (i) Common Stock; or (ii) any other class of stock or
series thereof; unless, in each instance, full dividends on all outstanding
shares of Recovery Payment Preferred: (i) for all past dividend periods shall
have been paid; and (ii) for the then current calendar quarter shall have been
paid or declared and set aside for payment.
In the event of any dissolution, liquidation or winding up of the affairs
of the Company, after payment or provision for payment of the debts and other
liabilities of the Company, the holders of the Recovery Payment Preferred shall
be entitled to receive, out of the net assets of the Company available for
distribution to its stockholders and before any distribution shall be made to
the holders of Common Stock or to the holders of any other class of stock or
series thereof, an amount equal to $1,000 per share, plus an amount equal to all
dividends accrued and unpaid on each share of Recovery Payment Preferred to but
excluding the date fixed for distribution, and no more. If upon such voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the
Company, the net assets of the Company shall be insufficient to permit payment
in full of the amounts required to be paid to the holders of the Recovery
Payment Preferred, then a pro rata portion of the full amount required to be
paid upon such dissolution, liquidation or winding up shall be paid to the
holders of Recovery Payment Preferred.
The Company shall have the right, at its option and by resolution of its
Board of Directors, to redeem at any time and from time to time the Recovery
Payment Preferred Stock, in whole or in part, upon payment in cash in respect to
each share of Recovery Payment Preferred redeemed at $1,000 per share, plus an
amount equal to all dividends accrued and unpaid thereon to but excluding the
date fixed for redemption. If less than all of the outstanding shares of
Recovery Payment Preferred shall be redeemed, the particular shares to be
redeemed shall be allocated by the Company among the respective holders of
Recovery Payment Preferred, pro rata, by lot or by a substantially equivalent
method selected by the Board of Directors of the Company. Under such
circumstances, new certificates shall be issued evidencing unredeemed shares to
the extent applicable.
The holders of the Recovery Payment Preferred shall have no voting power
except as described in the Shareholder Rights Agreement. If at any time the
equivalent of six or more full quarterly dividends (whether or not consecutive)
payable on any shares of Recovery Payment Preferred shall be in default, the
number of directors constituting the Board of Directors of the Company shall be
increased by two, and the holders of all Recovery Payment Preferred shall have
the exclusive right, voting together as one class, to elect two directors to
fill such newly-created directorships. This right shall remain vested until all
dividends in default on all outstanding Recovery Payment Preferred have been
paid, or declared and set apart for payment, at which time: (i) the right shall
terminate (subject to revesting in the case of any subsequent default of the
kind described above); (ii) the term of the directors then in office elected by
the holders of the outstanding Recovery Payment Preferred as a class shall
terminate; and (iii) the number of directors constituting the Board of Directors
of the Company shall be reduced by two.
No sinking fund or funds shall be established for the retirement or
redemption of the Recovery Payment Preferred. In addition, shares of the
Recovery Payment Preferred shall not be convertible into Common Stock or any
other class of capital stock of the Company. The Common Stock of the Company and
any other preferred stock, whether now or hereafter issued, shall be deemed to
rank junior to the Recovery Payment Preferred with respect to the payment of
dividends or the distribution of assets upon redemption, liquidation or
dissolution or winding up of the Company.
35
MANAGEMENT OF THE GOODWILL LITIGATION AND ANY ANCILLARY LITIGATION. The
Shareholder Rights Agreement provides that the Company shall prosecute the
Goodwill Litigation vigorously following the distribution of Rights with a view
to resolution of the Goodwill Litigation as promptly as practicable. In
furtherance of this prosecution of the Goodwill Litigation, the Board of
Directors of the Company has designated a special litigation committee of the
Board of Directors (the "Litigation Committee") comprised of three directors
which includes the Chief Executive Officer of the Company, one Director
designated by the Bishop Estate, and one Director who shall be designated
jointly by BIL Securities and Arbur. The Litigation Committee shall have the
exclusive right to oversee and to direct the prosecution of the Litigation and
any Ancillary Litigation. The Litigation Committee shall be authorized to make
final decisions relating to any dismissal, settlement, or termination of the
Goodwill Litigation and any Ancillary Litigation and to decline to pursue any
appeal or to settle the Litigation and any Ancillary Litigation prior to any
Recovery Payment. In the event that any or all of the Material Stockholders
should lose their representation on the Board of Directors before the conclusion
of the Goodwill Litigation or any Ancillary Litigation and the distribution of
the Recovery Payment, the relevant Material Stockholder(s) shall retain the
right to designate member(s) of the Litigation Committee, which designees may
include persons not members of the Board of Directors of the Company. If any
such designee should not be simultaneously a member of the Board of Directors,
the Litigation Committee shall thereupon become an advisory committee of the
Company. The Litigation Committee's authority shall thenceforward consist of
making recommendations to the Board of Directors relating to the prosecution of,
and any dismissal, settlement or termination of the Goodwill Litigation and any
Ancillary Litigation, in whole or in part. The Litigation Committee shall
present such recommendations in writing to the Board of Directors of the Company
and the Board of Directors may not dismiss, settle or terminate the Goodwill
Litigation and any Ancillary Litigation, in whole or in part, without first
receiving the favorable recommendation to that effect from the Litigation
Committee. The adoption of any such recommendation to settle or otherwise
terminate the Goodwill Litigation by the Board of Directors shall require an
affirmative vote of six of the seven members of the Board of Directors of the
Company. The Company, as the sole shareholder of the Bank, is also required to
cause the Bank to take no action which is inconsistent with any action taken at
the direction of the Litigation Committee.
As discussed above, to the extent that the Company enters into a definitive
agreement providing for the acquisition, merger or consolidation of the Company
in which the Company is not the surviving entity (an "Acquisition Transaction"),
the Company or its successor is required to create the Litigation Trust. The
Litigation Trust shall have five Trustees designated by the Material
Stockholders, as follows: The Bishop Estate shall designate three Trustees; BIL
Securities alone shall designate one Trustee; and BIL Securities together with
Arbur shall jointly designate one Trustee. Effective upon consummation of the
Acquisition Transaction, the Company or its successor shall be contractually
obligated to assume all duties and obligations of the Company and the Bank with
respect to the Litigation Recovery and the redemption of the Rights under the
Shareholder Rights Agreement.
Upon consummation of the Acquisition Transaction, the Litigation Trustees
shall assume authority, identical to and succeeding to that of the Litigation
Committee, to make all decisions on behalf of the Company and its successors
with respect to the prosecution of the Goodwill Litigation and in any Ancillary
Litigation. Without prejudice to any rights of the Material Stockholders, the
Litigation Trustees shall have the authority to bring suit on behalf of the
Material Stockholders to enforce any provision of the Shareholder Rights
Agreement for the benefit of the Material Stockholders. The Litigation Trustees
may seek reimbursement by the Bank and/or the Company for any expenses, costs or
fees reasonably incurred for their own administration and for management of the
Goodwill Litigation and any Ancillary Litigation, which reimbursement by the
Bank and/or the Company shall be deducted from the Litigation Recovery.
REIMBURSEMENT OF FEES AND EXPENSES AND INDEMNIFICATION. Under the terms of
the Shareholder Rights Agreement, the amount of the Recovery Payment which is to
be paid to the 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 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 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.
36
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. In both instances, such agreement to indemnify
includes any amounts paid in any judgment or settlement of such claims or any
portion of the Litigation Recovery which is determined to be owing to parties
other than a Material Stockholder, the Company and the Bank. The litigation with
respect to either or both of the foregoing types of claims is referred to herein
as the "Ancillary Litigation." In no event will the Material Stockholders be
liable, with respect to any and all claims or indemnities for Ancillary
Litigation, for an amount in excess of the actual monies recovered or awarded in
the Goodwill Litigation and paid over to the Material Stockholders as part of
the Recovery Payment. To the extent any liability, fees and expenses are
incurred subsequent to the distribution of the Recovery Payment to the Material
Stockholders, each Material Stock-holder is required to bear responsibility and
shall reimburse the Company and/or the Bank for a share of such indemnification
in the same proportion as its pro rata share of the Rights outstanding. The
obligations and duties of the Material Stockholder to indemnify the Company and
the Bank under the Shareholder Rights Agreement shall survive and continue as
obligations of the Material Stockholders irrespective of whether the Material
Stockholders assign any or all of the Rights to third parties.
RIGHTS OF THE MATERIAL STOCKHOLDERS. The Material Stockholders will not
have any rights to receive any payment pursuant to the Shareholder Rights
Agreement except in each case to the extent of the Recovery payment, if any and
except as described in the Shareholder Rights Agreement. The Rights (i) will be
junior to all debt obligations of the Company and the Bank existing at the time
of the redemption except as to an obligation that is expressly made junior to
the Rights, (ii) do not have a right to vote, and (iii) will be a senior claim
in relation to the right of the holders of any stock of Company, including the
Company Common Stock or other preferred stock, whether now existing or herafter
created, as to dividends or as to the distribution of assets upon redemption,
liquidation, dissolution, or winding up with respect to a Recovery Payment
attributable to any Litigation Recovery (although the Material Stockholders will
continue to have such other rights on liquidation attributable to their status
as holders of Common Stock).
TAX CONSEQUENCES. KPMG LLP has issued an opinion to the Company and the
Bank to the effect that, for federal income tax purposes, the Rights evidenced
by the terms of the Shareholder Rights Agreement should be treated as stock of
the Company for purposes of Sections 382(e), 311(a) and 305(a) of the Code.
Thus, the Company should recognize no gain or loss on the distribution of the
Rights to the Material Stockholders with respect to their ownership of Company
Common Stock. In addition, the Bank should not recognize gain or loss on the
Company's distribution of the Rights to the Material Stockholders. Furthermore,
the Material Stockholders should not be required to include the amount of the
Rights in income. Finally, the amount of value taken into account for purposes
of determining the annual Section 382 limitation in connection with the 1998
Ownership Change should include the value of the Rights.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
37
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 9, 1999 the Company had approximately 27 stockholders of record
(not including the number of persons or entities holding stock in nominee or
street name through various brokerage firms) and 20,448,705 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 1/2 13 5/8
Third Quarter ................ 13 13/16 9
Fourth Quarter ............... 10 3/4 8
Year ......................... 14 1/2 8
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.
38
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
(Dollars in thousands, except per share data)
The following selected historical consolidated financial and other data for
the five years ended December 31, 1998 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 December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------- ------------- ------------- -------------
SELECTED FINANCIAL CONDITION DATA:
Total assets .................................... $3,335,027 $2,213,054 $1,747,918 $1,579,760 $1,722,256
Cash and cash equivalents ....................... 22,401 14,113 14,720 7,258 10,507
Federal funds sold .............................. 24,000 7,004 7,200 11,800 --
Securities purchased under agreements
to resell .............................. -- -- -- 35,000 --
Securities available-for-sale ................... 1,004,937 571,160 502,301 241,645 7,677
Loans held for sale ............................. -- -- -- -- 28,946
Mortgage-backed securities
held-to-maturity ....................... 6,282 9,671 10,971 -- 304,620
Loans receivable, net ........................... 2,148,857 1,533,212 1,141,707 1,228,152 1,306,057
Real estate held for investment and
sale, net .............................. 2,723 15,191 22,561 16,288 17,514
Deposits ........................................ 1,542,162 1,266,615 1,371,243 1,473,318 1,384,218
Securities sold under agreements to
repurchase .................... 364,000 340,788 192,433 -- --
FHLB advances ................................... 1,198,000 472,000 80,000 31,746 310,000
Senior debt (1) ................................. -- 11,113 11,398 10,000 38,199
Minority interest (2) ........................... 33,250 33,250 -- -- 23,324
Stockholders' equity (3) ........................ 180,606 79,602 64,822 56,613 (52,463)
39
At December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- --------- -------- --------
(Dollars in thousands, except per share data)
SELECTED OPERATING DATA:
Interest, fees and dividend income ............ $180,873 $130,979 $122,896 $122,926 $116,262
Interest expense .............................. 140,358 97,205 90,791 97,977 97,100
-------- -------- --------- -------- --------
Net interest income ........................... 40,515 33,774 32,105 24,949 19,162
Provision for loan losses ..................... 2,000 2,046 2,884 8,823 24,443
-------- -------- --------- -------- --------
Net interest income after provision for
loan losses .................................. 38,515 31,728 29,221 16,126 (5,281)
Gain on sale of mortgage-backed
securities, net .............................. 1,682 1,275 3,638 641 485
Gain (loss) on loan and servicing sales, net... 613 3,413 (53) (166) 2,712
Income (loss) from other real estate
operations, net .............................. 1,479 (1,805) 1,946 (2,067) (5,398)
Other noninterest income ...................... 2,662 2,234 2,593 2,095 2,328
Operating expenses ............................ 46,962 29,543 27,816 30,751 40,923
-------- -------- --------- -------- --------
Earnings (loss) before income taxes
(benefit) and minority interest .............. (2,011) 7,302 9,529 (14,122) (46,077)
Income taxes benefit .......................... (16,390) (4,499) (3,015) (2,644) 11,356
Minority interest ............................. 3,476 859 -- -- --
-------- -------- --------- -------- --------
Net earnings (loss) ........................... $ 10,903 $ 10,942 $ 12,544 $(11,478) $(57,433)
Net earnings (loss) available to common
Stockholders ................................. $ 8,743 $ 3,602 $ 5,989 $(14,863) $(57,433)
Earnings per share, basic and diluted (4) ..... $ 0.59 $ 1.14 $ 1.90 $ (3.41) $ (9.45)
KEY OPERATING RATIOS: (5)
Return on average assets ...................... 0.39% 0.57% 0.72% (0.65)% (3.00)%
Return on average assets, excluding
one-time IPO-related expenses (6) ............ 0.72 0.57 0.72 -- --
Return on average equity ...................... 7.79 15.37 22.00 (38.21) (251.75)
Return on average equity, excluding
one-time IPO-related expenses (6) ............ 14.37 15.37 22.00 -- --
Equity to assets .............................. 4.98 3.72 3.29 1.70 (1.19)
Dividend payout ratio ......................... -- -- -- -- --
Interest-earning assets to interest-bearing
liabilities .................................. 104 101 100 100 98
Interest rate spread (7) ...................... 1.28 1.80 1.91 1.46 1.16
Net interest margin (7) ....................... 1.49 1.84 1.92 1.45 1.04
Operating expenses to average assets .......... 1.67 1.55 1.60 1.74 2.14
Operating expenses to average assets,
excluding one-time IPO-related expenses (6) .. 1.12 1.55 1.60 -- --
Efficiency ratio (8) .......................... 100.02 72.17 64.52 89.72 93.58
Efficiency ratio, excluding one-time IPO-
related expenses (6) (8) ..................... 66.82 72.17 64.52 -- --
(Continued)
40
At December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands, except per share data)
ASSET QUALITY DATA:
Total non-performing assets and troubled debt
restructurings (9) ................................ $14,806 $33,123 $46,218 $52,640 $78,737
Non-performing loans as a percent of loans,
net ............................................... 0.40% 0.65% 1.60% 2.90% 2.10%
Non-performing assets as a percent of total
assets (9) ........................................ 0.34 1.05 2.21 2.94 2.20
Non-performing assets and troubled debt
restructurings as a percent of total assets (9) ... 0.44 1.50 2.64 3.33 4.57
Allowance for loan losses as a percent of
loans, net ........................................ 0.88 1.16 2.04 2.57 2.28
Allowance for loan losses as a percent of
non-performing loans (9) .......................... 222.13 179.97 127.65 88.71 108.53
Allowance for loan losses as a percent of
non-performing loans and troubled debt
restructurings (9) ................................ 156.39 89.84 90.30 75.67 43.66
Net charge-offs to average loans , net ............. 0.05 0.63 0.95 0.55 0.95
BANK REGULATORY CAPITAL RATIOS (10):
Tier 1 leverage .................................... 6.30% 5.43% 4.57% 4.18% 1.08%
Tier 1 risk-based .................................. 11.48 10.74 9.15 7.56 2.01
Total risk-based ................................... 12.36 11.99 10.38 8.43 2.76
(1) The senior debt was repaid in connection with the Offering.
(2) Minority interest consists of the interest in PPCCP held by persons
other than the Bank. See "ITEM 1. BUSINESS--Subsidiaries."
(3) At December 31, 1998, 1997 and 1996, stockholders' equity is net of
$13.6 million, $2.0 million and $6.1 million of unrealized losses on
securities available-for-sale, respectively.
(4) Based on a weighted average number of shares of Common Stock of
14,793,644, 3,152,064, 3,152,064, 4,361,280 and 6,075,008 for 1998,
1997, 1996, 1995 and 1994, respectively.
(5) With the exception of end of period ratios, all ratios are based on
average daily balances during the respective periods.
(6) One-time IPO-related expenses paid in 1998 were comprised of: (1)
$11.1 million ($6.5 million net of applicable income tax benefits) for
employment agreement benefits due to certain executive officers of the
Company and (2) $4.5 million ($2.7 million net of applicable income
tax benefits) for a special FDIC assessment which the Bank had
deferred from paying in prior years.
(7) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities; net interest margin represents net
interest income as a percentage of average interest-earning assets.
(8) Efficiency ratio represents operating expenses as a percent of the
aggregate of net interest income and non-interest income.
(9) Non-performing assets consist of nonaccrual loans and real estate
owned. Nonaccrual loans are loans that the Company has removed from
accrual status because the loans are 90 or more days delinquent as to
principal and/or interest or, in management's opinion, full
collectibility of the loans is in doubt. Real estate owned consists of
real estate acquired in settlement of loans. A loan is considered a
troubled debt restructuring if, as a result of the borrower's
financial condition, the Company has agreed to modify the loan by
accepting below market terms either by granting an interest rate
concession or by deferring principal or interest payments. As used in
this table, the term "troubled debt restructurings" means a
restructured loan on accrual status. Troubled debt restructurings on
nonaccrual status are reported in the nonaccrual loan category. See
"ITEM 1. BUSINESS--Asset Quality."
(10) For information on the Bank's regulatory capital requirements. See
"ITEM 1. BUSINESS--Regulation Of Federal Savings Banks--Regulatory
Capital Requirements."
41
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 Company conducts its business primarily through the Bank, which is a
community oriented savings bank which emphasizes customer service and
convenience. The Company has operated profitably during 1996 and 1997 and 1998,
after giving effect for $15.6 million of one time expenses ($9.2 million net of
applicable tax benefits) paid in connection with the Offering. Without the
effect of such one-time payments, the Company would have reported net earnings
of $20.1 million for the year ended December 31, 1998, an 84% increase over the
results for the prior year. The Bank is currently well capitalized under the
applicable regulatory requirements.
As part of its overall business strategy, the Bank has sought to develop a
wide variety of products and services which meet the needs of its retail and
commercial customers. On the asset side of the Bank's balance sheet, management
has increased its emphasis on commercial business and consumer lending which
complements the Bank's existing residential and commercial real estate lending
operations. In addition, the Bank has increased its investment in corporate
trust preferred obligations and U.S. Government agency mortgage-backed
securities with the intention of enhancing net interest income while limiting
credit and interest rate risk. On the liability side of the Bank's balance
sheet, the Bank is focused on accessing cost-efficient funding sources,
including retail deposits, FHLB advances ,and securities sold under agreements
to repurchase.
The Bank's business strategy focuses on achieving attractive returns
consistent with the Company's risk management objectives. The Bank has sought to
implement this strategy by (i) reducing non-performing assets; (ii) improving
operating efficiency by maintaining a low level of operating expenses relative
to interest-earning assets; (iii) reducing funding costs through the utilization
of retail deposits and other borrowings; (iv) revising the Bank's investment
policy and, in connection therewith, replacing illiquid mortgage-related
securities with U.S. Government agency obligations and U.S. Government agency
mortgage-backed securities; (v) managing the Bank's interest rate risk through
on-balance sheet hedging; (vi) developing new business relationships through an
increased emphasis on commercial lending and diversifying the Bank's retail
products and services, including an increase in consumer loan originations;
(vii) increasing the Bank's securities portfolio as a means of enhancing net
interest income while minimizing the Bank's credit and interest rate risk
exposure; and (viii) expanding the Bank's franchise through new branch openings
and pursuing acquisition opportunities when appropriate.
FINANCIAL CONDITION
GENERAL. Total assets increased by $1.1 billion or 50.7% to $3.3 billion
during the year ended December 31, 1998 and increased by $465.1 million or 26.6%
during the year ended December 31, 1997. The increase in total assets during
1998 primarily reflected an increase in the Bank's loans receivable, net, as
well as investments in U.S. Government agency debt securities, corporate trust
preferred securities and mortgage-backed securities. During 1998, the Bank took
advantage of the leverage opportunities presented as a result of the capital
raised from the PBOC Offering, originating $607.6 million of loans and
purchasing $876.9 million of loans, which were funded by intermediate-term FHLB
advances. Total investments increased by $430.4 million during 1998 and were the
primary reason for the increase in total assets in 1997. These assets were
funded primarily through the use of short- and intermediate-term borrowings,
consisting of reverse repurchase agreements and FHLB advances. The shift in the
composition of the Bank's asset and liability mix since 1996 reflects the new
management's operational philosophy, discussed above.
