<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
COMMISSION FILE NUMBER _____
-------------------
BANK PLUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4571410
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
4565 COLORADO BOULEVARD 90039
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 241-6215
-------------------
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
--- ---
As of July 31, 1996, Registrant had outstanding 18,242,465 shares of Common
Stock, par value $.01 per share.
================================================================================
<PAGE>
BANK PLUS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial 1
Condition (Unaudited) as of June 30, 1996
and December 31, 1995.....................
Consolidated Statements of Operations
(Unaudited) for the quarters and six
months ended June 30, 1996 and 1995....... 2
Consolidated Statements of Cash Flows
(Unaudited) for the quarters and six
months ended June 30, 1996 and 1995....... 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................... 27
Item 2. Changes in Securities..................... 28
Item 3. Defaults Upon Senior Securities........... 28
Item 4. Submission of Matters to a Vote of
Security Holders.......................... 28
Item 5. Other Information......................... 28
Item 6. Exhibits and Reports on Form 8-K.......... 29
a. Exhibits............................... 29
b. Reports on Form 8-K.................... 31
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................................... $ 65,752 $ 94,794
Investment securities available for sale, at fair value..................... 220,607 94,305
Mortgage-backed securities available for sale, at fair value................ 47,522 31,733
Loans receivable, net of allowances of $73,722 and $89,435 at
June 30, 1996 and December 31, 1995, respectively.......................... 2,809,860 2,935,116
Interest receivable......................................................... 21,368 20,162
Investment in FHLB stock.................................................... 50,752 49,425
Real estate owned, net...................................................... 20,519 19,521
Premises and equipment, net................................................. 33,399 34,333
Other assets................................................................ 26,854 20,055
---------- ----------
$3,296,633 $3,299,444
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits................................................................... $2,552,946 $2,600,869
FHLB advances.............................................................. 232,700 292,700
Commercial paper........................................................... 99,000 50,000
Mortgage-backed notes...................................................... 100,000 100,000
Other borrowings........................................................... 53,357 --
Other liabilities.......................................................... 31,882 26,832
---------- ----------
3,069,885 3,070,401
---------- ----------
Preferred stock issued by consolidated subsidiary........................... 51,750 51,750
Stockholders' equity:
Common stock, par value $.01 per share; 78,500,000 shares authorized;
18,242,465 shares outstanding............................................. 182 182
Paid-in capital............................................................ 262,151 262,151
Unrealized (losses) gains on securities.................................... (2,119) 788
Accumulated deficit........................................................ (85,216) (85,828)
---------- ----------
174,998 177,293
---------- ----------
$3,296,633 $3,299,444
========== ==========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
1996 1995 1996 1995
------------ ---------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans................................................................ $ 54,096 $ 57,504 $ 110,276 $ 112,959
Mortgage-backed securities........................................... 756 1,489 1,260 2,464
Investment securities and other...................................... 4,704 3,528 8,074 7,668
----------- ---------- ----------- ----------
Total interest income............................................... 59,556 62,521 119,610 123,091
----------- ---------- ----------- ----------
INTEREST EXPENSE:
Deposits............................................................. 29,787 32,850 60,822 61,283
FHLB advances........................................................ 3,175 4,020 6,842 9,131
Other borrowings..................................................... 4,828 8,755 8,342 17,852
----------- ---------- ----------- ----------
Total interest expense.............................................. 37,790 45,625 76,006 88,266
----------- ---------- ----------- ----------
NET INTEREST INCOME................................................... 21,766 16,896 43,604 34,825
Provision for estimated loan losses.................................. 3,905 11,131 7,810 15,151
----------- ---------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOAN LOSSES................................................ 17,861 5,765 35,794 19,674