CASH, CASH EQUIVALENTS AND OTHER SHORT-TERM INVESTMENTS. Cash, cash
equivalents and other short-term investments (consisting of cash,
interest-bearing deposits in other banks, federal funds sold and securities
purchased under agreements to resell) amounted to $46.4 million and $21.1
million at December 31, 1998 and 1997, respectively.
42
The Bank manages its cash, cash equivalents and other short-term investments
based upon the Bank's operating, investing and financing activities. The Bank
generally attempts to invest its excess liquidity into higher yielding assets
such as loans or securities. At December 31, 1998, the Bank's regulatory
liquidity exceeded the minimum OTS requirements. See "Liquidity And Capital
Resources."
SECURITIES. At December 31, 1998, the Bank's securities portfolio (both
held-to-maturity and available-for-sale) amounted to $1.0 billion or 30.3% of
the Company's total assets, as compared to $580.8 million or 26.2% at December
31, 1997. At December 31, 1998 and 1997, $590.8 million and $428.1 million, or
58.4% and 73.7% of the Bank's securities portfolio, consisted of mortgage-backed
securities, $325.0 million and $0 million, or 32.1% and 0% of such portfolio,
consisted of investment-grade trust preferred obligations, and $37.0 million and
$139.7 million, or 3.6% and 24.0% of such portfolio, consisted of U.S.
Government agency securities, respectively. Although mortgage-backed securities
often carry lower yields than traditional mortgage loans, such securities
generally increase the credit quality of the Bank's assets because they have
underlying insurance or guarantees, require less capital under risk-based
regulatory capital requirements than non-insured or non-guaranteed mortgage
loans, are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Bank. At December 31, 1998,
$6.3 million of the Bank's securities portfolio was classified as
held-to-maturity and reported at historical cost and $1.0 billion 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,
1998, the Bank's securities classified as available-for-sale had in the
aggregate $13.6 million of unrealized losses.
The following table sets forth information regarding the carrying and
market value of the Bank's securities at the dates indicated.
At December 31,
--------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------ -----------------------
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 ................................... $ 36,977 $ 36,977 $ 139,719 $ 139,719 $ 38,714 $ 38,714
Investment-grade trust preferred obligations .. 324,965 324,965 -- -- -- --
Mortgage-backed securities .................... 584,515 584,515 418,450 418,450 463,587 463,587
SBA certificates ..................... 58,480 58,480 12,991 12,991 -- --
---------- ---------- ---------- --------- --------- ---------
$1,004,937 $1,004,937 $ 571,160 $ 571,160 $ 502,301 $ 502,301
---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- --------- --------- ---------
Held-to-maturity:
Mortgage-backed securities ........... $ 6,282 $ 6,372 $ 9,671 $ 9,743 $ 10,971 $ 10,899
---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- --------- --------- ---------
43
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,
--------------------------------------------
1998 1997 1996
----------- ---------- -----------
(Dollars in thousands)
Securities at beginning of period ............................................... $ 580,831 $ 513,272 $ 241,645
Purchases ....................................................................... 1,134,026 408,729 487,719
Sales ........................................................................... (513,159) (234,339) (158,448)
Repayments and prepayments ...................................................... (178,842) (110,941) (53,207)
Decrease (increase) in unrealized losses on available-for-sale securities(1) .... (11,637) 4,110 (4,437)
----------- ---------- -----------
Securities at end of period(2)(3) ............................................... $ 1,011,219 $ 580,831 $ 513,272
----------- ---------- -----------
----------- ---------- -----------
(1) At December 31, 1998, the cumulative unrealized losses on securities
classified as available-for-sale amounted to $13.6 million, which
reduces stockholders' equity.
(2) At December 31, 1998, the book value and market value of the Bank's
securities (including held-to-maturity and available-for-sale
securities) amounted to $1,011.2 million and $1,011.3 million,
respectively.
(3) At December 31, 1998, $501.1 million or 49.5% of the Bank's securities
portfolio consisted of adjustable-rate securities, compared to $222.4
million or 43.3% and $115.8 million or 47.9% at December 31, 1997 and
1996, respectively.
LOANS RECEIVABLE. Net loans receivable increased by $615.6 million, or
40.2%, during the year ended December 31, 1998 and increased by $391.5 million,
or 34.3%, during the year ended December 31, 1997. The significant increase
during 1998 was directly attributable to management's strategy of leveraging the
capital generated from the Offering. The Bank purchased $821.7 million of
single-family residential mortgage loans in 1998 on a ervicing retained basis.
At December 31, 1998, $412.0 million in principal balance of such purchases were
secured by properties located outside of the state of California. The Bank also
increased its loan originations to $607.6 million in 1998 compared to $160.7
million in 1997.
44
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
the Bank's loans at the dates indicated.
December 31,
---------------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------------ -----------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
---------- ---------- ----------- ---------- ---------- ----------
(Dollars in thousands)
Mortgage loans:
Single-family residential ............... $1,494,756 68% $ 953,701 62% $ 595,915 51%
Multi-family residential ................ 366,625 17 426,254 27 453,064 39
Commercial .............................. 206,402 9 135,407 9 110,931 10
Land and other .......................... 880 -- 5,896 -- 1,639 --
---------- --- ----------- --- ---------- ---
Total mortgage loans .................. 2,068,663 94 1,521,258 98 1,161,549 100
---------- --- ----------- --- ---------- ---
Other loans:
Commercial business ..................... 62,665 3 22,484 1 3,523 --
Consumer ................................ 53,826 3 8,485 1 988 --
Secured by deposits ..................... 3,537 -- 2,287 -- 2,132 --
---------- --- ----------- --- ---------- ---
Total loans receivable ................ 2,188,691 100% 1,554,514 100% 1,168,192 100%
---------- --- ----------- --- ---------- ---
--- --- ---
Less:
Undistributed loan proceeds ............. 17,152 6,206 473
Unamortized net loan discounts
and deferred origination fees ......... 814 (6,859) 2,732
Deferred gain on servicing sold ......... 2,971 4,131 --
Allowance for loan losses ............... 18,897 17,824 23,280
---------- ---------- ----------
Loans receivable, net ................... $2,148,857 $1,533,212 $1,141,707
---------- ---------- ----------
---------- ---------- ----------
December 31,
------------------------------------------------------
1995 1994
-------------------------- --------------------------
Percent of Percent of
Amount Total Amount Total
----------- ------------- ------------- -----------
(Dollars in thousands)
Mortgage loans:
Single-family residential ............ $ 658,412 52% $ 721,801 54%
Multi-family residential ............. 479,100 38 480,547 36
Commercial ........................... 120,109 10 129,768 10
Land and other ....................... 3,176 -- 7,546 --
---------- --- ---------- ---
Total mortgage loans ............... 1,260,797 100 1,339,662 100
---------- --- ---------- ---
Other loans:
Commercial business .................. -- -- -- --
Consumer ............................. -- -- -- --
Secured by deposits .................. 1,976 -- 908 --
---------- --- ---------- ---
Total loans receivable ............. 1,262,773 100% 1,340,570 100%
---------- --- ---------- ---
--- ---
Less:
Undistributed loan proceeds .......... 28 1,376
Unamortized net loan discounts
and deferred origination fees ...... 3,021 3,336
Deferred gain on servicing sold ...... -- --
Allowance for loan losses ........... 31,572 29,801
---------- ----------
Loans receivable, net ................ $1,228,152 $1,306,057
---------- ----------
---------- ----------
45
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth scheduled contractual amortization of the Bank's total loan portfolio
at December 31, 1998, 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, 2002- 2004- 2010-
1998 1999 2000 2001 2003 2009 2015 Thereafter
------------ --------- --------- --------- --------- --------- --------- ----------
(Dollars in thousands)
Mortgage loans:
Single-family residential .... $1,494,756 $ 23,223 $ 36,775 $ 39,178 $ 87,115 $ 307,170 $ 352,285 $ 649,010
Multi-family residential ..... 366,625 19,282 6,717 11,194 23,249 107,732 81,303 117,148
Commercial ................... 206,402 38,638 7,525 3,242 22,813 125,207 4,566 4,411
Land ......................... 880 147 30 10 693 -- -- --
Other loans:
Commercial ................... 62,665 28,434 17,778 2,746 4,306 5,783 1,347 2,271
Consumer ..................... 53,826 11,771 8,255 8,316 18,989 2,962 809 2,724
Secured by deposits .......... 3,537 3,537 -- -- -- -- -- --
---------- --------- --------- --------- --------- --------- --------- ---------
Total (1) .................. $2,188,691 $ 125,032 $ 77,080 $ 64,686 $ 157,165 $ 548,854 $ 440,310 $ 775,564
---------- --------- --------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- --------- --------- ---------
(1) Of the $2.06 billion of loan principal repayments contractually due
after December 31, 1999, $1.24 billion have fixed rates of interest
and $817 million have adjustable rates of interest.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less
than their average contractual terms because of prepayments and, in the
case of conventional mortgage loans, due-on-sale clauses, which generally
give the Bank the right to declare a loan immediately due and payable in
the event, among other things, that the borrower sells the real property
subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when the current mortgage loan rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when rates on existing mortgages are substantially lower than
current mortgage loan rates (due to refinancings of adjustable rate and
fixed rate loans at lower rates).
46
The following table shows the activity in the Bank's loan portfolio during the
periods indicated.
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
Gross loans held at beginning of period .......................... $1,554,514 $1,168,192 $1,262,773
Originations of loans:
Mortgage loans:
Single-family residential ................................... 389,475 88,077 37,129
Multi-family residential .................................... 7,847 15,806 7,823
Commercial .................................................. 116,242 24,232 6,945
Land ........................................................ -- -- --
Other loans:
Commercial .................................................. 57,492 20,869 4,303
Consumer .................................................... 32,969 8,050 1,069
Secured by deposits ......................................... 3,537 3,664 4,389
---------- ---------- ----------
Total originations ........................ 607,562 160,698 61,658
---------- ---------- ----------
Purchases of loans:
Single-family residential ................................... 821,716 482,943 --
Multi-family residential .................................... 13,302 4,834 --
Commercial real estate ...................................... 10,201 12,899 --
Land ........................................................ -- 5,000 --
Commercial .................................................. 9,200 -- --
Consumer .................................................... 22,479 5 --
---------- ---------- ----------
Total purchases ............................................. 876,898 505,681 --
---------- ---------- ----------
Total originations and purchases .......... 1,484,460 666,379 61,658
---------- ---------- ----------
Loans sold:
Single-family residential ................................... (37,051) (85,241) --
Commercial real estate ...................................... (357) -- --
Commercial .................................................. (5,000) -- --
Consumer .................................................... (13) -- --
---------- ---------- ----------
Total sold ................................ (42,421) (85,241) --
---------- ---------- ----------
Repayments ....................................................... (797,614) (163,467) (113,721)
Transfers to real estate owned ................................... (10,248) (31,349) (42,518)
---------- ---------- ----------
Net activity in loans ............................................ 634,177 386,322 (94,581)
---------- ---------- ----------
Gross loans held at end of period ................................ $2,188,691 $1,554,514 $1,168,192
---------- ---------- ----------
---------- ---------- ----------
47
NON-PERFORMING LOANS AND TROUBLED DEBT RESTRUCTURINGS. The Bank's new
management has successfully taken steps to reduce the level of the Bank's
non-performing assets, which has resulted in a substantial decline in
non-performing loans and troubled debt restructurings (troubled debt
restructurings consist of loans with respect to which the Bank has agreed to
grant an interest rate concession or defer principal or interest payments), from
an aggregate of $25.8 million at December 31, 1996 to an aggregate of $12.1
million at December 31, 1998.
The following table sets forth information with respect to non-performing
assets identified by the Bank, including non-accrual loans, real estate owned
and TDRs at the dates indicated.
At December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- --------- ----------
(Dollars in thousands)
Non-performing loans, net:
Mortgage loans:
Single-family residential................. $ 3,959 $ 8,435 $ 7,947 $ 10,467 $ 14,780
Multi-family residential.................. 428 405 9,198 16,840(1) --
Commercial................................ 3,613 1,064 1,093 8,173 8,446
Land...................................... -- -- -- 112 4,232
Non-mortgage loans:
Commercial................................ 99 -- -- -- --
Consumer.................................. 408 -- -- -- --
--------- --------- -------- --------- ----------
Total non-performing loans, net 8,507 9,904 18,238 35,592 27,458
--------- --------- -------- --------- ----------
Real estate owned, net:
Single-family residential................. 2,723 678 3,268 6,387 5,322
Multi-family residential.................. -- 6,482 8,310 901 3,999
Commercial................................ -- 5,921 8,614 3,506 1,095
Land...................................... -- 202 244 121 69
--------- --------- -------- --------- ----------
Total real estate owned, net.................. 2,723 13,283 20,436 10,915 10,485
--------- --------- -------- --------- ----------
Total non-performing assets................... 11,230 23,187 38,674 46,507 37,943
Troubled debt restructurings.................. 3,576 9,936 7,544 6,133 40,794(1)
--------- --------- -------- --------- ----------
Total non-performing assets and troubled debt
restructurings............................... $ 14,806 $ 33,123 $ 46,218 $ 52,640 $ 78,737
--------- --------- -------- --------- ----------
--------- --------- -------- --------- ----------
Non-performing loans to total loans, net...... 0.40% 0.65% 1.60% 2.90% 2.10%
Non-performing loans to total assets.......... 0.26 0.45 1.04 2.25 1.59
Non-performing assets to total assets......... 0.34 1.05 2.21 2.94 2.20
Total non-performing assets and troubled debt
restructurings to total assets............ 0.44 1.50 2.64 3.33 4.57
-----------
(1) Reflects to a large extent problems associated with the 1994
Northridge earthquake.
48
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
At December 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ----------- ---------------
(Dollars in thousands)
Allowance at beginning of period ............ $ 17,824 $ 23,280 $ 31,572 $ 29,801 $ 20,426
-------- -------- -------- -------- --------
Provision for loan losses ................... 2,000 2,046 2,884 8,823 22,330
-------- -------- -------- -------- --------
Charge-offs:
Mortgage loans:
Single-family residential ............... (616) (1,967) (2,213) (3,416) (5,428)
Multi-family residential ................ (261) (5,599) (5,039) (1,854) (1,787)
Commercial .............................. -- (42) (3,371) (860) (5,813)
Land .................................... -- -- (1,478) (956) --
Non-mortgage loans:
Commercial .............................. (16) -- -- -- --
Consumer ................................ (119) -- -- -- --
-------- -------- -------- -------- --------
Total charge-offs .............. (1,012) (7,608) (12,101) (7,086) (13,028)
-------- -------- -------- -------- --------
Recoveries:
Mortgage loans:
Single-family residential ............... 85 106 16 34 73
Multi-family residential ................ -- -- 22 -- --
Commercial .............................. -- -- 2 -- --
Land .................................... -- -- 885 -- --
-------- -------- -------- -------- --------
Total recoveries ............... 85 106 925 34 73
-------- -------- -------- -------- --------
Net charge-offs ............................. (927) (7,502) (11,176) (7,052) (12,955)
-------- -------- -------- -------- --------
Allowance at end of period .................. $ 18,897 $ 17,824 $ 23,280 $ 31,572 $ 29,801
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Allowance for loan losses to total
nonperforming loans at end of period .... 222.13% 179.97% 127.65% 88.71% 108.53%
Allowance for loan losses to total
nonperforming loans and troubled debt
restructurings at end of period ......... 156.39% 89.84% 90.30% 75.67% 43.66%
Allowance for loan losses to total loans, net
at end of period ........................ 0.88% 1.16% 2.04% 2.57% 2.28%
As shown in the table above, loan charge-offs (net of recoveries) amounted
to $927,000, $7.5 million and $11.2 million, during the years ended December 31,
1998, 1997 and 1996, respectively. The net charge-offs recognized by the Bank
during the years ended December 31, 1998, 1997 and 1996 primarily reflected the
transfer of loans (particularly multi-family residential loans) to real estate
owned, as shown in the preceding non-performing assets table. Such multi-family
loans had specific valuation allowances which had been established through
increased provisions for loan losses in prior periods. At the time of transfer
of the loans to real estate owned, such specific valuation allowances were
charged off. As a result of the transfer of such loans to real estate owned, the
Bank's non-performing loans have
49
declined significantly since 1995, which has contributed to the decrease in the
Bank's provision for loan losses. Management believes that its allowance for
loan losses at December 31, 1998 is adequate. Nevertheless, there can be no
assurances that additions to such allowance will not be necessary in future
periods, particularly if the growth in the Bank's commercial and consumer
lending continues.
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,
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------ ------------------ -----------------
Percent Percent Percent Percent Percent
to Total to Total to Total to Total to Total
Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance
------- --------- ------- --------- ------- --------- ------- --------- ------- --------
(Dollars in thousands)
Residential real estate... $ 5,637 29.8% $ 5,014 28.1% $ 4,051 17.4% $ 5,109 16.2% $ 7,809 26.2%
Multi-family
residential ............. 7,239 38.3 8,964 50.3 15,753 67.7 18,509 58.6 11,396 38.2
Commercial real
estate .................. 3,887 20.6 3,062 17.2 3,267 14.0 7,850 24.9 6,964 23.4
Land ..................... 44 0.2 305 1.7 94 0.4 104 0.3 3,120 10.5
Other loans .............. 2,090 11.1 479 2.7 115 0.5 -- -- 512 1.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total ................ $18,897 100.0% $17,824 100.0% $23,280 100.0% $31,572 100.0% $29,801 100.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
REAL ESTATE HELD FOR INVESTMENT AND SALE. Net real estate held for
investment and sale consists of real estate acquired through foreclosure (i.e.,
real estate owned) and real estate held for investment. Real estate owned is
included in total non-performing assets.
At December 31, 1998, the Company's real estate held for investment and
sale was $2.7 million as compared to $15.2 million in December 31, 1997.
DEPOSITS. Total deposits increased by $275.5 million or 21.8% during the
year ended December 31, 1998. The Bank's aggregate certificates of deposit
increased from $932.8 million, or 73.6% of total deposits, at December 31, 1997
to $1.1 billion, or 71.9% of total deposits, at December 31, 1998. Of the total
increase in certificates of deposit, certificates of deposit $100,000 and over
increased from $138.2 million, or 10.9% of total deposits, to $316.3 million, or
20.5% of total deposits, from December 31, 1997 to December 31, 1998. The
increase in deposits was primarily due to the acquisition of two branch offices
and their related deposits and expanded business customer deposit base. The Bank
has offered a wide array of deposit products through its branch system in order
to foster retail deposit growth. Transaction accounts (consisting of passbook,
NOW and money market accounts) increased from $333.8 million, or 26.4% of total
deposits, at December 31, 1997 to $433.0 million, or 28.1% of total deposits, at
December 31, 1998
50
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,
-----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ---------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
NOW accounts .................... $ 120,664 1.75% $ 83,248 1.96% $ 58,511 0.77%
Money market accounts ........... 96,447 4.71 21,938 2.94 29,665 2.52
Passbook accounts ............... 158,396 3.88 235,162 4.34 264,677 4.64
----------- ----------- -----------
Total transaction accounts ...... 375,507 340,348 352,853
Term certificates of deposit .... 1,010,209 5.71 966,863 5.66 1,069,484 5.76
----------- ----------- -----------
Total deposits ......... $ 1,385,716 5.09% $ 1,307,211 5.14% $ 1,422,337 5.28%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
The following table sets forth the activity in the Bank's deposits during
the periods indicated.
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
Beginning balance ............................................... $1,266,615 $1,371,243 $1,473,318
Net increase (decrease) before interest ......................... 221,269 (157,599) (160,804)
Interest credited ............................................... 54,278 52,971 58,729
---------- ---------- ----------
Net increase (decrease) in deposits ............................. 275,547 (104,628) (102,075)
---------- ---------- ----------
Ending balance .................................................. $1,542,162 $1,266,615 $1,371,243
---------- ---------- ----------
---------- ---------- ----------
51
The following table sets forth by various interest rate categories the term
certificates of deposit with the Bank at the dates indicated.
At December 31,
------------------------------------------------------------
1998 1997 1996
--------------- ------------ --------------
(Dollars in thousands)
0.00% to 2.99% ...................... $ 4,536 $ 4,071 $ 4,299
3.00 to 3.99 ........................ 5,085 2,993 3,833
4.00 to 4.99 ........................ 107,373 5,700 46,771
5.00 to 6.99 ........................ 961,204 918,842 909,895
7.00 to 8.99 ........................ 30,961 1,219 36,244
--------------- ------------ --------------
Total .............................. $ 1,109,159(1) $ 932,825(1) $ 1,001,042(1)
--------------- ------------ --------------
--------------- ------------ --------------
- -----------
(1) At December 31, 1998, 1997 and 1996, certificates of deposit in
amounts greater than or equal to $100,000 amounted to $316.3 million,
$138.2 million and $158.7 million, respectively.
The following table sets forth the amount and remaining maturities of the
Bank's term certificates of deposit at December 31, 1998.
Over
Six Months Over One Over Two
Six Months Through Year Through Years Through Over Three
and Less One Year Two Years Three Years Years
---------- ----------- ------------ ------------- -------------
(Dollars in thousands)
0.00% to 1.99% ..... $ 200 $ -- $ -- $ -- $ --
2.00 to 2.99 ....... 3,339 779 219 -- --
3.00 to 3.99 ....... 5,085 -- -- -- --
4.00 to 4.99 ....... 42,807 56,905 7,334 326 --
5.00 to 6.99 ....... 550,865 255,868 129,750 10,233 14,488
7.00 to 8.99 ....... 30,590 69 302 -- --
---------- ----------- ----------- ----------- -------------
Total ..... $ 632,886 $ 313,621 $ 137,605 $ 10,559 $ 14,488
---------- ----------- ----------- ----------- -------------
---------- ----------- ----------- ----------- -------------
52
The following table presents the maturity of term certificates of deposit
in amounts greater than $100,000 at December 31, 1998.
At December 31, 1998
----------------------
(Dollars in thousands)
3 months or less ......................................... $ 76,714
Over 3 months through 6 months ........................... 106,257
Over 6 months through 12 months .......................... 92,364
Over 12 months ........................................... 40,943
------------
Total ........................................... $ 316,278
------------
------------
BORROWINGS. The Company used $11.4 of Offering proceeds, to repurchase
senior notes held by a Selling Stockholder in 1998.
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,
--------------------------------------------
1998 1997 1996
----------- --------- ----------
(Dollars in thousands)
FHLB OF SAN FRANCISCO ADVANCES:
Average balance outstanding .......................................... $ 902,083 $ 148,681 $ 53,666
Maximum amount outstanding at any month-end during the period ........ 1,249,000 472,000 80,000
Balance outstanding at end of period ................................. 1,198,000 472,000 80,000
Weighted average interest rate during the period ..................... 5.54% 5.91% 5.49%
Weighted average interest rate at end of period ...................... 5.38% 5.87% 5.91%
Weighted average remaining term to maturity at end of period (in
years) .............................................................. 5.01 1.61 0.95
SECURITIES SOLD UNDER AGREEMENTS TO PURCHASE:
Average balance outstanding .......................................... $ 385,451 $ 357,396 $ 179,002
Maximum amount outstanding at any month-end during the period ........ 658,409 415,676 219,229
Balance outstanding at end of period ................................. 364,000 340,788 192,433
Weighted average interest rate during the period ..................... 5.66% 5.49% 6.09%
Weighted average interest rate at end of period ...................... 5.61% 5.76% 5.49%
Weighted average remaining term to maturity at end of period (in
years) .............................................................. 3.73 2.71 0.63
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, 1998, reverse repurchase agreements amounted to $364.0 million, compared to
$340.8 million at December 31, 1997. The Bank has been utilizing reverse
repurchase agreements as part of its overall asset growth and leverage strategy
and, in connection therewith, during 1998, the Bank increased the weighted
average remaining term to maturity of such instruments. As of December 31, 1998,
the weighted average
53
remaining term to maturity of the Bank's reverse repurchase agreements increased
to 3.73 years, compared to 2.71 years at December 31, 1997, and such reverse
repurchase agreements had a weighted average interest rate of 5.61% at December
31, 1998 as compared to 5.76% at December 31, 1997. See "Sources Of
Funds--Borrowings."
Advances from the FHLB of San Francisco amounted to $1.2 billion and $472.0
million at December 31, 1998 and 1997, respectively. The significant increase in
FHLB advances during 1998 is directly attributable to management's strategy of
leveraging the capital raised in the Offering. Fixed-rate FHLB advances of
intermediate-term maturities were used to fund the wholesale purchase of loans
and securities and loan originations. Of the Bank's FHLB advances outstanding as
of December 31, 1998, $14 million is scheduled to mature during 1999 and the
remaining $1,184 million matures between years of 2000 and 2008. As of December
31, 1998, the weighted average remaining term to maturity of the Bank's FHLB
advances amounted to 5.01 years, compared to 1.61 at December 31, 1997,
respectively, and had a weighted average interest rate of 5.38% at December 31,
1998, compared to 5.87% at December 31, 1997. At December 31, 1998, the Bank had
a collateralized available line of credit of approximately $1.7 billion with the
FHLB of San Francisco.
STOCKHOLDERS' EQUITY. Stockholders' equity increased from $79.6 million at
December 31, 1997 to $180.6 million at December 31, 1998. The $101.0 million or
126.9% increase in stockholders' equity during the year ended December 31, 1998
was mainly due to the Offering. The net proceeds to the Company from the sale of
the shares of common stock offered by the Company was $129.6 million after
deducting the underwriting discounts and commissions and offering expenses paid
by the Company.
RESULTS OF OPERATIONS
GENERAL. The Company's results of operations depend substantially on its
net interest income, which is the difference between interest income on
interest-earning assets, which consist primarily of loans receivable,
mortgage-backed and investment securities and various other short-term
investments, and interest expense on interest-bearing liabilities, which consist
primarily of deposits and borrowings. The Company's results of operations are
also significantly affected by the Bank's provisions for loan losses resulting
from the Bank's assessment of the adequacy of its allowance for loan losses; the
level of its other income, including loan service and related fees, net gains on
sales of securities, loans and loan servicing, and net earnings and losses from
real estate operations; the level of its operating expenses, such as personnel
and benefits expense, occupancy and other office related expense and FDIC
insurance premiums; and income taxes and benefits.
The Company reported net earnings before preferred dividends of $10.9
million, $10.9 million and $12.5 million during the years ended December 31,
1998, 1997 and 1996, respectively. The 1998 results were impacted by a one-time
expense of $11.1 million ($6.5 million net of applicable tax benefits) for
employment agreement benefits due to certain senior executives officers of the
Company in connection with the Offering. The Company also paid a one-time
special FDIC assessment, which it had deferred from paying in prior years, of
$4.5 million ($2.7 million net of applicable tax benefits). Without the effect
of such one-time payments, the Company would have reported net earnings of $20.1
million for the year ended December 31, 1998. Net earnings decreased by $39,000
or 0.36% for the year ended December 31, 1998, compared to the same period in
the prior year, due to one-time expenses, which was partially offset by a $6.8
million or 21.3% increase in net interest income after provision for loan losses
and a $11.9 million increase in income tax benefit recognized during the year.
Net earnings decreased by $1.6 million during the year ended December 31,
1997 compared to the prior year, due to a $3.0 million decrease in total other
income and a $1.7 million increase in total operating expenses, which was
partially offset by a $2.5 million or 8.6% increase in net interest income after
provision for loan losses and a $1.5 million increase in income tax benefit
recognized during the year.
NET INTEREST INCOME. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities.
Net interest income totaled $40.5 million, $33.8 million and $32.1 million
during the years ended December 31,
54
1998, 1997 and 1996, respectively. Net interest income increased by $6.7 million
or 20% for the year ended December 31, 1998, compared to the prior year, due to
a $888.5 million or 48.4% increase in the average balance of interest-earning
assets (consisting primarily of a $614.7 million increase in the average balance
of loans receivable and a $218.0 million increase in the average balance of
other interest earning assets), which was partially offset by a decrease in the
interest rate spread of 52 basis points. Net interest income increased by $1.7
million or 5.2% during the year ended December 31, 1997 compared to the year
ended December 31, 1996 due a $167.2 million increase in the average balance of
total interest earning assets.
The Company's net interest margin for the year ended December 31, 1998 was
1.49% as compared to 1.84% for the year ended December 31, 1997. This decrease
in net interest margin compared to the 1997 reflects the decrease in yields on
earning assets, primarily due to accelerated premium amortization on the
purchased adjustable-rate single-family residential portfolio. Such premium
amortization amounted to $6.3 million in 1998.
55
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.
Year Ended December 31,
-------------------------------------------------------------------
1998 1997
---------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1) .................... $1,814,855 $ 125,851 6.93% $1,200,137 $ 89,938 7.49%
Mortgage-backed securities (2) .......... 557,038 32,439 5.82 501,261 32,672 6.52
Other interest-earning assets (3) ....... 353,926 22,583 6.38 135,949 8,369 6.16
---------- --------- ---------- --------
Total interest-earning assets ......... 2,725,819 180,873 6.64 1,837,347 130,979 7.13
Noninterest-earning assets ................ 84,039 --------- 74,487 --------
---------- ----------
Total assets ........................ $2,809,858 $1,911,834
---------- ----------
---------- ----------
Interest-bearing liabilities:
Deposits:
Transaction accounts (4) .............. $ 366,910 12,786 3.48% $ 340,348 12,476 3.67%
Term certificates of deposit .......... 1,010,307 57,141 5.66 966,863 54,771 5.66
---------- --------- ---------- --------
Total deposits ...................... 1,377,217 69,927 5.08 1,307,211 67,247 5.14
Senior debt ............................. 4,467 445 9.96 11,404 1,271 11.15
Other borrowings ........................ 1,236,120 69,772 5.64 506,077 28,420 5.62
Hedging costs ........................... -- 214 -- 267
---------- --------- ---------- --------
Total interest-bearing liabilities .. 2,617,804 140,358 5.36% 1,824,692 97,205 5.33%
Noninterest-bearing liabilities ........... 52,160 --------- 15,957 --------
---------- ----------
Total liabilities ................... 2,669,964 1,840,649
Stockholders' equity ...................... 139,894 71,185
---------- ----------
Total liabilities and stockholders'
equity ............................ $2,809,858 $1,911,834
---------- ----------
---------- ----------
Net interest-earning assets $ 108,015 $ 12,655
---------- ----------
---------- ----------
Net interest income/interest rate spread .. $ 40,515 1.28% $ 33,774 1.80%
--------- ---- -------- -----
--------- ---- -------- -----
Net interest margin ....................... 1.49% 1.84%
---- ----
---- ----
Ratio of average interest-earning
assets to average interest-bearing
liabilities ............................. 1.04% 1.01%
---- ----
---- ----
Year Ended December 31,
---------------------------------
1996
---------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
Interest-earning assets:
Loans receivable (1) .................... $1,176,944 $ 89,020 7.56%
Mortgage-backed securities (2) .......... 387,603 26,136 6.74
Other interest-earning assets (3) ....... 105,583 7,740 7.33
---------- --------
Total interest-earning assets ......... 1,670,130 122,896 7.36
Noninterest-earning assets ................ 65,179 --------
----------
Total assets ........................ $1,735,309
----------
Interest-bearing liabilities: ----------
Deposits:
Transaction accounts (4) .............. $ 352,853 12,737 3.61%
Term certificates of deposit .......... 1,069,484 62,399 5.83
---------- --------
Total deposits ...................... 1,422,337 75,136
Senior debt ............................. 10,294 1,160 11.27
Other borrowings ........................ 232,668 14,108 6.06
Hedging costs ........................... -- 387
---------- --------
Total interest-bearing liabilities .. 1,665,299 90,791 5.45%
Noninterest-bearing liabilities ........... 12,998 --------
----------
Total liabilities ................... 1,678,297
Stockholders' equity ...................... 57,012
----------
Total liabilities and stockholders'
equity ............................ $1,735,309
----------
----------
Net interest-earning assets $ 4,831
----------
----------
Net interest income/interest rate spread .. $ 32,105 1.91%
-------- -----
-------- -----
Net interest margin ....................... 1.92%
-----
-----
Ratio of average interest-earning
assets to average interest-bearing
liabilities ............................. 1.00%
----
----
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(2) Includes mortgage-backed securities classified as held-to-maturity and
available-for-sale.
(3) Includes short-term investments, securities purchased under agreements to
resell, investment securities and FHLB stock.
(4) Includes passbook NOW and money market accounts.
56
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, 1998 Year Ended December 31, 1997
Compared to Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
-------------------------------------------- ----------------------------------------
Increase (decrease) due to Increase (decrease) due to
------------------------------- -----------------------------
Total Net Total Net
Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
---- ------ ------ ---------- ---- ------ -------- --------
Interest-earning assets:
Loans receivable ................... $ (6,715) $ 46,067 $ (3,439) $ 35,913 $ (820) $ 1,754 $ (16) $ 918
Mortgage-backed securities ......... (3,481) 3,636 (388) (233) (872) 7,664 (256) 6,536
Other interest-earning assets ...... 733 10,743 2,738 14,214 (1,240) 2,226 (357) 629
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in income on
interest-earning assets ............ (9,463) 60,446 (1,089) 49,894 (2,932) 11,644 (629) 8,083
-------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Transaction accounts ............. (616) 974 (48) 310 197 (451) (7) (261)
Term certificates of deposit ..... (87) 2,461 (4) 2,370 (1,815) (5,987) 174 (7,628)
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits ................. (703) 3,435 (52) 2,680 (1,618) (6,438) 167 (7,889)
Senior debt ........................ (135) (773) 82 (826) (13) 125 (1) 111
Other borrowings ................... 145 40,997 210 41,352 (1,042) 16,578 (1,224) 14,312
Hedging costs ...................... -- -- (53) (53) -- -- (120) (120)
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in expense on
interest-bearing liabilities ...... (693) 43,659 187 43,153 (2,673) 10,265 (1,178) 6,414
-------- -------- -------- -------- -------- -------- -------- --------
Change in net interest income ....... $ (8,770) $ 16,787 $ (1,276) $ 6,741 $ (259) $ 1,379 $ 549 $ 1,669
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
57
INTEREST INCOME. Total interest income increased by $49.9 million
or 38.1% during the year ended December 31, 1998 and increased by $8.1
million or 6.6% during the year ended December 31, 1997. This increase
was partially offset by accelerated premium amortization on the
purchased adjustable-rate single-family residential loan portfolio.
Such premium amortization amounted to $6.3 million for 1998. Interest
income on loans receivable, the largest component of interest-earning
assets, increased by $35.9 million or 39.9% during the year ended
December 31, 1998 and increased by $918,000 or 1.0% during the year
ended December 31, 1997. This increase was primarily due to loan
growth and investment of funds as a result of leverage of capital
raised in the Company's Offering. Loan purchases were funded by FHLB
advances with a weighted average rate of 5.38%. The decline in
interest income on loans receivable during 1996 was attributable to
management's focus on non-performing assets, as well as a change in
the Bank's orientation with respect to lending. See "ITEM 1.
BUSINESS--Lending Activities--Origination, Purchase and Sale of
Loans."
Interest income on mortgage-backed securities decreased by
$233,000 or 0.7% during the year ended December 31, 1998 and increased
by $6.5 million or 25.0% during the year ended December 31, 1997. This
decrease in 1998 was mainly due to sales and accelerated premium
amortizations due to prepayments.
Interest income on other interest-earning assets (which consist
of U.S. Government agency securities, FHLB stock, securities purchased
under agreements to resell and other short-term investments) increased
by $14.2 million or 169.8% during the year ended December 31, 1998 and
increased by $629,000 or 8.1% during the year ended December 31, 1997.
The increase in such interest income during the year ended December
31, 1998 was primarily due to a $218.0 million increase in the average
balance of such investments, and an increase in the weighted average
yield earned on such investments of 22 basis points. The increase in
such interest income during 1996 was due primarily to an increase in
the weighted average yield earned on such investments of 121 basis
points. See "Investment Activities."
INTEREST EXPENSE. Total interest expense increased by $43.2
million or 44.4% during the year ended December 31, 1998 and increased
by $6.4 million or 7.1% during the year ended December 31, 1997. The
increase during 1998 is the result of a $793.1 million or 43.5%
increase in the average balance of interest-bearing liabilities,
reflecting the growth in the balance sheet. Interest expense on
deposits, the largest component of the Bank's interest-bearing
liabilities, increased by $2.7 million or 4.0% during the year ended
December 31, 1998 and decreased by $7.9 million or 10.5% during the
year ended December 31, 1997. The increase in interest expense on
deposits during the year ended December 31, 1998 was primarily due to
a $70.0 million increase in the average balance. See "Sources Of
Funds--Deposits."
Interest expense on borrowings consists of senior notes and other
borrowings, which is comprised of reverse repurchase agreements and
FHLB advances. Interest expense on senior notes amounted to $445,000,
$1.3 million and $1.2 million during the years ended December 31,
1998, 1997 and 1996, respectively. The senior notes outstanding during
the periods were purchased by the Material Stockholders during the
1995 recapitalization of the Bank. The Bishop Estate purchased $10.0
million of aggregate principal amount of senior notes in connection
with the 1995 recapitalization. In 1998, upon completion of the
Offering, the Company repurchased such senior note.
Interest expense on other borrowings increased by $41.4 million
or 145.5% during the year ended December 31, 1998 and increased by
$14.3 million or 101.4% during the year ended December 31, 1997.
Interest expense on advances from the FHLB increased by $38.8 million
or 442.0% during 1998 and $5.6 million or 174.0% during 1997. The
Bank's new management has utilized FHLB advances when the rates and
other terms on such borrowings are favorable as compared to its other
funding sources. See "Sources Of Funds--Borrowings."
Interest expense on securities sold under agreements to
repurchaseincreased by $2.5 million or 12.9% during the year ended
December 31, 1998 and increased by $8.7 million or 80.1% during the
year ended December 31, 1997. See "Sources Of Funds--Borrowings."
The Bank's interest expense during the years ended December 31,
1998, 1997 and 1996 included the costs of hedging the Bank's interest
rate exposure. Such hedging costs amounted to $214,000, $267,000 and
$387,000 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
58
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, 1998, the Bank had no
remaining interest rate swap contracts and eight remaining interest
rate corridors with an aggregate contract amount of $52 million.
PROVISION FOR LOAN LOSSES. The Bank established provisions for
loan losses of $2.0 million, $2.0 million and $2.9 million during the
years ended December 31, 1998, 1997 and 1996, respectively. New
management has aggressively charged off non-performing loans and taken
possession of and sold a significant amount of the assets which
collateralized such loans. As a consequence of such actions, the
Bank's non-performing assets have been reduced over the periods
presented and the Bank's provision for loan losses have been reduced
to more normalized levels.
The 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, 1998 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. Total other income increased by $1.3 million or
25.8% during the year ended December 31, 1998 and decreased by $3.0
million during the year ended December 31, 1997. Loan service and loan
related fees amounted to $111,000, $481,000 and $1.4 million during
the years ended December 31, 1998, 1997 and 1996, respectively. The
decline in such fees during these periods primarily reflected the sale
of residential loan servicing during 1997 and the reduction in loan
balances outstanding in the loan servicing portfolio due to normal
repayments and prepayments. See "ITEM 1. BUSINESS--Lending
Activities--Single-Family Residential Real Estate Loans."
The Bank recognized net gains on sales of mortgage-backed and
other securities of $1.7 million, $1.3 million and $3.6 million during
the years ended December 31, 1998, 1997 and 1996, respectively. During
such respective periods, the Bank sold $281.2 million, $234.3 million
and $158.4 million of mortgage-backed securities.
Net gains (losses) on the sale of loans and loan servicing
amounted to $613,000, $3.4 million and $(53,000) during the years
ended December 31, 1998, 1997 and 1996, respectively. The Bank sold
$42.4 million, $92.9 million and $0 of loans during the years ended
December 31, 1998, 1997 and 1996, respectively, and no loan servicing
during the year ended December 31, 1998. In connection with the sale
of loan servicing during 1997, the Bank recognized a gain of $3.2
million during the year and an additional $5.3 million was deferred
and is being recognized over a period of the lives of the loans. See
"ITEM 1. BUSINESS--Lending Activities--Single-Family Residential Real
Estate Loans."
Income (loss) from real estate operations amounted to $1.5
million, $(1.8) million and $1.9 million during the years ended
December 31, 1998, 1997 and 1996, 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. During the years ended December 31, 1998, 1997 and
1996, losses from real estate operations amounted to $(701,000), $(1.3
million) and $(634,000), respectively. Gains on sales of real estate
owned and real estate held for investment amounted to $2.2 million,
$2.2 million and $3.3 million for the years ended December 31, 1998,
1997 and 1996, respectively and provisions for losses on real estate
owned and real estate held for investment amounted to $0, $2.8 million
and $766,000, for the respective periods. The improving economy in
Southern California since 1996 has assisted in new management's
efforts to dispose of the Bank's real estate holdings and has
facilitated sales in 1997 and 1998.