----------- ---------- ----------- ----------
NONINTEREST INCOME (EXPENSE):
Loan fee income...................................................... 560 895 1,374 2,124
Gains on loan sales, net............................................. 6 938 6 646
Fee income from sale of uninsured investment products................ 1,092 1,155 2,291 2,364
Fee income on deposits and other income.............................. 856 961 1,558 1,769
Gains on securities and trading activities, net...................... 235 3,159 152 4,098
Gains on sale of servicing........................................... -- -- -- 4,319
Other................................................................ 18 (342) 106 (252)
----------- ---------- ----------- ----------
2,767 6,766 5,487 15,068
----------- ---------- ----------- ----------
Provision for estimated real estate losses........................... (578) (1,153) (1,246) (1,544)
Direct costs of real estate operations, net.......................... (1,237) (1,366) (3,024) (2,986)
----------- ---------- ----------- ----------
(1,815) (2,519) (4,270) (4,530)
----------- ---------- ----------- ----------
Total noninterest income............................................. 952 4,247 1,217 10,538
----------- ---------- ----------- ----------
OPERATING EXPENSE:
Personnel and benefits............................................... 6,833 8,628 13,806 18,025
Occupancy............................................................ 2,689 3,158 5,406 6,144
FDIC insurance....................................................... 1,931 2,059 3,962 4,119
Professional services................................................ 2,780 2,302 5,283 4,597
Office-related expenses.............................................. 846 1,163 1,932 2,416
Other................................................................ 1,459 1,725 2,776 2,885
----------- ---------- ----------- ----------
Total operating expense............................................. 16,538 19,035 33,165 38,186
----------- ---------- ----------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES................................... 2,275 (9,023) 3,846 (7,974)
Income tax expense................................................... 53 4 93 4
----------- ---------- ----------- ----------
EARNINGS (LOSS) BEFORE DIVIDENDS ON PREFERRED STOCK
OF SUBSIDIARY........................................................ 2,222 (9,027) 3,753 (7,978)
Dividends on preferred stock of subsidiary........................... 1,552 -- 3,105 --
----------- ---------- ----------- ----------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCKHOLDERS..................... $ 670 $ (9.027) $ 648 $ (7,978)
=========== ========== =========== ==========
EARNINGS (LOSS) PER COMMON SHARE...................................... $ 0.04 $ (1.39) $ 0.04 $ (1.23)
=========== ========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................ 18,242,465 6,492,465 18,242,465 6,492,465
=========== ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
1996 1995 1996 1995
------------ ---------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings (losses)..................................................... $ 2,222 $ (9,027) $ 3,753 $ (7,978)
Adjustments to reconcile earnings (loss) to net cash
provided by (used in) operating activities:
Provisions for estimated loan and real estate losses................ 4,483 12,284 9,056 16,695
Gains on sale of loans and securities............................... (241) (4,097) (158) (4,744)
Amortization of deferred items, net................................. (568) (677) (1,009) (1,566)
FHLB stock dividend................................................. (727) (443) (1,375) (1,176)
Depreciation and amortization....................................... 992 1,456 1,970 3,024
Proceeds from sales of loans held for sale............................ -- 1,290 -- 1,290
Interest receivable (increase) decrease............................... (285) 553 (1,206) 102
Other assets (increase) decrease...................................... (2,576) 3,384 (6,766) (4,496)
Interest payable (decrease) increase.................................. (1,516) (5,774) 82 3,295
Other liabilities increase (decrease)................................. 2,941 (2,559) 4,665 (2,455)
-------- --------- --------- ---------
Net cash provided by (used in) operating activities............... 4,725 (3,610) 9,012 1,991
-------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale................. (83,450) -- (151,025) (45,569)
Maturities of investment securities available for sale................ 22,950 -- 22,950 5,000
Proceeds from sales of investment securities available for sale....... -- 36,907 -- 102,061
Purchases of investment securities held to maturity................... -- -- -- (25,001)
Maturities of investment securities held to maturity.................. -- -- -- 10,000
Purchases of mortgage-backed securities available for sale............ (38,961) -- (38,961) (27,858)
Principal repayments of mortgage-backed securities
available for sale................................................... 852 1,663 2,759 3,998