Miscellaneous other income (consisting primarily of fees on
deposit accounts) amounted to $2.6 million, $1.8
59
million and $1.2 million during the years ended December 31, 1998,
1997 and 1996, respectively.
OPERATING EXPENSES. Total operating expenses increased by $17.4
million or 59.0% during the year ended December 31, 1998 and increased
by $1.7 million or 6.2% during the year ended December 31, 1997. The
increase in operating expenses during 1998 is primarily attributable
to one-time payments of $15.6 million ($9.2 million net of applicable
tax benefits) which were incurred in connection with the Company's
Offering. During the years ended December 31, 1998, 1997 and 1996,
total operating expenses as a percentage of average total assets
amounted to 1.67%, 1.55% and 1.60%, respectively, and the Company's
efficiency ratio amounted to 100.02%, 72.17% and 64.52%, respectively.
The principal category of the Company's operating expenses is
personnel and benefits expense of the Bank, which amounted to $23.8
million, $11.8 million and $10.8 million during the years ended
December 31, 1998, 1997 and 1996, respectively. The increase in 1998
was primarily a result of a one-time $11.1 million payment of benefits
to certain senior executives in connection with the Company's
Offering.
Occupancy expense amounted to $8.4 million, $7.1 million and $6.4
million during the years ended December 31, 1998, 1997 and 1996,
respectively. The increase in such expense during the year ended
December 31, 1998 was primarily due to the lease of data processing
equipment and expenses associated with security personnel. The general
decline in occupancy expense during the prior period occurred
notwithstanding the Bank opening a branch office in Buena Park,
California in November 1995 and a branch office facility in Los
Angeles, California in April 1996. Management expects occupancy
expense to continue to increase over the next year as the Bank has
begun to operate 20 new ATMs within a chain of health clubs located in
Southern California. The Bank also has an option to install and
operate up to an additional three ATMs within such chain of health
clubs. In 1997, the Company also obtained regulatory approval to
install remote automated loan machines, which can take an application
for a loan of up to $10,000, underwrite the loan and extend funds to
applicants which have been approved. The Company believes it is the
first institution to receive approval to operate such units at remote
locations, nine of which were placed in operation in late 1997. The
new ATMs and automated loan machines are also expected to contribute
to an increase in occupancy expense in future periods.
FDIC insurance premiums totaled $7.3 million, $4.9 million and
$4.4 million during the years ended December 31, 1998, 1997 and 1996,
respectively. This increase is mainly due to one-time special FDIC
assessment, which the Company deferred paying in prior years, of $4.5
million. As a result of paying the one-time special assessment, the
Bank lowered its assessment rate from 35.28 basis points in 1997
through June 30, 1998 and to 9.1 basis points since June 30, 1998,
including the debt service paid to the Financing Corporation. FDIC
insurance premiums are a function of the size of the Bank's deposit
base.
Professional services expense amounted to $1,294,000, $528,000
and $771,000 during the years ended December 31, 1998, 1997 and 1996,
respectively. This increase was mainly due to an increase in other
consulting expenses. The significant expense recognized during 1996
reflected legal expenses associated with problem asset resolution.
Office related expenses have remained relatively stable over the
periods presented and amounted to $4.4 million, $3.9 million and $4.0
million during the years ended December 31, 1998, 1997 and 1996,
respectively.
Miscellaneous other expense (consisting primarily of regulatory
assessments) amounted to $1.7 million, $1.3 million and $1.5 million
during the years ended December 31, 1998, 1997 and 1996, respectively.
INCOME TAXES. During the years ended December 31, 1998, 1997 and
1996, the Company recognized $16.4 million, $4.5 million and $3.0
million in income tax benefits primarily as a result of offsetting
available NOLs carryforwards against taxable income. At December 31,
1998, the Company had $166.3 million of federal and state NOLs
carryforwards which expire between 2001 and 2013.
The Company had Federal and California alternative minimum tax
credit carryforwards at December 31, 1998 and 1997 of approximately
$1,374,058 and $58,150, respectively. These carryforwards are
available to reduce future
60
regular federal income taxes and California franchise taxes, if any,
over an indefinite period.
In 1992, issuance of preferred stock resulted in a change in
control as defined under Section 382 of the Code. As a result, any
usage of NOLs carryforwards created in 1992 and prior years is limited
to approximately $7.7 million per year. The total NOLs carryforwards
created in 1992 and prior years are approximately $42.3 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 1999 and thereafter is approximately $42.3
million.
During May 1998, the Offering resulted in a second change in
control as defined under Code Section 382. As a result, any usage of
NOLs carryforwards created prior to May 1998 (but post 1992) is
limited to approximately $21.3 million per year. The total NOLs
carryforwards created prior to May 1998 (but post 1992) is
approximately $111.5 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 1999 is
approximately $22.5 million.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. It is the
objective of the Company to attempt to control risks associated with
interest rate movements. In general, management's strategy is to match
asset and liability balances within maturity categories to limit the
Bank's exposure to earnings variations and variations in the value of
assets and liabilities as interest rates change over time. The
Company's asset and liability management strategy is formulated and
monitored by the Bank's Asset/Liability Management Committee, which is
comprised of senior officers of the Bank, in accordance with policies
approved by the Board of Directors of the Bank. The Asset/Liability
Management Committee meets weekly to review, among other things, the
sensitivity of the Bank's assets and liabilities to interest rate
changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and sale activity, and maturities of
investments and borrowings. The Asset/Liability Management Committee
also approves and establishes pricing and funding decisions with
respect to overall asset and liability composition and reports
regularly to the full Board of Directors.
One of the primary goals of the Bank's Asset/Liability Management
Committee is to effectively increase the duration of the Bank's
liabilities and/or effectively contract the duration of the Bank's
assets so that the respective durations are matched as closely as
possible. This duration adjustment can be accomplished either
internally by restructuring the Bank's balance sheet, or externally by
adjusting the duration of the Bank's assets and/or liabilities through
the use of interest rate contracts, such as interest rate swaps,
corridors, caps and floors. Although the Bank has in the past hedged
its interest rate exposure externally through the use of various
interest rate contracts, the Bank's current strategy is to hedge
internally through the use of core transaction deposit accounts, which
are not as rate sensitive as other deposit instruments, FHLB advances
and reverse repurchase agreements, together with an emphasis on
investing in and/or purchasing shorter-term or adjustable rate assets
which are more responsive to changes in interest rates, such as
adjustable rate U.S. Government agency mortgage-backed securities,
short-term U.S. Government agency securities and commercial business
and consumer loans.
Internal hedging through balance sheet restructuring generally
involves either the attraction of longer-term or less rate sensitive
funds (i.e., core transaction deposit accounts which are not as rate
sensitive as other deposit instruments or FHLB advances) or the
investment in certain types of shorter-term or adjustable rate assets
such as adjustable-rate mortgage-backed securities, shorter-term U.S.
Government agency securities and commercial business and consumer
loans. On the asset side of the balance sheet, since the change in the
Bank's management, the Bank has not originated any additional
adjustable-rate mortgage products tied to COFI, which tends to react
more slowly to changes in interest rates, and has emphasized loan
products tied to a U.S. Treasury based index (which reacts much more
quickly to changes in interest rates). During the year ended December
31, 1997, the Bank sold $85.2 million of such COFI-based residential
mortgage loans and used most of the sale proceeds to purchase $59.0
million of one-year adjustable-rate loans tied to the U.S. Treasury
index of comparable maturity. See "ITEM 1. BUSINESS--Lending
Activities--Origination, Purchase and Sale of Loans."
The Bank has also significantly increased aggregate purchases of
short-term or adjustable-rate mortgage-backed
61
securities in recent periods. Purchases of such securities were $105.7
million, $186.0 million and $216.8 million during the years ended
December 31, 1998, 1997 and 1996, respectively. In 1998 the Bank also
purchased investment grade corporate trust preferred obligations of
$378.4 million. At December 31, 1998, $501.1 million or 49.5% of the
Bank's mortgage-backed securities were adjustable-rate instruments.
See "ITEM 1. BUSINESS--Investment Activities."
During the years ended December 31, 1998, 1997 and 1996, the Bank
originated in the aggregate $94.0 million, $32.6 million and $9.8
million, respectively, of commercial business and consumer loans which
amounted to15.5%, 20.3% and 15.8% of total loan originations,
respectively. The Bank intends to increase its origination of
commercial business and consumer loans which have adjustable rates of
interest and shorter terms. "See ITEM 1. BUSINESS--Lending
Activities--Commercial Business and Consumer Loans."
On the liability side of the balance sheet, management has
decreased the Bank's reliance on shorter-term brokered deposits, which
carry high interest rates and are a volatile funding source, in favor
of short- and intermediate-term FHLB advances and reverse repurchase
agreements and retail certificates of deposit. As a result,
out-of-market, institutional jumbo certificates of deposit have
declined from $103.4 million at December 31, 1997 to $322,000 at
December 31, 1998 and FHLB advances and reverse repurchase agreements
have increased from $812.8 million in the aggregate at December 31,
1997 to $1.6 billion in the aggregate at December 31, 1998.
External hedging involves the use of interest rate swaps,
collars, corridors, caps and floors. The notional amount of interest
rate contracts represents the underlying amount on which periodic cash
flows are calculated and exchanged between counterparties. However,
this notional amount does not represent the principal amount of loans
or securities which would effectively be hedged by that interest rate
contract. In selecting the type and amount of interest rate contract
to utilize, the Bank compares the duration of a particular contract,
or its change in value for a 100 basis point movement in interest
rates, to that of the loans or securities to be hedged. An interest
rate contract with the appropriate offsetting duration may have a
notional amount much greater than the face amount of the securities
being hedged.
At December 31, 1998, the Bank was a party to no interest rate
swap agreements. The net expense (income) relating to the Bank's
interest rate swap agreements was $0, $2,000 and $35,000 during the
years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the Bank was also a party to eight interest
rate corridor agreements, which agreements expire from 1999 through
2001 and cover an aggregate contract amount of approximately $52.0
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, 1998, the
interest rate corridors have an average strike price of 6.58% and an
average limit rate of 8.21% (the Bank's interest rate corridors are
based on either three month London Inter-Bank Offered Rate ("LIBOR")
or COFI). The aggregate net expense relating to the Bank's interest
rate corridors and floors was $214,000, $265,000 and $352,000 during
the years ended December 31, 1998, 1997, and 1996, respectively. See
"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" Note (17)--Notes
to Consolidated Financial Statements.
The Asset/Liability Management Committee's methods for evaluating
interest rate risk include an analysis of the Bank's interest rate
sensitivity "gap," which is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount
of interest-rate sensitive liabilities. A gap is considered negative
when the amount of interest-rate sensitive liabilities exceeds
interest-rate sensitive assets. During a period of falling interest
rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and
liabilities with the same or similar maturities may react differently
to changes in overall market rates or conditions, changes in interest
rates may affect net interest income positively or negatively even if
an institution were perfectly matched in each maturity category.
62
The following table summarizes the anticipated maturities or
repricing of the Company's interest-earning assets and
interest-bearing liabilities as of December 31, 1998, based on the
information and assumptions set forth in the notes below.
Three to More Than More Than
Within Three Twelve One Year to Three Years Over Five
Months Months Three Years to Five Years Years Total
------------ -------- ----------- ------------- --------- -----
(Dollars in thousands)
Interest-earning assets(1):
Loans receivable(2):
Single-family
residential loans:
Fixed ................. $ 30,406 $ 173,248 $ 307,555 $ 200,353 $ 350,917 $1,062,479
Adjustable ............ 203,734 174,660 35,253 14,670 -- 428,317
Multi-family residential:
Fixed ................. 8,537 4,367 10,765 8,954 13,554 46,177
Adjustable ............ 312,054 7,965 -- -- -- 320,019
Commercial, industrial
and land:
Fixed ................. 73,908 8,648 -- -- -- 82,556
Adjustable ............ 3,652 13,369 28,072 22,938 53,083 121,114
Other loans (3).......... 61,475 12,017 19,851 20,805 5,375 119,523
Mortgage-backed and
other securities (4) ..... 79,200 92,526 13,186 59,794 349,657 594,363
Other interest-earning
assets (5) ............... 402,198 -- -- -- 115,419 517,617
---------- ---------- ---------- ---------- ---------- ----------
Total ................. 1,175,164 486,800 414,682 327,514 888,005 3,292,165
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities:
Deposits:
NOW accounts .......... 166,807 -- -- -- -- 166,807
Passbook accounts ..... 139,800 -- -- -- -- 139,800
Money market
accounts ............. 126,396 -- -- -- -- 126,396
Term certificates
of deposit ........... 173,862 772,645 148,164 14,400 88 1,109,159
Other borrowings ........ 14,000 -- 339,000 849,000 360,000 1,562,000
---------- ---------- ---------- ---------- ---------- ----------
Total ................. 620,865 772,645 487,164 863,400 360,088 3,104,162
---------- ---------- ---------- ---------- ---------- ----------
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities .............. $ 554,299 $ (285,845) $ (72,482) $ (535,886) $ 527,917 $ 188,003
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Excess (deficiency) of
interest-earning
assets over
interest-bearing
liabilities as a percent
of total assets .......... 16.62% (8.57%) (2.17%) (16.07%) 15.83% 5.64%
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Cumulative excess
(deficiency) of
interest-earning
assets over interest-
bearing liabilities ...... $ 554,299 $ 268,454 $ 195,972 $ (339,914) $ 188,003
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Cumulative excess
(deficiency) of
interest-earning
assets over
interest-bearing
liabilities as a
percent of
total assets ........... 16.62% 8.05% 5.88% (10.19%) 5.64%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
(1) Adjustable-rate loans are included in the period in which
interest rates are next scheduled to adjust rather than in
63
the period in which they are due, and fixed-rate loans are
included in the periods in which they are scheduled to be repaid,
based on scheduled amortization, in each case as adjusted to take
into account estimated prepayments based on assumptions used by
the OTS in assessing the interest rate sensitivity of savings
associations in the Company's region.
(2) Balances have been reduced for non-performing loans, which
amounted to $8.5 million at December 31, 1998.
(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 $13.6 million.
(5) Comprised of short-term investments, securities purchased under
agreements to resell, investment securities and FHLB stock.
Although interest rate sensitivity gap is a useful measurement
and contributes toward effective asset and liability management, it is
difficult to predict the effect of changing interest rates based
solely on that measure. As a result, the Asset/Liability Management
Committee also regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest
income and net portfolio value ("NPV"), which is defined as the net
present value of an institution's existing assets, liabilities and
off-balance sheet instruments, and evaluating such impacts against the
maximum potential changes in net interest income and NPV that is
authorized by the Board of Directors of the Bank.
The following table sets forth as of December 31, 1998 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 Points) Net Interest Income
In Interest Rates(1) (Next Two Years) NPV
------------------------ -------------------- ------------
(DOLLARS IN THOUSANDS)
+400 $ 90,349 $ 55,093
+300 101,645 99,069
+200 110,825 142,021
+100 116,975 181,865
0 112,047 189,532
-100 101,590 157,288
-200 87,290 103,248
-300 72,967 52,682
-400 55,160 797
-----------
(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 IRR component in
calculating its total capital for risk-based capital purposes. Based
on the OTS model, at December 31, 1998, 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.
64
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. As the Bank is the primary operating vehicle for the
Company, liquidity management is generally handled by the Company's
management. Liquidity refers to a company's ability to generate
sufficient cash to meet the funding needs of current loan demand,
savings deposit withdrawals, principal and interest payments with
respect to outstanding borrowings and pay operating expenses. It is
management's policy to maintain greater liquidity than required by the
OTS in order to be in a position to fund loan originations, to meet
withdrawals from deposit accounts, to make principal and interest
payments with respect to outstanding borrowings and to make
investments that take advantage of interest rate spreads. The Bank
monitors its liquidity in accordance with guidelines established by
the Bank and applicable regulatory requirements. The Bank's need for
liquidity is affected by loan demand, net changes in deposit levels
and the scheduled maturities of its borrowings. The Bank can minimize
the cash required during the times of heavy loan demand by modifying
its credit policies or reducing its marketing effort. Liquidity demand
caused by net reductions in deposits are usually caused by factors
over which the Bank has limited control. The Bank derives its
liquidity from both its assets and liabilities. Liquidity is derived
from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by
utilizing unpledged assets as collateral for borrowings. Liquidity is
derived from liabilities by maintaining a variety of funding sources,
including deposits, advances from the FHLB of San Francisco and other
short and long-term borrowings.
CAPITAL RESOURCES. Federally insured savings institutions such as
the Bank are required to maintain minimum levels of regulatory
capital. See "ITEM 1. BUSINESS--Regulation Of Federal Savings
Banks--Regulatory Capital Requirements."
The Bank's liquidity management is both a daily and long-term
function of funds management. Liquid assets are generally invested in
short-term investments such as securities purchased under agreements
to resell, federal funds sold and certificates of deposit in other
financial institutions. If the Bank requires funds beyond its ability
to generate them internally, various forms of both short and long-term
borrowings provide an additional source of funds. At December 31,
1998, the Bank had $1.7 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. During 1998, the Bank began
extending the maturities of both its FHLB advances and reverse
repurchase agreements.
At December 31, 1998, the Bank had outstanding commitments
(including unused lines of credit of $17.6 million) to originate
and/or purchase mortgage and non-mortgage loans of $46.4 million.
Certificates of deposit which are scheduled to mature within one year
totaled $946.5 million at December 31, 1998, and borrowings that are
scheduled to mature within the same period amounted to $14.0 million.
The Bank anticipates that it will have sufficient funds available to
meet its current loan commitments.
Beginning September 30, 1997, the Company began making interest
payments on its senior debt, which were funded through dividends from
the Bank. The Company made an initial payment of $1.8 million
(reflecting accruals since the senior debt was issued in 1995) at
September 30, 1997 and quarterly interest payments in the amount of
$192,000 beginning with the December 31, 1997 quarter. The Company
used $11.4 million of Offering proceeds to prepay $10.0 million of
senior notes (plus accrued interest through May 15, 1998).
65
The following table reflects the Bank's actual levels of
regulatory capital and applicable regulatory capital requirements at
December 31, 1998.
Required Actual Excess
------------------ -------------------- ------------------
Percent Amount Percent Amount Percent Amount
------- ------ ------- ------ ------- ------
(Dollars in thousands)
Tangible capital.......................... 1.50% $ 49,983 6.30% $210,073 4.80% $160,090
Tier 1 leverage capital (1)............... 3.00 133,288 6.30 210,073 2.30 76,785
Tier 1 risk-based capital (2)(3).......... 4.00 73,189 11.48 210,073 8.36 136,884
Risk-based capital (2)(3)................. 8.00 146,378 12.36 226,216 3.48 79,838
-----------
(1) Does not reflect amendments which were proposed by the OTS in
April 1991, which would increase this requirement to between 4%
and 5%.
(2) Does not reflect the interest-rate risk component to the
risk-based capital requirement, the effective date of which has
been postponed.
(3) Tangible and Tier 1 leverage (or core) capital are computed as a
percentage of adjusted total assets of $3.3 billion. Risk-based
capital is computed as a percentage of adjusted risk-weighted
assets of $1.8 billion.
ASSET QUALITY
The interest income that would have been recorded during the
years ended December 31, 1998, 1997 and 1996 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 $950,000, $644,000, and $1.4
million, respectively.
As a result of the focus given by new management to rehabilitate
or liquidate the Bank's problem assets, nonperforming assets and TDRs
have declined from $33.1 million or 1.5% of total assets at December
31, 1997 to $14.8 million or 0.4% of total assets at December 31,
1998.
Management's actions to acquire non-performing assets, make
necessary improvements and list such properties for resale, coupled
with improved real estate market conditions in California, contributed
to significant declines in each of the major real estate owned
property categories in 1998. In particular, during 1998, the Company
sold all multi-family, commercial and land properties owned, and 88.9%
of residential properties owned during the year. As a consequence of
such actions, at December 31, 1998, an aggregate of $0.4 million of
multi-family residential loans were on a non-accrual status (compared
to $0.4 million at December 31, 1997) and $0 was in real estate owned
(compared to $6.5 million at December 31, 1997).
Of the Bank's $8.5 million of non-performing loans at December
31, 1998, the largest loan was secured by a retail shopping center,
with a carrying value of $2.7 million. This loan has been classified
as collateral dependent, and as of December 31, 1998 was carried at
fair value. The Bank's $2.7 million of real estate owned at December
31, 1998 was comprised of ten residential properties.
The decline in real estate owned in 1997 was due to a significant
extent to the Bank financing purchases of such real estate owned
through loans to facilitate (which loans generally carry more
favorable terms to the borrower than what is otherwise obtainable in
the market). To the extent that new management has financed the
disposition of real estate owned, such loans have been made consistent
with market terms and conditions and cash downpayments to qualify the
transaction as a sale under applicable accounting guidelines. During
1998 and 1997, the Bank extended an aggregate of $6.1 million and
$16.1 million to finance the disposition of real estate owned,
respectively, which constituted 22.8% and 40.8% of total sales of real
estate owned during such years, respectively.