Proceeds from sales of mortgage-backed securities
available for sale................................................... 20,158 127,706 20,158 162,365
Purchases of mortgage-backed securities held to maturity.............. -- -- -- (16,234)
Principal repayments of mortgage-backed securities
held to maturity..................................................... -- 1,802 -- 3,408
Loans receivable decrease............................................. 53,642 36,509 98,196 58,332
Net proceeds from sales of real estate................................ 13,653 5,152 17,597 7,642
Net (additions to) dispositions of premises and equipment............. (266) 1,176 (1,021) 1,433
-------- --------- --------- ---------
Net cash (used in) provided by investing activities............... (11,422) 210,915 (29,347) 239,577
-------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand deposits and passbook savings decrease......................... (34,887) (29,267) (101,740) (64,050)
Certificate accounts increase......................................... 8,770 16,396 53,817 104,158
Payments of dividends on preferred stock of subsidiary................ (1,552) -- (3,105) --
Proceeds from FHLB advances........................................... -- -- -- 80,000
Repayments of FHLB advances........................................... -- -- (60,000) (120,000)
Short-term borrowings increase (decrease)............................. 42,457 (190,500) 102,357 (241,400)
Other financing activity.............................................. (36) -- (36) --
-------- --------- --------- ---------
Net cash provided by (used in) financing activities.................. 14,752 (203,371) (8,707) (241,292)
-------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............. 8,055 3,934 (29,042) 276
Cash and cash equivalents at the beginning of the period............. 57,697 70,407 94,794 74,065
-------- --------- --------- ---------
Cash and Cash Equivalents at End of Period............................. $ 65,752 $ 74,341 $ 65,752 $ 74,341
======== ========= ========= =========
</TABLE>
(Continued on following page)
3
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
1996 1995 1996 1995
------------ ---------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash (paid) received during the period for:
Interest on deposits, advances and other borrowings................... $(38,631) $(51,754) $(74,570) $( 85,257)
Income taxes.......................................................... (81) (4) 302 (89)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Additions to real estate acquired through foreclosure.................. 12,346 16,950 21,220 28,349
Loans originated to finance sale of real estate acquired
through foreclosure................................................... 1,129 4,187 1,379 5,470
Loans originated to finance sale of office building.................... -- 5,339 -- 5,339
Transfers from held to maturity to available for sale portfolio:
Loans................................................................. -- 68,995 -- 68,995
Investment securities................................................. -- 141,678 -- 141,678
Mortgage-backed securities............................................ -- 16,404 -- 16,404
Transfer from available for sale to held to maturity portfolio:
Mortgage-backed securities............................................ -- -- -- 3,603
Mortgage loans exchanged for mortgage-backed securities................ -- 66,444 -- 112,840
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In May 1996, Fidelity Federal Bank, A Federal Savings Bank ("Fidelity" or
the "Bank") completed a reorganization pursuant to which all of the outstanding
common stock of Fidelity was converted on a one-for-one basis into all of the
outstanding common stock of a recently formed Delaware corporation, Bank Plus
Corporation ("Bank Plus"), and Bank Plus became the holding company for Fidelity
(the "Reorganization"). Bank Plus' headquarters are in Los Angeles, California
and its principal operating subsidiaries are Fidelity and Gateway Investment
Services, Inc. ("Gateway"), which prior to the Reorganization was a subsidiary
of the Bank. Bank Plus currently has no significant business or operations other
than serving as the holding company for Fidelity and Gateway. Unless otherwise
indicated, references to the "Company" include Bank Plus, Fidelity, Gateway, and
all subsidiaries of Fidelity and Bank Plus. All references to "Fidelity" prior
to the Reorganization include Gateway.
The Company offers a broad range of consumer financial services, including
demand and term deposits, and loans to consumers, through 33 full-service
branches, all of which are located in Southern California, principally in Los
Angeles and Orange counties. All significant intercompany transactions and
balances have been eliminated. Certain reclassifications have been made to prior
periods' consolidated financial statements to conform to the current period
presentation. The results of operations for the six months ended June 30, 1996
are not necessarily indicative of the results of operations to be expected for
the entire year of 1996.