66
With the downturn in the California economy experienced during
the early 1990s and the problems associated with the Northridge
earthquake in 1994, prior management entered into a significant number
of TDRs. Since the change in the Bank's management in 1995, the Bank
enters into TDRs only on a limited basis.
ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain
an allowance for estimated loan losses based on a number of factors,
including economic trends, industry experience, estimated collateral
values, past loss experience, the Bank's underwriting practices, and
management's ongoing assessment of the credit risk inherent in its
portfolio. Provisions for loan losses are provided on both a specific
and general basis. Specific and general valuation allowances are
increased by provisions charged to expense and decreased by
charge-offs of loans, net of recoveries. Specific allowances are
provided for impaired loans for which the expected loss is measurable.
General valuation allowances are provided based on a formula which
incorporates a number of factors, including economic trends, industry
experience, estimated collateral values, past loss experience, the
Bank's underwriting practices, and management's ongoing assessment of
the credit risk inherent in the portfolio. The Bank periodically
reviews the assumptions and formula by which additions are made to the
specific and general valuation allowances for losses in an effort to
refine such allowances in light of the current status of the factors
described above.
Although management believes that it uses the best information
available to make such determinations, future adjustments to the
allowance may be necessary, and net earnings could be significantly
affected, if circumstances differ substantially from the assumptions
used in making the initial determinations. The Bank's Internal Asset
Review Committee undertakes a quarterly evaluation of the adequacy of
the allowance for loan losses as well as the allowance with respect to
real estate owned. The Committee will provide allowances to absorb
losses that are both probable and reasonably quantifiable as well as
for those that are not specifically identified but can be reasonably
estimated.
The OTS, in conjunction with the Office of the Comptroller of the
Currency, the FDIC and the Federal Reserve Board, has issued an
Interagency Policy Statement on the Allowance for Loan and Lease
Losses ("Policy Statement"), which includes guidance (i) on the
responsibilities of management for the assessment and establishment of
an adequate allowance and (ii) for the agencies' examiners to use in
evaluating the adequacy of such allowance and the policies utilized to
determine such allowance. The Policy Statement also sets forth
quantitative measures for the allowance with respect to assets
classified substandard and doubtful and with respect to the remaining
portion of an institution's loan portfolio. Specifically, the Policy
Statement sets forth the following quantitative measures which
examiners may use to determine the reasonableness of an allowance: (i)
50% of the portfolio that is classified doubtful, (ii) 15% of the
portfolio that is classified substandard and (iii) for the portions of
the portfolio that have not been classified (including loans
designated special mention), estimated credit losses over the upcoming
twelve months based on facts and circumstances available on the
evaluation date. While the Policy Statement sets forth this
quantitative measure, such guidance is not intended as a "floor" or
"ceiling."
YEAR 2000
During 1997, the Bank finalized its plan to address issues
related to the year 2000 ("Y2K") problem. The Y2K issue is primarily a
result of computer software recognizing a two-digit date field rather
than the full four digits, which identify the appropriate year.
Date-sensitive computer programs, hardware or equipment controlled by
microprocessor chips may not appropriately deal with the year "00".
The Bank's objective was to manage the process by determining the
scope of the problem and to focus its efforts and attention on solving
it. The Bank's plan followed the Federal Financial Institution's
Examination Council ("FFIEC") guideline that manages the process in
five phases: 1) Awareness 2) Assessment 3) Renovation 4) Validation
and 5) Implementation. To help manage the process the Bank developed a
detailed project plan that identifies various milestones and
deadlines. The Bank also established budgets for manpower resources
and financial expenditures.
The Bank utilizes Fiserv CBS, a third party vendor, to process
substantially all of its data processing functions. Also, a
significant portion of the single-family residential loan portfolio is
serviced by other institutions. The Bank has contacted its critical
vendors and has received confirmation that they will be Year 2000
compliant. The Bank is working with Fiserv CBS and other critical
vendors to ensure that their operational and financial systems will
not be adversely
67
affected by the Y2K problem.
The Bank has analyzed its loan and deposit customers that may
present some exposure to Y2K compliance. Non-compliant commercial loan
customers may be at risk of default and large depositors may cause
liquidity problems if the funds are withdrawn. In an effort to educate
borrowers and to gather information for the risk assessments,
questionnaires were sent to the commercial loan customers. The initial
assessment of commercial loan and deposit customers indicates that
there would be minimal impact on the Bank's statement of operations.
The Bank will continue to monitor and evaluate the risks on a
quarterly basis.
The Bank is also in the process of reviewing its loan servicers
and investment securities issuers to determine the liquidity and
credit risks associated with their failure to remit payments in a
timely manner due to Y2K problems. The Bank has also implemented a
customer awareness program to keep customers informed of the progress
of the Y2K project. The Bank's quarterly customer newsletter contains
Y2K articles and statement stuffers are also utilized to keep the
customers aware of the Bank's efforts. Customers with questions are
encouraged to call the Y2K office.
The Bank is currently in the validation or testing phase of the
Year 2000 compliance plan. The Bank developed an extensive test plan
that contains test requirements and criteria, manpower assignments and
target dates. A dedicated local area network specifically for Y2K
testing was established to communicate with the Fiserv CBS test
system. Detailed test scripts designed to test date-related functions
are processed on the system for the FFIEC's recommended critical test
dates. The results are reviewed to ensure the system is functioning
properly. Testing with Fiserv CBS will continue through May 1999. The
Bank is also in the process of testing with other critical vendors
such as the Federal Reserve Bank.
The Bank's costs associated with the Y2K project include: 1) an
additional assessment from Fiserv CBS for the test system 2) lease
expense for the test local area network equipment 3) various hard
costs for the upgrading of the operating network for the corporate
office and retail branch system and 4) replacing hardware in branches.
Excluding the "soft" costs of Bank management and personnel time, the
Bank estimates that the total Y2K project costs will not exceed
$775,000. Approximately $500,000 of the costs is attributable to a
planned 1999 purchase of new hardware for the branches that will be
amortized over a five-year period. As of December 31, 1998, the Bank
estimates that it has incurred approximately $130,000 in total costs
in connection with its Year 2000 project plan.
The Bank is currently developing a contingency plan that will be
completed and tested by May 31, 1999 to address a plan of action in
the unlikely event that the Bank or its vendors and/or business
partners are not ready for Year 2000. If Fiserv CBS experiences some
unforeseen Y2K problem after the turn of the century, the contingency
plan will include off-line, manual postings of transactions to ledger
cards or a database. Even though operating in this manner would
severely tax resources, the Bank will be able to continue business
while Fiserv CBS corrects the problem. The contingency plan will
address any required Bank service provider changes or need to
outsource to Y2K compliant entities.
The Bank's Y2K efforts are being closely monitored by the Office
of Thrift Supervision, its primary regulator, which conducts periodic
Y2K examinations of the Bank's Y2K project progress.
The Bank's plans to complete Y2K compliance are based on
management's and the Board's best estimates. There can be no guarantee
that these estimates will be achieved, and the ending results could be
significantly different due to unforeseen circumstances.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of the Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 amends SFAS No. 52
"Foreign Currency Translation" to permit special accounting for a
hedge of a foreign currency forecasted transaction with a derivative.
It supersedes SFAS No. 80, "Accounting for Future Contracts", SFAS No.
105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations
of Credit Risk", and SFAS No. 119, "Disclosure about Derivative
Financial Instruments". It amends SFAS No.107, "Disclosure about Fair
Value of
68
Financial Instruments, to include in Statement 107 disclosure
provisions about concentrations of credit risk from Statement 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 recognizes 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 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management
believes that the adoption of SFAS 133 will not have a material impact
on the Company's disclosures.
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."
69
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PBOC HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT................................................................................... 71
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--DECEMBER 31, 1998 AND 1997..................................... 72
CONSOLIDATED STATEMENTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996............................ 73
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE EARNINGS (LOSS)--YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996... 74
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996.................. 75
CONSOLIDATED STATEMENTS OF CASH FLOWS--YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996............................ 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................................................... 79
70
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, 1998
and 1997 and the related consolidated statements of operations, other
comprehensive earnings (loss), changes in stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PBOC Holdings, Inc.
and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Los Angeles, California
January 25, 1999
71
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
(Dollars in thousands, except per share data)
1998 1997
----------- -----------
ASSETS
Cash and cash equivalents .............................................. $ 22,401 $ 14,113
Federal funds sold ..................................................... 24,000 7,004
Securities available-for-sale, at estimated market values
(notes 3, 12 and 17) ................................................. 1,004,937 571,160
Mortgage-backed securities held-to-maturity, market values
$6,372 and $9,743 at, December 31, 1998 and 1997
(notes 5 and 12) ..................................................... 6,282 9,671
Loans receivable, net (notes 6, 7 and 12) .............................. 2,148,857 1,533,212
Real estate held for investment and sale, net (note 8) ................. 2,723 15,191
Premises and equipment, net (note 9) ................................... 7,212 6,676
Federal Home Loan Bank stock, at cost (note 12) ........................ 63,150 23,634
Accrued interest receivable ............................................ 17,607 13,216
Other assets ........................................................... 37,858 19,177
----------- -----------
Total assets ..................................................... $ 3,335,027 $ 2,213,054
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 10) ..................................................... $ 1,542,162 $ 1,266,615
Securities sold under agreements to repurchase (note 11) ............... 364,000 340,788
Advances from Federal Home Loan Bank (note 12) ......................... 1,198,000 472,000
Senior debt (note 13) .................................................. -- 11,113
Accrued expenses and other liabilities ................................. 17,009 9,686
----------- -----------
Total liabilities ................................................ 3,121,171 2,100,202
----------- -----------
Commitments and contingencies (notes 6, 9 and 19)
Minority interest (note 1) ............................................. 33,250 33,250
Stockholders' equity (notes 1, 15 and 21):
Preferred stock, $.01 par value. Authorized 25,000,000 shares; none
issued and outstanding at December 31, 1998:
Preferred stock, $.01 par value. Authorized 1,000,000 shares at
December 31, 1997:
Preferred stock Series C, voting issued and outstanding
85,000 shares; liquidation value $8,500 .......................... -- 1
Preferred stock Series D, voting issued and outstanding
68,000 shares; liquidation value $6,800 .......................... -- 1
Preferred stock Series E, nonvoting issued and outstanding
332,000 shares; liquidation value $33,200 ........................ -- 3
Common stock, par value $.01 per share. Authorized
75,000,000 and 500,000 shares; issued 21,876,205 and
98,502 shares; and outstanding 21,041,205 and 98,502 shares ...... 219 1
Additional paid-in capital ........................................... 259,207 129,814
Accumulated other comprehensive income ............................... (14,025) (2,267)
Accumulated deficit .................................................. (56,487) (47,951)
Treasury stock, at cost (835,000 and no shares at December 31, 1998
and 1997, respectively) .......................................... (8,308) --
----------- -----------
Total stockholders' equity ..................................... 180,606 79,602
----------- -----------
Total liabilities and stockholders' equity ..................... $ 3,335,027 $ 2,213,054
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
72
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share amounts)
1998 1997 1996
----------- ----------- ---------
Interest, fees and dividend income:
Short term investments ...................................... $ 1,797 $ 1,038 $ 1,195
Securities purchased under agreements to resell ............. 519 2,328 3,257
Investment securities available-for-sale .................... 17,746 3,980 2,374
Mortgage-backed securities .................................. 32,439 32,672 26,136
Loans receivable ............................................ 125,851 89,938 89,020
Federal Home Loan Bank stock ................................ 2,521 1,023 914
----------- ----------- ---------
Total interest, fees and dividend income ................ 180,873 130,979 122,896
----------- ----------- ---------
Interest expense:
Deposits (note 10) .......................................... 69,927 67,247 75,136
Advances from the Federal Home Loan Bank .................... 47,613 8,785 3,207
Securities sold under agreements to repurchase .............. 22,159 19,635 10,901
Senior debt ................................................. 445 1,271 1,160
Hedging costs, net (note 17) ................................ 214 267 387
----------- ----------- ---------
Total interest expense .................................. 140,358 97,205 90,791
----------- ----------- ---------
Net interest income ........................................... 40,515 33,774 32,105
Provision for loan losses (note 7) ............................ 2,000 2,046 2,884
----------- ----------- ---------
Net interest income after provision for loan losses ......... 38,515 31,728 29,221
----------- ----------- ---------
Other income:
Loan service and loan related fees .......................... 111 481 1,378
Gain on sale of mortgage-backed securities, net ............. 1,682 1,275 3,638
Gain (loss) on loan and loan servicing sales, net (note 4) .. 613 3,413 (53)
Income (loss) from real estate operations, net (note 8) ..... 1,479 (1,805) 1,946
Other income ................................................ 2,551 1,753 1,215
----------- ----------- ---------
Total other income ...................................... 6,436 5,117 8,124
----------- ----------- ---------
Operating expenses:
Personnel and benefits ...................................... 23,814 11,787 10,763
Occupancy ................................................... 8,371 7,109 6,389
FDIC insurance .............................................. 7,316 4,899 4,415
Professional services ....................................... 1,294 528 771
Office related expenses ..................................... 4,393 3,913 3,992
Other ....................................................... 1,774 1,307 1,486
----------- ----------- ---------
Total operating expenses ................................ 46,962 29,543 27,816
----------- ----------- ---------
Earnings (loss) before income tax benefit and minority interest (2,011) 7,302 9,529
Income tax benefit (note 14) .................................. (16,390) (4,499) (3,015)
----------- ----------- ---------
Earnings before minority interest ............................. 14,379 11,801 12,544
Minority interest ............................................. 3,476 859 --
----------- ----------- ---------
Net earnings ............................................ 10,903 10,942 12,544
Preferred dividends ........................................... (2,160) (7,340) (6,555)
----------- ----------- ---------
Net earnings available to common stockholders ........... $ 8,743 $ 3,602 $ 5,989
----------- ----------- ---------
----------- ----------- ---------
Earnings per share, basic and diluted ......................... $ 0.59 $ 1.14 $ 1.90
----------- ----------- ---------
----------- ----------- ---------
Weighted average shares outstanding ........................... 14,793,644 3,152,064 3,152,064
----------- ----------- ---------
----------- ----------- ---------
See accompanying notes to consolidated financial statements.
73
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE EARNINGS (LOSS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share amounts)
December 31,
----------------------------------
1998 1997 1996
--------- --------- ---------
Net earnings ............................................. $ 10,903 $ 10,942 $ 12,544
Other comprehensive earnings (loss):
Unrealized (loss) gain on securities available-for-sale (13,319) 2,835 (8,075)
Reclassification of realized gains included in earnings 1,682 1,275 3,638
Minimum pension liability, net of tax ................. (121) (293) --
--------- --------- ---------
Other comprehensive earnings (loss) .................... (11,758) 3,817 4,437
--------- --------- ---------
Comprehensive earnings (loss) ............................ $ (855) $ 14,759 $ 8,107
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
74
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share amounts)
Common Stock
Preferred -------------------------
Stock Number Amount
----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 .......... $ 5 98,502 $ 1
Net earnings ...................... -- -- --
Change in unrealized losses on
securities....................... -- -- --
Capital contributions, net ........ -- -- --
----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 .......... 5 98,502 1
Net earnings ...................... -- -- --
Change in unrealized losses on
securities....................... -- -- --
Capital contributions, net ........ -- -- --
Change in minimum pension liability -- -- --
----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 .......... 5 98,502 1
Net earnings ....................... -- -- --
Change in unrealized losses on
securities....................... -- -- --
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
Preferred dividend paid ........... -- -- --
Change in minimum pension liability -- -- --
Purchases of treasury stock ....... -- (835,000) --
----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 .......... $ -- 21,041,205 $219
----------- ----------- -----------
----------- ----------- -----------
Other
Accumulated
Additional Comprehensive
Paid In Income Accumulated Treasury
Capital Deficit Stock Total
--------- ---------- ----------- --------- ----------
BALANCE, DECEMBER 31, 1995 .......... $129,691 $ (1,647) $(71,437) $ -- $ 56,613
Net earnings ...................... -- -- 12,544 -- 12,544
Change in unrealized losses on
securities....................... -- (4,437) -- -- (4,437)
Capital contributions, net ........ 102 -- -- -- 102
-------- -------- -------- -------- ---------
BALANCE, DECEMBER 31, 1996 .......... 129,793 (6,084) (58,893) -- 64,822
Net earnings ...................... -- -- 10,942 -- 10,942
Change in unrealized losses on
securities....................... -- 4,110 -- -- 4,110
Capital contributions, net ........ 21 -- -- -- 21
Change in minimum pension liability -- (293) -- -- (293)
-------- -------- -------- -------- ---------
BALANCE, DECEMBER 31, 1997 .......... 129,814 (2,267) (47,951) -- 79,602
Net earnings ....................... -- -- 10,903 -- 10,903
Change in unrealized losses on
securities....................... -- (11,637) -- -- (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 ................ 129,393 -- -- -- 129,611
Preferred dividend paid ........... -- -- (19,439) -- (19,439)
Change in minimum pension liability -- (121) -- -- (121)
Purchases of treasury stock ....... -- -- -- (8,308) (8,308)
-------- -------- -------- -------- ---------
BALANCE, DECEMBER 31, 1998 .......... $259,207 $(14,025) $(56,487) $ (8,308) $ 180,606
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
See accompanying notes to the consolidated financial statements.
75
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net earnings ............................................................... $ 10,903 $ 10,942 $ 12,544
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization ..................................... 1,221 1,234 1,837
Provisions for loan and real estate losses ........................ 2,000 4,800 3,650
Decrease in valuation allowance on net deferred tax asset ........ 15,569 8,159 8,106
(Amortization) write-down for discontinued lease operations ....... 55 (265) (150)
Increase (decrease) in net deferred tax asset ..................... 1,024 (3,434) (5,069)
Amortization and accretion of premiums, discounts and
deferred fees ................................................... 12,110 2,270 515
Amortization of purchase accounting intangible assets,
premiums and discounts, net ..................................... 180 (90) (185)
(Gain) on sale of mortgage-backed securities ...................... (1,682) (1,275) (3,638)
(Gain) loss on sale of loans and loan servicing ................... (613) (3,413) 53
(Gain) on real estate sales ....................................... (2,180) (2,214) (3,346)
Federal Home Loan Bank stock dividend ............................. (1,640) (952) (853)
Increase in accrued interest receivable ........................... (4,391) (1,605) (2,173)
Increase (decrease) in accrued interest payable ................... 5,974 (1,000) 5,539
Decrease in other assets .......................................... (35,260) (8,697) (10,317)
Interest deferred on Senior Debt .................................. -- -- 1,165
Increase (decrease) in accrued expenses ........................... 1,349 (17,364) 15,419
Amortization of Goodwill .......................................... 67 -- --
-------- -------- --------
Net cash provided by (used in) operating activities .......... 4,686 (12,904) 23,097
-------- -------- --------
(Continued)
76
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
1998 1997 1996
----------- --------- ---------
Cash flows from investing activities:
Increase in securities purchased under agreements to resell .... $ -- $ -- $ 35,000
Proceeds from sales of investment and mortgage-backed securities
available-for-sale .................................... 514,841 235,612 162,087
Proceeds from sale of loans and servicing rights ............... 43,034 93,081 --
Investment and mortgage-backed security principal repayments
and maturities ........................................ 173,830 108,022 52,380
Loan originations, net of repayments ........................... 207,243 17,607 41,610
Purchases of investments and mortgage-backed securities
available-for-sale .................................... (1,134,026) (408,780) (476,748)
Purchase of mortgage-backed securities held-to-maturity ........ -- -- (10,971)
Purchases of loans ............................................. (878,508) (515,053) --
Costs capitalized on real estate ............................... (174) (1,424) (2,228)
Proceeds from sale of real estate .............................. 18,923 23,458 40,217
Additions to premises and equipment ............................ (1,937) (1,833) (1,081)
Sales of premises and equipment ................................ -- -- 785
Purchase of FHLB stock ......................................... (37,876) (8,475) --
Redemption of FHLB stock ....................................... -- 1,173 --
----------- --------- ---------
Net cash used in investing activities ..................... (1,094,650) (456,612) (158,949)
----------- --------- ---------
(Continued)
77
PBOC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
----------- ----------- ---------
Cash flows from financing activities:
Proceeds from subsidiary preferred stock offering ................. $ -- $ 33,250 $ --
Proceeds from capital infusion, net ............................... 129,611 21 --
Cash contributions to additional paid-in capital .................. -- -- 102
Repayment on senior debt .......................................... (11,370) (285) --
Preferred dividend paid ........................................... (19,439) -- --
Redemption of preferred stock ..................................... (5) -- --
Purchases of treasury stock ...................................... (8,308) -- --
Net increase (decrease) in deposits ............................... 275,547 (104,628) (102,075)
Net increase in securities sold under agreements to repurchase .... 23,212 148,355 192,433
Proceeds from FHLB advances ...................................... 4,360,900 1,137,684 113,900
Repayment of FHLB advances ........................................ (3,634,900) (745,684) (65,646)
----------- ----------- ---------
Net cash provided by financing activities ..................... 1,115,248 468,713 138,714
----------- ----------- ---------
Net increase (decrease) in cash and cash equivalents ....................... 25,284 (803) 2,862
Cash and cash equivalents at beginning of year ............................. 21,117 21,920 19,058
----------- ----------- ---------
Cash and cash equivalents at end of year ................................... $ 46,401 $ 21,117 $ 21,920
----------- ----------- ---------
----------- ----------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ................................................. $ 134,632 $ 96,667 $ 83,691
Income taxes ............................................. -- 200 247
----------- ----------- ---------
----------- ----------- ---------
Supplemental schedule of non cash investing and financing activities:
Foreclosed real estate ............................................ $ 10,248 $ 31,349 $ 42,518
Loans originated in connection with sale of foreclosed real estate 6,147 16,145 12,608
Transfer of loans held for investment to loans held for sale ...... 42,421 85,241
----------- ----------- ---------
----------- ----------- ---------
See accompanying notes to consolidated financial statements.
78
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
On May 15, 1998, the Company completed an Offering of its Common
Stock. An aggregate of 14.6 million shares of Common Stock were sold
to the public at an Offering price of $13.75 per share, of which 10.2
million shares were issued and sold by the Company and 4.4 million
shares were sold by the existing stockholders of the Company.
The following is a description of significant accounting and
reporting policies which the Company follows in preparing and
presenting its consolidated financial statements.
BASIS OF ACCOUNTING
The consolidated financial statements are prepared in accordance
with generally accepted accounting principles which conform to general
practice within the banking industry. The preparation of these
consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reported periods. Actual results
could differ from these estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned, except
for PPCCP in which the Bank owns all of the common stock. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
FEES ON LOANS AND MORTGAGE-BACKED AND INVESTMENT SECURITIES
The Company defers origination and related fees on loans and
certain direct loan origination costs. These deferred fees, net of any
deferred costs, are amortized as an adjustment to the yield on the
loans over their lives using the interest method.
The Company may purchase whole loans at a premium or discount
which is amortized over the life of the loans as an adjustment to
yield using the interest method. The premium or discount amortization
percentage is determined by adjusting the yield for estimated
prepayments when prepayments are probable and the timing and amount of
prepayments can be reasonably estimated based on market consensus
prepayment rates. Calculation of the yield is done on the aggregate
method where there are a large number of similar loans, otherwise, a
loan by loan approach is used. The yield on adjustable rate loans is
calculated based upon the fully adjusted rate in effect when the loan
or security is originated or purchased. Initial estimates of
prepayment rates are evaluated periodically against actual prepayment
experience and current market consensus prepayment forecasts and if
significantly different from the original estimate, the yield is
recalculated.
The Company purchases mortgage-backed and investment securities
at a premium or discount which is amortized over the life of the
security as an adjustment to the yield using the interest method. The
premium or discount percentage is determined by adjusting the
securities' 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.
79
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
COMMITMENT FEES
Commitment fees received in connection with the origination or
purchase of loans are deferred and recognized over the life of the
resulting loans using the interest method as an adjustment of yield.
If the commitment, or a portion thereof, expires unexercised, deferred
commitment fees are recognized in income upon expiration of the
commitment. There were no expired commitment fees recognized during
the years ended December 31, 1998, 1997 and 1996. Direct costs, if
any, to originate a commitment are expensed as incurred.
Commitment fees paid to an investor in connection with the sale
of loans are expensed and reduce the net sales proceeds at the time of
sale.
INVESTMENT SECURITIES AND LOANS
Management determines the appropriate classification of its
securities (mortgage-backed and investment securities) and loans at
the time of purchase or origination.
SECURITIES AVAILABLE-FOR-SALE -- Securities to be held for
indefinite periods of time and not intended to be held-to-maturity are
classified as available-for-sale. Assets included in this category are
those assets that management intends to use as part of its
asset/liability management strategy and that may be sold in response
to changes in interest rates, resultant prepayment risk and other
factors related to interest rate and resultant prepayment risk
changes. Securities available-for-sale are recorded at fair value.
Both unrealized gains and losses on securities available-for-sale are
included in other comprehensive income in the consolidated statements
of financial condition until these gains or losses are realized. Gains
or losses on sales of securities available-for-sale are based on the
specific-valuation method. If a security has a decline in fair value
that is other than temporary, then the security will be written down
to its fair value by recording a loss in the consolidated statements
of operations. Premiums and discounts are accreted or amortized using
the interest method over the estimated life of the securities.
SECURITIES HELD-TO-MATURITY -- Securities that management has the
intent and the Bank has the ability at the time of purchase or
origination to hold until maturity are classified as securities
held-to-maturity. Securities in this category are carried at amortized
cost adjusted for accretion of discounts and amortization of premiums
using the interest method over the estimated life of the securities.
If a security has a decline in fair value below its amortized cost
that is other than temporary, then the security will be written down
to its new cost basis by recording a loss in the consolidated
statements of operations.
FHLB STOCK -- This asset is owned due to regulatory requirements
and is carried at cost. This stock is pledged as collateral to secure
FHLB advances.
IMPAIRED LOANS
A loan is impaired when it is "probable" that a creditor will be
unable to collect all amounts due (i.e., both principal and interest)
according to the contractual terms of the loan agreement. The
measurement of impairment may be based on (1) the present value of the
expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (2) the observable market
price of the impaired loan or (3) the fair value of the collateral of
a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is
recognized by recording a valuation allowance.
Interest income on impaired loans is recognized on a cash basis
if it is determined that collection of principal is probable. Loans
that are 90 days or more past due, or when full collection of
principal and interest is not probable, are placed on nonaccrual
status and interest income that has been earned but not collected is
reversed. Loans are returned to accrual status when the borrower has
had a period of sustained repayment performance. Management considers
all loans formally treated as troubled debt restructurings to be
impaired loans
80
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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 INVESTMENT AND FOR SALE
Real estate held for investment consists of investments which
were acquired for development and sale. Real estate held-for-sale
consists of property acquired in settlement of loans. Real estate held
for investment and for sale is carried at lower of cost or market
value, net of anticipated selling costs. Market value is determined
based on recent appraisals or discounted cash flow calculations. Gains
or losses on sales of real estate, net of selling and other costs, are
recognized at the time of sale.
Real estate acquired in settlement of loans is recorded at the
date of acquisition at fair value, less estimated disposition costs.
The excess of the loan balance over fair value of the asset acquired,
if any, is charged to the allowance for loan losses upon foreclosure.
Subsequent to foreclosure, additional decreases in the carrying value
of foreclosed properties are recognized through a provision charged to
operations. An allowance for losses equal to the excess of the book
value over the fair value of the property, less estimated selling
costs is maintained. The allowance for losses is increased or
decreased for subsequent changes in estimated fair market value. Costs
of developing and improving such property to facilitate sale are
capitalized. Expenses related to holding such real estate, net of
rental and other income, are charged against operations as incurred.
GAINS ON THE SALE OF LOANS AND LOAN SERVICING
Gains or losses on sales of loans are recognized at the time of
sale and are determined by the difference between the net sales
proceeds and the allocated basis of the loans sold. The Company
adopted effective January 1, 1997, Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," (SFAS 125). In
accordance with SFAS 125, the Company capitalizes mortgage servicing
rights (MSRs) acquired through either the purchase or origination of
mortgage loans for sale or securitization with servicing rights
retained. The total costs of the mortgage loans designated for sale is
allocated to the MSRs and the mortgage loans without the MSRs based on
their relative fair values. The MSRs are included in other assets and
as a component of gain on sale of loans. The MSRs are amortized in
proportion to and over the estimated period of net servicing income.
Such amortization is reflected as a component of loan servicing fees.
The MSRs are periodically reviewed for impairment based on their
fair value. The fair value of the MSRs for the purpose of impairment,
is measured using a discounted cash flow analysis based on the
Company's estimated net servicing income, market prepayments rates and
market-adjusted discount rates. Impairment is
81
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
measured on a disaggregated basis based on predominant risk
characteristics of the underlying mortgage loans. The risk
characteristics used by the Company for the purpose of capitalization
and impairment evaluation include loan type, interest rate tranches,
loan term and collateral type. Impairment losses are recognized
through a valuation allowance, with any associated provision recorded
as a component of loan servicing fees.
Gains or losses on sales of servicing assets for which the
Company owns the underlying loans are deferred and amortized over the
estimated loan lives using the interest method.
DEPRECIATION AND AMORTIZATION
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which ranges from 3 to 25 years.
Leasehold improvements are amortized using the straight-line method
over the lives of the assets or term of the lease, whichever is
shorter. Maintenance and repairs are expensed as incurred.
TAXES ON INCOME
The Company uses the asset and liability method for measurement
and recognition of income taxes. The statements of financial condition
amounts of net deferred tax assets or liabilities are recognized on
the temporary differences between the basis of assets and liabilities
as measured by tax laws and their financial statement basis, plus
available tax operating loss carryforwards and tax credit
carryforwards, reduced by a valuation allowance for that portion of
tax assets not considered more likely than not to be realized.
Deferred income tax benefit is recognized for the change in net
deferred tax assets or liabilities, plus the valuation allowance
change. Current income tax (benefit) is the amount of total taxes
currently payable (receivable).
DERIVATIVE AND HEDGING ACTIVITIES
The Company uses interest rate swap (swaps), interest rate cap
(caps), interest rate floor (floors), and interest rate corridor
(corridors) contracts in the management of its interest rate risk. The
objective of these financial instruments is to more closely match the
estimated repricing duration and/or repricing characteristics of
specifically identified interest-sensitive assets and liabilities to
reduce interest rate exposure. Such contracts are used to reduce
interest rate risk and are not used for speculative purposes, and
therefore are not marked-to-market. The net interest income or
expense, net of amortization of premiums, discounts and fees, from
these contracts is recognized currently on an accrual basis over their
term in interest expense in "hedging costs, net" in the consolidated
statements of operations.
Premiums paid for and discounts associated with, and costs and
fees of interest rate swap, cap, floor and corridor contracts are
amortized or accredited into interest expense on a straight-line basis
over the life of the contracts.
CASH AND CASH EQUIVALENTS
For the purposes of the consolidated statements of cash flows,
the Company considers all highly liquid debt instruments (investments)
purchased with an original maturity of three months or less to be cash
equivalents. This currently includes cash and amounts due from banks,
Federal funds sold, and term certificates of deposit.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of the Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 amends SFAS No. 52
"Foreign Currency Translation" to permit special accounting for a
hedge of a foreign currency forecasted transaction with a derivative.
It supersedes SFAS No. 80, "Accounting for Future Contracts", SFAS No.
105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with
82
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Concentrations of Credit Risk", and SFAS No. 119, "Disclosure about
Derivative Financial Instruments". It amends SFAS No.107, "Disclosure
about Fair Value of Financial Instruments, to include in Statement 107
disclosure provisions about concentrations of credit risk from
Statement 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 recognizes 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 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management
believes that the adoption of SFAS 133 will not have a material impact
on the Company's disclosures.
INITIAL PUBLIC OFFERING
On May 15, 1998, the Company completed its Offering of its Common
Stock. An aggregate of 12,666,667 shares of Common Stock were sold to
the public at an Offering price of $13.75 per share, of which
8,866,667 shares were issued and sold by the Company and 3,800,000
shares were sold by the existing stockholders of the Company. In
connection with the underwriting agreement executed by the Company
with the underwriters of the Offering, the Company granted the
underwriters an option to purchase up to an additional 1,900,000
shares of Common Stock, on the same terms and conditions as in the
Offering, solely to cover over-allotments, if any. Such over-allotment
option was exercised in full, and on May 21, 1998, the Company and the
original stockholders sold an additional 1,330,000 shares and 570,000
shares, respectively. The Company did not receive any proceeds from
the sale of shares by the existing stockholders.
RECLASSIFICATION
Certain amounts in prior years' financial statements have been
reclassified to conform to the current financial statement
presentation.
(2) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank purchases securities under agreements to resell at a
later date at set prices, generally collateralized by AA or higher
rated mortgage-backed securities. The average outstanding balance was
approximately $10,175,000 and $41,225,000 during each of the years
ended December 31, 1998 and 1997, respectively. The maximum
outstanding balance at any month-end was $90,000,000 and $25,000,000
during 1998 and 1997, respectively. The weighted average interest rate
on such agreements was approximately 5.61%, 5.65% and 5.53% during the
years ended December 31, 1998, 1997 and 1996, respectively. The
securities pledged are held by a third-party institution.
83
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(3) SECURITIES AVAILABLE-FOR-SALE
The Bank holds certain securities available-for-sale. The
amortized cost, unrealized gains and losses, and estimated fair value
of securities available-for-sale at December 31, 1998 and 1997 were as
follows (dollars in thousands):
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
1998
-----------------------------------------------
Debt securities issued by government agencies:
Due after five years to ten years ....................... $ 37,000 $-- $ (23) $ 36,977
Corporate trust preferred ................................... 334,814 -- (9,849) 324,965
Mortgage-backed securities .................................. 588,081 35 (3,601) 584,515
SBA certificates ............................................ 58,653 33 (206) 58,480
--------- ---------- ---------- -----------
Total securities available-for-sale ................... $1,018,548 $68 $(13,679) $1,004,937
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
1997
-----------------------------------------------
Debt securities issued by government agencies:
Due after one year through five years......... $ 55,250 $156 $ (73) $ 55,333
Due after five years to ten years ............ 74,254 244 (205) 74,293
Due after ten years .......................... 10,000 93 -- 10,093
Mortgage-backed securities ....................... 420,621 377 (2,548) 418,450
SBA certificates ................................. 13,009 -- (18) 12,991
--------- ---------- ---------- -----------
Total securities available-for-sale......... $573,134 $870 $(2,844) $ 571,160
--------- ---------- ---------- -----------
--------- ---------- ---------- -----------
Proceeds from sales of investments and mortgage-backed securities
available-for-sale were approximately $514,841,000, $235,612,000 and
$162,087,000 in each of the years ended December 31, 1998, 1997 and
1996, respectively, and resulted in gross realized gains of
approximately $1,847,000, $1,714,000 and $3,860,000, respectively, and
gross realized losses of approximately $165,000, $439,000 and $222,000
in the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, the amortized cost and estimated
fair value of mortgage-backed securities available-for-sale pledged to
secure borrowings and swap agreements are as follows:
1998 1997
----------------------- -----------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
(Dollars in thousands)
Pledged against:
Securities sold under agreements to repurchase $397,488 $395,720 $366,827 $365,822
Advances from Federal Home Loan Bank ......... 178,797 177,434 47,542 46,779
Swap and corridor agreements ................. 142 139 1,970 1,943
Treasury tax and loan account ................ 804 820 4,577 4,546
-------- -------- -------- --------
$577,231 $574,113 $420,916 $419,090
-------- -------- -------- --------
-------- -------- -------- --------
84
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(4) LOANS HELD-FOR-SALE
Proceeds from sales of loans held-for-sale were approximately
$43,034,000 and $93,081,000 in each of the years ended December 31,
1998 and 1997, respectively. The sales resulted in gross realized
gains of approximately $613,000 and $165,000 and no gross realized
losses in each of the years ended December 31, 1998 and 1997,
respectively. Gains from sales of servicing rights, including flow
through and bulk sales of servicing, were $0 and $3,248,000 for the
years ended December 31, 1998 and 1997, respectively. There were no
loan or servicing rights sales in 1996. In 1997 the Company deferred
gains totaling $5,291,000 on the sales of servicing rights for loans
owned by the Bank. The unamortized balance of the deferred gain was
$2,970,570 and $4,131,000 at December 31, 1998 and 1997, respectively.
In the years ended December 31, 1998, 1997 and 1996, write-offs
of servicing assets totaled approximately $0, $0 and $18,000,
respectively, and are included in gain (loss) on loan and loan
servicing sales in the accompanying consolidated statements of
operations.
(5) MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
The amortized cost, unrealized gains and losses, and estimated
fair value of mortgage-backed securities at December 31, 1998 and 1997
are as follows (dollars in thousands):
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- ------------- -------------- --------------
1998............... $ 6,282 $ 90 $ -- $ 6,372
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
1997............... $ 9,671 $ 72 $ -- $ 9,743
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
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 1998 and 1997.
85
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) LOANS RECEIVABLE
A summary of loans receivable at December 31, 1998 and 1997 is as
follows (dollars in thousands):
1998 1997
---------- -----------
Real estate loans
Single-family residential:
Fixed rate ........................................................... $1,150,414 $ 212,552
Variable rate ........................................................ 344,342 741,149
Multifamily, primarily variable rate ................................... 366,625 426,254
Commercial and industrial, primarily variable rate ..................... 206,402 135,407
Land, primarily fixed rate ............................................. 880 5,896
---------- -----------
Real estate loans .................................................. 2,068,663 1,521,258
Commercial loans ......................................................... 62,665 22,484
Consumer loans ........................................................... 53,826 8,485
Secured by deposits ...................................................... 3,537 2,287
---------- -----------
All loans .......................................................... 2,188,691 1,554,514
Less:
Undistributed loan proceeds ........................................... 17,152 6,206
Unamortized net loan (premiums)/discounts and deferred origination fees 814 (6,859)
Deferred gain on servicing sold ....................................... 2,971 4,131
Allowance for loan losses (note 7) .................................... 18,897 17,824
---------- -----------
$2,148,857 $ 1,533,212
---------- -----------
---------- -----------
Nonaccrual loans were $8,507,000, $9,904,000 and $18,238,000 at
December 31, 1998, 1997 and 1996, respectively. If loans which were on
nonaccrual at December 31, 1998, 1997 and 1996 had performed in
accordance with their terms for the year or since origination, if
shorter, interest income from these loans would have been $950,000,
$644,000 and $1,405,000, respectively. Interest collected on these
loans for these years was $364,000, $67,000 and $846,000,
respectively.
The Company's variable rate loans are indexed primarily to the
COFI and U.S. Treasury one-year CMT.
Substantially all real estate collateralized loans are secured by
first trust deeds. The Bank's loan portfolio is concentrated primarily
in the state of California. The commercial real estate secured
portfolio is diversified with no significant industry concentrations
of credit risk. Single-family residence, multifamily, and commercial
real estate secured loans are diversified geographically across the
state and by size.
At December 31, 1998, the Company had loan applications pending
to originate loans of approximately $28,832,000. Other than pending
loan applications at year-end, the Bank had no outstanding commitments
to originate or purchase loans.
86
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(7) ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR LOAN LOSSES
An analysis of the activity in the allowance for loan losses for
each of the years ended December 31, 1998, 1997 and 1996 is as follows
(dollars in thousands):
1998 1997 1996
-------- -------- --------
Balance at beginning of year ....... $ 17,824 $ 23,280 $ 31,572
Provision for loan losses .......... 2,000 2,046 2,884
Recoveries credited to the allowance 85 106 925
-------- -------- --------
19,909 25,432 35,381
Losses charged to the allowance .... (1,012) (7,608) (12,101)
-------- -------- --------
Balance at end of year ............. $ 18,897 $ 17,824 $ 23,280
-------- -------- --------
-------- -------- --------
The Bank's gross impaired loans were $10,165,000 and $11,361,000
as of December 31, 1998 and 1997, respectively. The average impaired
loans for the years then ended were $9,615,000 and $20,600,000,
respectively. Gross impaired loans with a valuation allowance totaled
$7,188,000 and gross impaired loans without a valuation allowance
totaled $2,978,000 at December 31, 1998. Interest income recognized
related to these loans was $552,000 and $67,000 for 1998 and 1997,
respectively.
The valuation allowance related to impaired loans was $1,597,000
and $1,772,000 at December 31, 1998 and 1997, respectively, and is
included in the schedule of the allowance for loan losses described
above.
Troubled debt restructurings totaled $4,515,000 and $11,000,000
as of December 31, 1998 and 1997, respectively. The Bank has no
commitments to lend additional funds to borrowers whose loans were
classified as troubled debt restructurings at December 31, 1998.