In the fourth quarter of 1995, Fidelity completed a plan of
recapitalization (the "1995 Recapitalization"), pursuant to which Fidelity
raised approximately $134.4 million in net new equity through the sale of
2,070,000 shares of 12% Noncumulative Exchangeable Perpetual Preferred Stock,
Series A ("Series A Preferred Stock"), and 47,000,000 shares of Fidelity Class A
Common Stock. As part of the 1995 Recapitalization, Fidelity adopted the
accelerated asset resolution plan (the "Accelerated Asset Resolution Plan"),
which is designed to aggressively dispose of, resolve, or otherwise manage a
pool of primarily multifamily mortgage loans and real estate owned ("REO"). As a
result, Fidelity recorded a $45.0 million loan portfolio charge in the allowance
for estimated loan losses which represents the estimated additional losses
expected to be incurred in connection with the Accelerated Asset Resolution
Plan.
On February 9, 1996, the Bank's stockholders approved a one-for-four
Reverse Stock Split of the issued and outstanding shares of the Bank's Class A
Common Stock. Upon effectiveness of the Reverse Stock Split, each stockholder
became the owner of one share of Common Stock for each four shares of Common
Stock held at the time of the Reverse Stock Split and became entitled to receive
cash in lieu of any fractional shares. All per share data and weighted average
common shares outstanding have been retroactively adjusted to reflect the
Reverse Stock Split.
The Series A Preferred Stock of the Bank is presented on the Company's
Consolidated Statements of Financial Condition as "Preferred stock issued by
consolidated subsidiary."
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and include all
information and footnotes required for interim financial statement presentation.
The financial information provided herein, including the information under the
heading Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" ("MD&A"), is written with the presumption that the users
of the interim financial statements have read, or have access to, the Bank's
most recent Annual Report on Form 10-K which contains the latest available
audited consolidated financial statements and notes thereto, as of December 31,
1995, together with the MD&A as of such date.
5
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1996
Supplementary Earnings/Loss per Share Data
Assuming that 18,242,465 shares of Common Stock were issued at the
beginning of 1995, the net loss per common share would have been $0.49 and $0.44
for the quarter and six months ended June 30, 1995, respectively.
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The following table summarizes the Company's investment securities and
mortgage-backed securities ("MBS") portfolios.
<TABLE>
<CAPTION>
UNREALIZED
AMORTIZED --------------------------------- AGGREGATE
COST GAINS LOSSES NET FAIR VALUE
--------- ------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
JUNE 30, 1996
Available for sale:
Investment securities:
U.S. Treasury and agency securities (1)........... $213,214 $1,287 $(1,144) $ 143 $213,357
Other investments (2)............................. 7,295 -- (45) (45) 7,250
-------- ------ ------- ------- --------
220,509 1,287 (1,189) 98 220,607
-------- ------ ------- ------- --------
MBS:
FHLMC............................................. 2,491 26 -- 26 2,517
GNMA.............................................. 3,496 197 -- 197 3,693
Participation certificates........................ 26,109 -- -- -- 26,109
LIBOR asset trust................................. 15,528 -- (325) (325) 15,203
-------- ------ ------- ------- --------
47,624 223 (325) (102) 47,522
-------- ------ ------- ------- --------
Total available for sale......................... $268,133 $1,510 $(1,514) (4) $268,129
======== ====== ======== ========
Net unrealized losses on investment
securities included in amortized cost (1)......... (2,555)
Net unrealized gains, hedging activities........... 440
-------
Net unrealized losses included in
stockholders' equity............................. $(2,119)
=======
DECEMBER 31, 1995
Available for sale:
Investment securities:
U.S. Treasury and agency securities (1)........... $ 84,200 $2,984 $ -- $ 2,984 $ 87,184
Other investments (2)............................. 7,099 52 (30) 22 7,121
-------- ------ ------- ------- --------
91,299 3,036 (30) 3,006 94,305
-------- ------ ------- ------- --------
MBS:
FHLMC............................................. 3,068 -- (30) (30) 3,038
FNMA.............................................. 55 36 -- 36 91
Participation certificates........................ 28,123 481 -- 481 28,604
-------- ------ ------- ------- --------
31,246 517 (30) 487 31,733
-------- ------ ------- ------- --------
Total available for sale......................... $122.545 $3,553 $ (60) 3,493 $126.038
======== ====== ======= ========
Net unrealized losses on investment
securities included in amortized cost (1)......... (3,366)
Net unrealized gains, hedging activities........... 661
-------
Net unrealized gains included in
stockholders' equity............................. $ 788
=======
</TABLE>
- -------------------
(1) Amortized cost of certain securities that were previously transferred from
available for sale to held to maturity and back to available for sale,
includes unamortized market value adjustments recorded at the time of
transfer to the held to maturity portfolio.