(8) REAL ESTATE HELD FOR INVESTMENT AND FOR SALE
Real estate at December 31, 1998 and 1997, consisted of the following
(dollars in thousands):
1998 1997
------- --------
Acquired for sale or development ................. $ -- $ 8,054
Less allowance for losses ............... -- (6,146)
------- --------
Acquired for sale or development..... -- 1,908
------- --------
Acquired in settlement of loans:
Single-family residential ............... 2,723 750
Multifamily ............................. -- 6,481
Commercial and industrial ............... -- 7,268
Land .................................... -- 202
------- --------
2,723 14,701
Less allowance for losses ........................ -- (1,418)
------- --------
Acquired in settlement of loans...... 2,723 13,283
------- --------
$ 2,723 $ 15,191
------- --------
------- --------
87
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
A summary of the components of the income from real estate
operations in each of the years ended December 31, 1998, 1997 and 1996
is as follows (dollars in thousands):
1998 1997 1996
------- ------- -------
Gross income from real estate operations $ 1,147 $ 3,372 $ 4,761
Operating expenses ..................... 1,848 4,637 5,395
------- ------- -------
Loss from operations ............. (701) (1,265) (634)
Gain on real estate sales .............. 2,180 2,214 3,346
------- ------- -------
Gain from real estate operations . 1,479 949 2,712
Provisions for losses .................. -- (2,754) (766)
------- ------- -------
Total income (loss) from real
estate operations............... $ 1,479 $(1,805) $ 1,946
------- ------- -------
------- ------- -------
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, 1998, 1997 and 1996, respectively, is as
follows (dollars in thousands):
Direct
Real Estate Real Estate
Acquired Investments Total
----------- ----------- ---------
Balance, December 31, 1995 ........... $ 1,460 $ 6,526 $ 7,986
Provision for losses .................. 396 370 766
Charge-offs ........................... (1,784) (380) (2,164)
------- ------- -------
Balance, December 31, 1996 ........... 72 6,516 6,588
Provision for losses .................. 2,754 -- 2,754
Charge-offs ........................... (1,408) (370) (1,778)
------- ------- -------
Balance, December 31, 1997 ........... 1,418 6,146 7,564
Charge-offs ........................... (1,418) (6,146) (7,564)
------- ------- -------
Balance, December 31, 1998 ........... $ -- $ -- $ --
------- ------- -------
------- ------- -------
88
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(9) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 and 1997, consisted
of the following (dollars in thousands):
1998 1997
-------- --------
Land ......................................... $ 521 $ 521
Buildings .................................... 967 837
Furniture, fixtures and equipment ............ 13,969 12,434
Leasehold improvements ....................... 6,308 5,525
-------- --------
21,765 19,317
Less accumulated depreciation and amortization (14,553) (12,641)
-------- --------
$ 7,212 $ 6,676
-------- --------
-------- --------
The Bank is committed to operating leases on certain premises.
Certain of these leases require the Bank to pay property taxes and
insurance. Some are subject to annual inflation adjustments, and have
renewal options of various periods at various rates. Lease expense on
all property totaled approximately $2,610,000, $2,197,000 and
$2,144,000, net of sublease income of approximately $166,000, $353,000
and $452,000, in each of the years ended December 31, 1998, 1997 and
1996, respectively.
Approximate minimum lease commitments before consideration of the
charge for unused lease property referred to above under noncancelable
operating leases at December 31, 1998 are as follows (dollars in
thousands):
Year Gross Sublease Net
- -------------------- ---------- ---------- ------
1999............. $ 2,594 $ 152 $2,442
2000............. 2,293 152 2,141
2001............. 1,453 89 1,364
2002............. 958 -- 958
2003............. 543 -- 543
Thereafter.......... 2,433 -- 2,433
---------- --------- ----------
$10,274 $ 393 $9,881
---------- --------- ----------
---------- --------- ----------
89
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(10) DEPOSITS
Deposits at December 31, 1998 and 1997 consisted of the following
(dollars in thousands):
1998 1997
------------------------- -------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
--------- -------------- -------- --------------
Transaction accounts:
NOW accounts ................................ $ 166,807 1.26% $ 98,550 2.38%
Passbook accounts ........................... 139,800 3.60 182,690 4.16
Money market accounts ....................... 126,396 4.20 52,550 5.07
---------- ----------
Transaction accounts .................... 433,003 2.88 333,790 3.78
---------- ----------
Term certificates:
3-month ................................... 6,951 3.83 5,135 4.20
6-month ................................... 60,323 4.86 58,055 5.18
12-month .................................. 594,717 5.46 476,251 5.73
18-month .................................. 44,502 5.43 146,605 5.75
24-month .................................. 57,988 6.28 73,226 5.71
36-month .................................. 11,079 5.71 12,126 6.04
48-month .................................. 1,176 5.93 1,099 5.95
60-month .................................. 16,145 5.88 20,149 5.77
Public funds .............................. -- -- 2,006 5.79
$100,000 and over ......................... 316,278 5.54 138,173 5.90
---------- ----------
Term certificates........................ 1,109,159 5.49 932,825 5.72
---------- ----------
$1,542,162 4.76% $1,266,615 5.21%
---------- ----- ---------- -----
---------- ----- ---------- -----
Term certificates of deposit outstanding by scheduled maturity
date at December 31, 1998 are as follows (dollars in thousands):
Weighted
Amount Average Rate
------------ ------------
Due within 3 months ......................................................... $ 271,083 5.64%
Due within 3 to 6 months .................................................... 361,803 5.65
Due within 6 to 9 months .................................................... 112,299 5.45
Due within 9 to 12 months ................................................... 201,322 5.13
Due within 12 to 24 months .................................................. 137,605 5.30
Due within 24 to 36 months .................................................. 10,559 5.70
Due after 36 months ......................................................... 14,488 5.87
------------ ------------
Total ..................................................... $1,109,159 5.49%
------------ ------------
------------ ------------
90
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
The components of deposit interest expense in each of the years
ended December 31, 1998, 1997 and 1996 are as follows (dollars in
thousands):
1998 1997 1996
-------- -------- --------
NOW accounts ............................ $ 2,107 $ 1,635 $ 449
Passbook and money market accounts ...... 10,679 10,841 12,288
Term certificates -- under $100,000 ..... 45,217 44,852 52,556
Term certificates -- $100,000 and over .. 12,132 10,124 10,030
-------- -------- --------
70,135 67,452 75,323
Interest forfeitures on early withdrawals (208) (205) (187)
-------- -------- --------
$ 69,927 $ 67,247 $ 75,136
-------- -------- --------
-------- -------- --------
(11) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank enters into sales of agency and AA-rated mortgage-backed
securities under agreements to repurchase (reverse repurchase
agreements) which obligate the Bank to repurchase the identical
securities as those which were sold. Such transactions are treated as
a financing, with the obligations to repurchase securities sold
reflected as a liability and the carrying amount of securities
collateralizing the liability included in mortgage-backed securities
in the consolidated statements of financial condition. There were
$364,000,000 and $340,788,000 outstanding reverse repurchase
agreements at December 31, 1998 and 1997, respectively.
The maximum repurchase liability balances outstanding at any
month-end during the years ended December 31, 1998 and 1997 were
approximately $658,409,000 and $415,676,000, respectively. The average
balances outstanding during each of the years ended December 31, 1998
and 1997 were approximately $385,452,000 and $357,396,000,
respectively.
The securities sold under agreements to repurchase identical
securities are held in safekeeping by broker/dealers. It is
management's policy to enter into repurchase agreements only with
broker/dealers who are regarded as primary dealers in these securities
and meet satisfactory standards of capitalization and
creditworthiness.
The scheduled maturities and weighted average interest rates of
securities sold under agreements to repurchase at December 31, 1998
and 1997 are as follows (dollars in thousands):
1998 1997
---------------------- -----------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
-------- ------------ ------ -------------
YEAR OF MATURITY:
1998................ $ -- --% $ 76,788 5.79%
2000................ 129,000 5.71 129,000 5.71
2002................ 135,000 5.79 135,000 5.79
2003................ 50,000 5.34 -- --
2008................ 50,000 5.10 -- --
-------- --------
$364,000 5.61% $340,788 5.76%
-------- -------- -------- ---------
-------- -------- -------- ---------
91
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(12) ADVANCES FROM THE FHLB
Advances from the FHLB at December 31, 1998 and 1997 are
collateralized by mortgage-backed agency securities and mortgage loans
with a current principal balance of approximately $1.9 billion and
$913.9 million, respectively, and by the required investment in the
stock of the FHLB with a carrying value at December 31, 1998 and 1997
of approximately $63,150,000 and $23,634,000, respectively.
At December 31, 1998, the Bank had an available total
collateralized line of credit of approximately $1.7 billion with the
FHLB. Based on current securities and loans pledged, the Company had
$71.7 million of unused line of credit as of December 31, 1998 with
the FHLB.
The scheduled maturities and weighted average interest rates of
advances at December 31, 1998 and 1997 are as follows (dollars in
thousands):
1998 1997
------------------------- ---------------------
Weighted Weighted
YEAR OF MATURITY Amount Average Rate Amount Average Rate
- ---------------------- ------------------------- ---------------------
1998................. $ -- --% $357,000 5.97%
1999................. 14,000 4.77 -- --
2000................. 185,000 5.69 -- --
2001................. 25,000 5.68 -- --
2002................. 139,000 5.44 115,000 5.58
2003................. 525,000 5.17 -- --
2008................. 310,000 5.53 -- --
---------- ----------
$1,198,000 5.38% $472,000 5.87%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(13) SENIOR DEBT
On June 1, 1995, the Company issued $10,000,000 par of unsecured
Senior Notes (the "Notes") in conjunction with a reorganization of the
Company. The Notes contained an initial pay rate and accrual rate of
7% and 10.75%, respectively, and the accrual rate increased to 11.15%
on June 30, 1997. The difference between the pay rate and accrual rate
was deferred and compounded annually at the accrual rate commencing on
June 30, 1996. Included in the balance of the senior note was
$1,113,000 of accrued interest, as of December 31, 1997. Interest of
approximately $1.8 million, calculated at the pay rate of 7%, was paid
September 30, 1997 for the period from issuance of the Notes to that
date. Quarterly interest of approximately $192,000, at the pay rate,
was paid on December 31, 1997.
The Company used $11.4 million of public offering proceeds to
prepay the $10.0 million of senior notes (plus accrued interest
through May 15, 1998).
(14) INCOME TAXES
The Company, including the Bank and its subsidiaries (except for
PPCCP), file a federal consolidated tax return. The Company entered
into a tax sharing agreement with the Bank, whereby the Bank computes
and pays taxes based upon the Bank's tax position assuming that a
separate tax return was filed. While the senior debt was outstanding
at the Company, the payment by the Bank was limited to the amount of
the consolidated tax liability.
PPCCP has elected to be treated as a REIT for Federal income tax
purposes and intends to comply with the provisions of the Code, as
amended. Accordingly, PPCCP is not subject to Federal income tax to
the
92
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
extent it distributes its income to shareholders (other than Bank) and
as long as certain asset, income and stock ownership tests are met in
accordance with the Code. As PPCCP qualifies as a REIT for Federal
income tax purposes, no provision for income taxes is included for the
earnings of PPCCP that were distributed to outside stockholders.
The income tax (benefit) for the years ended December 31, 1998,
1997, and 1996 consist of the following (dollars in thousands):
1998 1997 1996
-------- ------- -------
Current:
Federal ..................... $ -- $ 154 $ 16
State ....................... 8 62 6
-------- ------- -------
Total current ........ 8 216 22
-------- ------- -------
Deferred:
Federal ..................... (16,398) (4,715) (3,037)
-------- ------- -------
Total tax benefit ..... $(16,390) $(4,499) $(3,015)
-------- ------- -------
-------- ------- -------
Deferred tax assets are initially recognized for NOLs and tax
credit carryforwards and differences between the financial statement
carrying amount and the tax bases of assets and liabilities which will
result in future deductible amounts. A valuation allowance is then
established to reduce that deferred tax asset to the level at which
"it is more likely than not" that the tax benefits will be realized. A
taxpayer's ability to realize the tax benefits of deductible temporary
differences and operating loss or credit carryforwards depends on
having sufficient taxable income of an appropriate character within
the carryback and carryforward periods. Sources of taxable income that
may allow for the realization of tax benefits include (i) taxable
income in the current year or prior years that is available through
carryback, (ii) future taxable income that will result from the
reversal of existing taxable temporary differences, and (iii) future
taxable income generated by future operations. Based on the Company's
projected taxable earnings, management believes it is more likely than
not that the Company will realize the benefit of the existing net
deferred tax asset at December 31, 1998.
93
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Below is a reconciliation of the expected federal income taxes
(benefit) to the consolidated effective income taxes (benefit) for the
noted periods:
1998 1997 1996
--------- -------- --------
(Dollars in thousands)
Statutory federal income tax rate ............ 35% 35% 35%
--------- -------- --------
--------- -------- --------
Expected federal income taxes
(benefit) .................................. $ (783) $ 2,556 $ 3,335
Increases (reductions) in income
taxes resulting from:
State franchise tax, net of federal
benefit .................................... 4 40 4
Change in the valuation allowance ............ (15,569) (7,006) (6,253)
PPCCP nontaxable earnings ................ (79) (301) --
Other .................................... 37 212 (101)
-------- ------- -------
$(16,390) $ (4,499) $(3,015)
-------- ------- -------
-------- ------- -------
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:
1998 1997
-------- --------
(Dollars in thousands)
Deferred Tax Assets:
Provision for losses on loans and real estate ............................................... $ 12,718 $ 14,875
Tax gains on sales of loans, net of deferred gains .......................................... 1,989 2,206
Recognition of interest on nonperforming loans for tax ...................................... 6,354 5,747
Accrued interest on deposits recognized for book but
deferred for tax ........................................................................ 1,187 1,424
REMIC Income ................................................................................ 6,576 5,384
Miscellaneous temporary deductible differences .............................................. 1,139 969
Available NOLs carryforwards ................................................................ 57,612 51,253
AMT tax credit carryforwards ................................................................ 1,432 1,432
-------- --------
Total deferred tax assets ............................................................ 89,007 83,290
Deferred tax liabilities:
Stock dividends from FHLB ................................................................... (4,429) (3,273)
Real estate partnership tax losses .......................................................... -- (259)
Miscellaneous temporary taxable differences ................................................. (5,585) (1,511)
Federal tax effect of state temporary differences ........................................... (3,714) (3,797)
-------- --------
Total deferred tax liabilities ....................................................... (13,728) (8,840)
-------- --------
Deferred tax assets, net of deferred tax liabilities .......................................... 75,279 74,450
Less deferred tax asset valuation allowance ................................................... (48,674) (64,243)
-------- --------
Net deferred tax assets .............................................................. $ 26,605 $ 10,207
-------- --------
-------- --------
94
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
The Federal and State tax NOLs carryforwards expire as follows
(dollars in thousands):
Year Total
------------ ----------
2001............................................... $ 17,845
2002............................................... 2
2003............................................... 24,444
2004............................................... 26
---------
Pre-1992 originated net operating losses........... 42,317
2003............................................... 828
2008............................................... 5,917
2009............................................... 14,706
2010............................................... 78,436
2011............................................... 5,061
2013............................................... 6,556
---------
Pre-May, 1998 originated net operating losses...... 111,504
2003............................................... 1,410
2013............................................... 11,162
---------
Post-May, 1998 originated net operating losses..... 12,572
---------
Total.......................................... $166,393
---------
---------
The above total includes $1.4 million of state NOLs carryforwards
which expire in 2003.
The Company had Federal and California AMT credit carryforwards
of approximately $1,374,000 and $58,000, respectively. These
carryforwards are available to reduce future regular federal income
taxes and California franchise taxes, if any, over an indefinite
period.
In 1992, issuance of preferred stock resulted in a change in
control as defined under Section 382 of the Code. As a result, any
usage of NOLs carryforwards created in 1992 and prior years is limited
to approximately $7.7 million per year. The total NOLs carryforwards
created in 1992 and prior years is approximately $42.3 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 1999 and thereafter is approximately $42.3
million.
During May of 1998, the Offering resulted in a second change in
control as defined under Section 382 of the Code. As a result, any
usage of NOLs carryforwards created prior to May, 1998 (but post 1992)
is limited to approximately $21.3 million per year. The total NOLs
carryforwards created prior to May, 1998 (but post 1992) is
approximately $111.5 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 1999 is
approximately $22.5 million
The Company is subject to examination by Federal and State taxing
authorities for tax returns filed in previous periods. The results and
effects of these examinations on individual assets and liabilities may
require adjustment to the tax assets and liabilities based on the
results of their examinations. Management does not anticipate that the
examinations will result in any material adverse effect on its
financial condition or results of operations.
(15) STOCKHOLDER'S EQUITY AND EARNINGS PER SHARE
At December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share" (SFAS 128). Under SFAS 128 basic earnings per share
excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per
95
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted
into common stock or resulted from issuance of common stock that then
shared in earnings.
The weighted average number of common shares outstanding used to
compute basic and diluted earnings per share in 1998, 1997 and 1996
were 14,793,644, 3,152,064 and 3,152,064, respectively.
Prior to consummation of the Offering and the exchange of
preferred stock for Common Stock, there were outstanding 85,000 shares
of Series C Preferred Stock, 68,000 shares of Series D Preferred Stock
and 332,000 shares of Series E Preferred Stock, all of which were
owned by the Material Stockholders. In connection with the Offering,
the Outstanding Preferred Stock was exchanged for shares of Common
Stock. An aggregate of 3,152,064 shares of Common Stock was
outstanding following consummation of the Offering, which gives effect
to the conversion of the Outstanding Preferred Stock into Common Stock
and the 32:1 stock split. Dividends are payable if and when the Board
of Directors of the Company declare such dividends out of the assets
of the Company, which by law are available. No dividends have been
declared or paid on Common Stock. In 1998, the Company paid a $19.4
million preferred stock dividend in connection with the Offering.
(16) 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. The additional repurchased shares will also
be held as treasury stock and used for general corporate purposes.
(17) DERIVATIVES AND HEDGING ACTIVITIES
Hedging costs, net, for each of the years ended December 31,
1998, 1997 and 1996 consists of the following (dollars in thousands):
1998 1997 1996
---- ---- ----
Interest paid on swaps, net of interest received ....... $-- $ 2 $ 35
Amortization of cost of caps, floors and corridors, net
of interest received ................................. 214 265 352
---- ---- ----
$214 $267 $387
---- ---- ----
---- ---- ----
Interest rate swaps are contracts where the parties agree to
exchange fixed rate for floating rate interest payments, or to
exchange floating rate interest payments upon two different rate
indices (basis swap), for a specified period of time on a specified
(notional) amount. The notional amount is used only to calculate the
amount of interest payments to be exchanged and does not represent
credit risk. The notional amount and weighted average pay and receive
rates are shown below in accordance with their contractual dates. The
variable repricing indexes associated with the contracts are
three-month LIBOR, one-month LIBOR and COFI which were 5.07%, 5.06%
and 4.69%, respectively, at December 31, 1998.
Swap contracts were entered into to limit the interest rate risk
related to the relative repricing characteristics of the Bank's
interest-bearing deposits. The floating rate on swap contracts
re-prices at intervals of one to three months based on the current
index in effect at that time. If all contracts were repriced at the
current index in effect at each year-end, the weighted average rate
paid and received would be 5.65% and 5.69%, respectively, at December
31, 1998.
96
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
The notional amount of the swap amortizes monthly based upon the
performance of a specific index. The swap is used to reduce interest
rate risk associated with fixed rate term liabilities. The performance
of the swap is based upon interest rates in general. The above table
does not include anticipated amortization relating to the swap.
Excluding this transaction, the Bank does not have any other positions
in complex derivative transactions.
Mortgage-backed securities with book values of approximately $0
and $1,970,000 and market values of approximately $0 and $1,943,000 at
December 31, 1998 and 1997, respectively, are pledged as collateral
for certain swap agreements.
The Bank has only limited involvement in derivative financial
instruments and does not use them for trading purposes. The
instruments are used to manage interest rate risk. The Bank has
entered into corridor contracts to artificially raise the interest
rate cap on certain loans. The corridor contracts provide for the
payment of interest on the outstanding principal contract amount.
Under such contracts, the Bank receives interest if an interest rate
that varies according to a specified index exceeds a pre-set level
(the strike rate) up to an upper limit (the limit) beyond which
additional interest is not received if the rate increases. The index
on the Bank's corridors is COFI or three-month LIBOR. A summary of
corridor contracts and average interest rate ranges at December 31,
1998 is as follows (dollars in thousands):
Contract Average Average
Year of Maturity Amount Strike Price Limit Rate
- ---------------------------------------- ------------------ ------------------ ------------------
1999 ............................... $ 20,000 6.64% 8.24%
2000 ............................... 12,000 6.38 8.13
2001 ............................... 20,000 6.64 8.24
------------------
$ 52,000 6.58% 8.21%
------------------ ------------------ -------------------
------------------ ------------------ -------------------
(18) BENEFIT PLANS
The Bank has had a noncontributory defined benefit pension plan
covering substantially all of its employees (the "Plan") hired before
1990. The benefits are based on years of service and the employee's
highest compensation during the last five consecutive years of
employment prior to 1991. The Plan was frozen effective December 31,
1990, and consequently, employees will no longer earn additional
defined benefits for future services; however, future service may be
counted toward vesting of benefits accumulated based on past service.
The Bank's funding policy has been to contribute annually the minimum
amount that can be deducted for Federal income tax purposes.
97
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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, 1998 and 1997 (dollars in thousands):
1998 1997
------- -------
CHANGE IN BENEFIT OBLIGATION:
Projected benefit obligation, beginning of year ..................... $ 5,727 $ 5,058
Interest cost .............................................. 397 372
Benefits paid .............................................. (106) (97)
Actuarial loss ............................................. 230 394
------- -------
Projected benefit obligation, end of year .................. 6,248 5,727
------- -------
CHANGE IN PLAN ASSETS:
Plan assets, beginning of year ............................. 5,083 4,492
Actual return on plan assets ............................... 715 663
Employer contribution ...................................... 25 24
Benefits paid .............................................. (106) (97)
------- -------
Plan assets, end of year ................................... 5,717 5,082
------- -------
Projected benefit obligation (in excess of) plan assets .... (531) (645)
Unrecognized (gain)/loss ................................... 1,157 1,221
------- -------
Net amount recognized ...................................... 626 576
------- -------
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF:
Accrued benefit liability .................................. (531) (645)
Accumulated comprehensive income ........................... 1,157 1,221
------- -------
Net amount recognized ...................................... 626 576
------- -------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Interest cost on projected benefit obligation .............. 396 372
Expected return on Plan assets ............................. (456) (404)
Amortization of unrecognized (gain)/loss ................... 35 3
------- -------
Pension income ............................................. $ (25) $ (2)
------- -------
------- -------
THE ASSUMPTIONS USED IN THE ACCOUNTING WERE:
Discount rate .............................................. 6.75% 7.00%
Expected long-term rate of return on assets ................ 9.00% 9.00%
Pension income was approximately $25,000, $2,000 and $9,000 for
the year's ended December 31,1998, 1997 and 1996, respectively. The
Company adopted a 401(k) plan, effective January 1, 1991. The 401(k)
plan covers employees with one year or more of service, and allows
participants to contribute a portion of their covered compensation,
which amount is 100% vested at the time of contribution. The Bank
shall contribute an amount equal to 50% of the participant's
contribution up to 6% of the participant's covered compensation, which
amount vests over a period of five years. The Bank may elect to make
additional contributions on a discretionary basis. The contributions
as directed by the participants are invested by the 401(k) plan's
trustee in one or more of five investment alternatives in trust for
the benefit of the participants. The Bank incurred approximately
$76,000, $144,000 and $155,000 of expense related to the 401(k) plan,
with no discretionary contributions in each of the years ended
December 31, 1998, 1997 and 1996, respectively.
98
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(19) COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation arising in the normal
course of business. Based on information from internal and external
legal counsel, and review of the facts and circumstances of such
litigation, management is of the opinion that the ultimate resolution
of all pending litigation proceedings will not have an adverse
material effect on the Company. See Note 24 for a discussion of
litigation related to the Company's goodwill litigation.
(20) 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, 1998 and 1997
(dollars in thousands):
1998 1997
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ----------- ---------- -----------
8664
Financial assets:
Cash and cash equivalents ........................... $ 46,401 $ 46,401 $ 21,117 $ 21,117
Securities available-for-sale ....................... 1,004,937 1,004,937 571,160 571,160
Mortgage-backed securities
held-to-maturity................................... 6,282 6,372 9,671 9,743
Loans receivable .................................... 2,148,857 2,160,238 1,533,212 1,516,827
FHLB stock .......................................... 63,150 63,150 23,634 23,634
Financial liabilities:
Deposits ............................................ 1,542,162 1,539,645 1,266,615 1,264,143
Securities sold under agreements to repurchase ...... 364,000 373,402 340,788 340,788
Advances from the FHLB .............................. 1,198,000 1,219,404 472,000 473,523
Senior debt ......................................... -- -- 11,113 11,113
Financial instruments:
Interest rate swaps ................................. -- -- -- (7)
Interest rate corridors ............................. 266 (236) 481 138
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.
99
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- 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 NOW accounts, passbook accounts
and money market accounts withdrawable on demand without
penalty are, by definition, equal to the amount withdrawable
on demand at the reporting date, which is their carrying
amount. The fair value of term certificates of deposit, all
of which are fixed maturity bearing a fixed rate of
interest, is estimated by discounting future projected cash
flows at interest rates approximating interest rates
currently offered by the Bank for similar types of
certificates of deposit for similar remaining terms to
maturity.
- Securities Sold under Agreements to Repurchase - The 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.
- Senior Debt - The carrying amount of senior debt
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 Swaps, Caps and Corridors - The fair value of
interest rate swaps is based upon dealer quotes or are
estimated by discounting projected future cash flows at the
current market interest rates for interest rate swaps of
similar terms and counter party credit risk for the same
remaining terms to maturity. The fair values of interest
rate caps and corridors are also 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.
(21) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and tangible capital (as defined in
the regulations) to adjusted tangible assets (as defined) and Tier 1
capital (as defined in the regulations) to
100
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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, 1998, that the Bank met all capital
adequacy requirements to which it is subject.
As of December 31, 1998, 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 $121.8 million of regulatory capital at
December 31, 1998. 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, 1998, 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 income to date during the calendar year plus the
amount that would reduce by one-half its capital surplus ratio at the
beginning of the year or (ii) 75% of the previous four quarters of net
earnings less dividends paid in such quarters. The OTS director must
be notified of the proposed distribution.
101
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
At December 31, 1998, and 1997, 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, 1998
---------------------------------------------------------
WITHOUT ADDITIONAL ASSISTANCE Tangible Tier 1 Tier 1 Risk- Total Risk-
AGREEMENT CAPITAL Capital Leverage Based Based Capital
- ---------------------------------------------- --------- --------- --------- ---------
Stockholders' equity/GAAP capital ............ $ 179,357 $ 179,357 $ 179,357 $ 179,357
Adjustment for unrealized losses on securities
available-for-sale ......................... 13,609 13,609 13,609 13,609
Deduction for disallowed deferred tax assets . (15,024) (15,024) (15,024) (15,024)
Deduction for intangible assets .............. (1,119) (1,119) (1,119) (1,119)
Minority interest in subsidiary .............. 33,250 33,250 33,250 33,250
--------- --------- --------- ---------
Total Tier 1 capital ....... 210,073 210,073 210,073 210,073
Includable allowance for loan losses ......... -- -- -- 16,143
--------- --------- --------- ---------
Total capital .............. 210,073 210,073 210,073 226,216
Minimum capital requirement .................. 49,983 133,288 73,189 146,378
--------- --------- --------- ---------
Regulatory capital excess .. $ 160,090 $ 76,785 $ 136,884 $ 79,838
--------- --------- --------- ---------
--------- --------- --------- ---------
Capital ratios:
Regulatory as reported .............. 6.30% 6.30% 11.48% 12.36%
Minimum capital ratio ............... 1.50 4.00 4.00 8.00
--------- --------- --------- ---------
Regulatory capital excess .. 4.80% 2.30% 7.48% 4.36%
--------- --------- --------- ---------
--------- --------- --------- ---------
WITH ADDITIONAL ASSISTANCE
AGREEMENT CAPITAL
- ----------------------------------------------
Regulatory capital as adjusted ............... $ 331,873 $ 331,873 $ 331,873 $ 348,017
Minimum capital requirement (per above) ...... 49,983 133,288 73,189 146,378
--------- --------- --------- ---------
Regulatory capital excess .................... $ 281,890 $ 198,585 $ 258,684 $ 201,639
--------- --------- --------- ---------
--------- --------- --------- ---------
102
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
Regulatory Capital/Standard as of December 31, 1997
------------------------------------------------------------
WITHOUT ADDITIONAL ASSISTANCE Tangible Tier 1 Tier 1 Risk- Total Risk-
AGREEMENT CAPITAL Capital Leverage Based Based Capital
- -------------------------------------------- ------------- ------------ ------------ ---------------
(Dollars in thousands)
Stockholders' equity/GAAP capital .......... $ 90,571 $ 90,571 $ 90,571 $ 90,571
Adjustment for unrealized losses on
securities available-for-sale ............ 1,974 1,974 1,974 1,974
Deduction for direct real estate investments (1,908) (1,908) (1,908) (1,908)
Deduction for intangible assets ............ (529) (529) (529) (529)
Minority interest in subsidiary ............ 30,033 30,033 30,033 30,033
--------- --------- --------- ---------
Total Tier 1 capital ................. 120,141 120,141 120,141 120,141
Includable allowance for loan losses ....... -- -- -- 13,988
--------- --------- --------- ---------
Total capital ........................ 120,141 120,141 120,141 134,129
Minimum capital requirement ................ 33,188 88,501 44,738 89,475
--------- --------- --------- ---------
Regulatory capital excess ............ $ 86,953 $ 31,640 $ 75,403 $ 44,654
--------- --------- --------- ---------
--------- --------- --------- ---------
Capital ratios:
Regulatory as reported ................... 5.43% 5.43% 10.74% 11.99%
Minimum capital ratio .................... 1.50 4.00 4.00 8.00
--------- --------- --------- ---------
Regulatory capital excess............. 3.93% 1.43% 6.74% 3.99%
--------- --------- --------- ---------
--------- --------- --------- ---------
WITH ADDITIONAL ASSISTANCE
AGREEMENT CAPITAL
- --------------------------------------------
Regulatory capital as adjusted ............. $ 244,841 $ 244,841 $ 244,841 $ 258,829
Minimum capital requirement (per above) .... 33,188 88,501 44,738 89,475
--------- --------- --------- ---------
Regulatory capital excess .................. $ 211,653 $ 156,340 $ 200,103 $ 169,354
--------- --------- --------- ---------
--------- --------- --------- ---------
103
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(22) CONDENSED FINANCIAL INFORMATION OF PBOC HOLDINGS, INC.:
The condensed unconsolidated balance sheets of the Company at
December 31, 1998 and 1997, were as follows:
1998 1997
-------- -------
(Dollars in thousands)
ASSETS
Cash ........................................................................... $ 1,804 $ 155
Investment in subsidiary ....................................................... 179,357 90,571
-------- -------
Total assets .......................................................... $181,161 $90,726
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses and other liabilities ................................ $ 555 $ 11
Senior debt, net ...................................................... -- 11,113
-------- -------
Total liabilities ............................................ 555 11,124
Total stockholders' equity ..................................................... 180,606 79,602
-------- -------
Total liabilities and stockholders' equity ................... $181,161 $90,726
-------- -------
-------- -------
The condensed unconsolidated statements of operations of the
Company for the years ended December 31, 1998, 1997 and 1996, are as
follows:
1998 1997 1996
-------- ------- --------
(Dollars in thousands)
Income:
Cash dividends from subsidiary ........................................ $ 200 $ 2,100 $ --
Interest income ....................................................... 259 -- --
Other income .......................................................... (64) -- --
Service fee income .................................................... -- -- 1,118
-------- ------- --------
395 2,100 1,118
Expense:
Interest on senior debt ............................................... 445 1,272 1,160
General and administrative expenses ................................... 284 30 1,012
-------- ------- --------
729 1,302 2,172
Earnings (loss) before undistributed earnings of subsidiary .................... (334) 798 (1,054)
Equity in undistributed earnings of subsidiary ................................. 11,237 10,144 13,598
-------- ------- --------
Net earnings ................................................. $ 10,903 $10,942 $ 12,544
-------- ------- --------
-------- ------- --------
The Company relies upon the Bank for dividends to support its
operations. Absent these dividends, the Company must rely upon its
stockholders to support its activities. The ability of the Bank to pay
dividends is dependent upon its ability to maintain minimum capital
requirements and profitability.
104
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
The condensed unconsolidated statements of cash flows of the
Company for the years ended December 31, 1998, 1997 and 1996 are as
follows (dollars in thousands):
1998 1997 1996
--------- -------- --------
Cash flows from operations activities:
Net earnings ............................................................. $ 10,903 $ 10,942 $ 12,544
Adjustment to reconcile net loss to net cash used in operating activities:
Increase in accrued expenses .................................... 544 (33) (175)
Decrease in accrued interest payable ............................ 257 (393) --
Interest deferred and added to senior debt ...................... -- -- 1,165
Equity in undistributed (income) of subsidiary .................. (11,237) (10,144) (13,598)
--------- -------- --------
Net cash provided by (used) in operating activities ......... 467 372 (64)
--------- -------- --------
Cash flows from financing activities:
Proceeds from Offering ................................................... 129,611 -- --
Payment of other borrowings .............................................. (11,370) -- --
Capital investment in subsidiary ......................................... (89,307) -- --
Purchases of treasury stock .............................................. (8,308) -- --
Retirement of preferred stock ............................................ (5) -- --
Dividends paid ........................................................... (19,439) -- --
Cash contributions to additional paid-in capital ......................... -- 21 102
Payment on senior debt ................................................... -- (285) --
--------- -------- --------
Net cash provided by (used in) financing activities ......... 1,182 (264) 102
--------- -------- --------
Net decrease (increase) in cash and cash equivalents ........................ 1,649 108 38
Cash and cash equivalents at beginning of period ............................ 155 47 9
--------- -------- --------
Cash and cash equivalents at end of period .................................. $ 1,804 $ 155 $ 47
--------- -------- --------
--------- -------- --------
105
PBOC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(23) QUARTERLY RESULTS OF OPERATIONS
The following table presents results of operations by quarter for
1998 and 1997:
Quarters Ended
--------------------------------------------------
March 31 June 30 September 30 December 31
--------- -------- ------------- -----------
(In thousands, except per share data)
1998
Total interest income .................... $ 38,944 $ 37,149 $51,979 $ 52,801
Total interest expense ................... 28,771 30,787 40,647 40,153
-------- -------- ------- --------
Net interest income ............. 10,173 6,362 11,332 12,648
Provision for loan losses ................ 450 450 450 650
-------- -------- ------- --------
Net interest income after provision for
loan losses............................. 9,723 5,912 10,882 11,998
Gain on sale of mortgage-backed securities 323 -- 937 422
Other income ............................. 535 2,411 851 957
Operating expenses ....................... 7,680 23,240 6,999 9,043
-------- -------- ------- --------
Earnings (loss) before income taxes
(benefit) .............................. 2,901 (14,917) 5,671 4,334
Income tax (benefit) ..................... -- (9,390) -- (7,000)
Minority interest ........................ 869 869 869 869
-------- -------- ------- --------
Net earnings (loss) ............ $ 2,032 $ (6,446) $ 4,852 $ 10,465
-------- -------- ------- --------
-------- -------- ------- --------
Net earnings (loss) per common share,
basic and diluted ............... $ 0.18 $ (0.57) $ 0.22 $ 0.50
-------- -------- ------- --------
-------- -------- ------- --------
1997
Total interest income .................... $ 30,701 $ 30,717 $32,342 $ 37,219
Total interest expense ................... 22,372 22,823 24,124 27,886
-------- -------- ------- --------
Net interest income ............. 8,329 7,894 8,218 9,333
Provision for loan losses ................ 422 233 450 941
-------- -------- ------- --------
Net interest income after provision for
loan losses............................. 7,907 7,661 7,768 8,392
Gain on sale of mortgage-backed securities 40 82 469 684
Other income ............................. 4,297 425 289 (1,169)
Operating expenses ....................... 7,156 6,970 7,252 8,165
-------- -------- ------- --------
Earnings before income taxes ............. 5,088 1,198 1,274 (258)
Income tax benefit ....................... -- -- -- (4,499)
-------- -------- ------- --------
Minority interest ........................ -- -- -- 859
Net earnings .................... $ 5,088 $ 1,198 $ 1,274 $ 3,382
-------- -------- ------- --------
-------- -------- ------- --------
Net earnings (loss) per common share
basic and diluted ............... $ 1.15 $ (0.57) $ (0.06) $ 0.61
-------- -------- ------- --------
-------- -------- ------- --------
(24) GOODWILL LITIGATION AND SHAREHOLDER RIGHTS AGREEMENT
As discussed in Note (21) 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 Bank's
position has substantial merit.
106
In May, 1997, 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.
The Company completed an Offering in May, 1998. In connection
with this Offering, 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 Stockholders' claim to
95% of any litigation recovery by the Company or Bank is documented in
the form of goodwill participation rights. To the extent the Company
is prohibited from distributing a recovery payment, or any portion
thereof, or cannot do so because the Bank is prohibited from making a
distribution to the Company, the Company shall, upon the written
request of any Material Stockholder, issue to such Material
Stockholder preferred stock of the Company with an aggregate
liquidation preference equal in value to the recovery payment or
portion thereof which the Company shall have been prohibited from
distributing (the "Recovery Payment Preferred"). The Company shall
issue the Recovery Payment Preferred upon surrender to the Company of
such Material Stockholder's rights. The stated value of each share of
Recovery Payment Preferred shall be $1,000. The holders of the
Recovery Payment Preferred shall be entitled to receive cumulative
preferential cash dividends payable quarterly at a fixed rate per
share of 9 3/4% per annum.
As long as any Recovery Payment Preferred remains outstanding, no
dividend shall be declared or paid on the Company's Common Stock and
no shares of Common Stock shall be redeemed or purchased by the
Company unless all cumulative dividends on all outstanding shares of
Recovery Payment Preferred have been paid. In the event of any
dissolution, liquidation or winding up of the affairs of the Company,
after payment or provision for payment of the debts and other
liabilities of the Company, the holders of the Recovery Payment
Preferred shall be entitled to receive, out of the net assets of the
Company available for distribution to its stockholders and before any
distribution shall be made to the holders of Common Stock, an amount
equal to $1,000 per share, plus an amount equal to all dividends
accrued and unpaid on each share of Recovery Payment Preferred.
The Company shall have the right, at its option, to redeem at any
time the Recovery Payment Preferred Stock, in whole or in part, upon
payment in cash with respect to each share of Recovery Payment
Preferred redeemed at $1,000 per share, plus an amount equal to all
dividends accrued and unpaid thereon to the date fixed for redemption.
The Agreement also established a Litigation Committee of the
Company's Board of Directors which will oversee the goodwill
litigation and related litigation with the former preferred
stockholder and make final decisions relating to any dismissal,
settlement or termination of the litigation. The Agreement further
provides that the Material Stockholders shall indemnify the Company
and/or the Bank for 95% of the liability incurred by the Company or
Bank in the claim by the former preferred stockholder or other parties
which challenges the validity of the Agreement.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
107
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 1999
from pages 3 to 5, 7 and 14. Such Proxy Statement was filed with the SEC on
March 22, 1999 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information relating to Directors and Executive Compensation is
incorporated herein by reference to the Registrant's Proxy Statement from pages
5 to 7, 8 to 14 and 17.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement from pages 15 to 16.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement from
page 18.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Document filed as part of this Report.
(1) The Consolidated Financial Statements are contained herein as listed
on the "Index" on page 70 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.
108
- --------------------------------------------------------------------------------
NO. DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation of PBOC Holdings,
Inc.
3.2 Bylaws of PBOC Holdings, Inc.
4 Stock Certificate of PBOC Holdings, Inc. (1)
10.1 Employment Agreement between PBOC Holdings, Inc.,
People's Bank of California and Rudolf P. Guenzel
10.2 Employment Agreement between PBOC Holdings, Inc.,
People's Bank of California and J. Michael Holmes
10.3 Employment Agreement between PBOC Holdings, Inc.,
People's Bank of California and William W. Flader
10.4 Employment Agreement between the People's Bank of California and
Doreen J. Blauschild (1)
10.5 Deferred Compensation Plan
10.6 Grantor Trust
10.7 Shareholder Rights Agreement
10.8 Stockholders' Agreement
21 Subsidiaries of the Registrant - Reference is made to "ITEM 1.
BUSINESS" for the Required
information
27 Financial Data Schedule
- ---------------
(1) 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)(b) Reports filed on Form 8-K.
None.
109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By: /s/RUDOLF P. GUENZEL
--------------------------
Rudolf P. Guenzel
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/RUDOLF P. GUENZEL March 15, 1999
- ---------------------------------------------------
Rudolf P. Guenzel,
President and Chief Executive Officer and Director
(Principal Executive Officer)
/S/J. MICHAEL HOLMES March 15, 1999
- ---------------------------------------------------
J. Michael Holmes
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer) and Director
/S/MURRAY KALIS March 15, 1999
- ---------------------------------------------------
Murray Kalis
Director
/S/GERARD JERVIS March 15, 1999
- ---------------------------------------------------
Gerard Jervis
Director
/S/ROBERT W. MACDONALD March 15, 1999
- ---------------------------------------------------
Robert W. MacDonald
Director
/S/JOHN F. DAVIS March 15, 1999
- ---------------------------------------------------
John F. Davis
Director
110