(2) Represents U.S. Treasury securities which have been pledged as credit
support to a securitization of loans by the Bank.
6
<PAGE>
BANK PLUS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED JUNE 30, 1996
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (CONTINUED)
The Bank reclassified all held to maturity investment securities and MBS to
its available for sale portfolio in the second quarter of 1995. Subsequent to
their reclassification, certain available for sale securities were sold. Under
the Company's current operating plan, all securities are classified as available
for sale. The Company may begin classifying securities as held to maturity in
the near future.
The following table summarizes the weighted average yield of securities as
of the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Available for sale
Investment securities... 6.26% 4.70%
MBS..................... 7.12 6.85
</TABLE>
The following table presents the Company's securities at June 30, 1996 by
contractual maturity. Actual maturities on MBS may differ from contractual
maturities due to prepayments.
<TABLE>
<CAPTION>
MATURITY
------------------------------------------------------------
WITHIN OVER 1 YEAR OVER 5 YEARS OVER 10
1 YEAR TO 5 YEARS TO 10 YEARS YEARS TOTAL
------ ----------- ------------ ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available for sale:
Investment securities... $2,240 $166,359 $9,977 $42,031 $220,607
MBS..................... -- -- -- 47,522 47,522
------ -------- ------ ------- --------
$2,240 $166,359 $9,977 $89,553 $268,129
====== ======== ====== ======= ========
</TABLE>
The following gains and losses were realized from the sale of investment
securities and MBS, the costs of which were computed on a specific
identification method, during the periods indicated:
<TABLE>
<CAPTION>
SALES GAINS LOSSES
----- ----- ------
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED JUNE 30,
---------------------------
<S> <C> <C> <C>
1996........................ $ 19,923 $ 235 $ --
1995........................ 160,983 3,154 --
<CAPTION>
SALES GAINS LOSSES
----- ----- ------
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
<S> <C> <C> <C>
1996........................ $ 19,923 $ 235 $ --
1995........................ 260,796 3,903 (566)
</TABLE>
The Company was engaged in certain option activities related to securities.
Realized losses from such activities totaled $0.1 million for the six months
ended June 30, 1996 compared to realized gains of $0.8 million for the
comparable period in 1995. There were no open positions or option activities in
this program at or for the quarter ended June 30, 1996.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company offers a broad range of consumer financial services, including
demand and term deposits, and loans to consumers, through 33 full-service
branches, all of which are located in Southern California, principally in Los
Angeles and Orange counties. The Company also provides residential mortgages and
consumer loans, which the Company does not underwrite or fund, by referral to
certain established providers of mortgage and consumer loan products with which
the Company has negotiated strategic alliances. In addition, through its
subsidiary, Gateway, a National Association of Securities Dealers, Inc. ("NASD")
registered broker/dealer, the Company provides customers with uninsured
investment products, including a number of mutual funds, annuities and unit
investment trusts. The principal executive offices of Bank Plus and Fidelity are
located at 4565 Colorado Boulevard, Los Angeles, California 90039, telephone
number (818) 241-6215.
RECENT DEVELOPMENTS
1995 Recapitalization
In the fourth quarter of 1995, Fidelity completed the 1995 Recapitalization of
the Bank, pursuant to which Fidelity raised approximately $134.4 million in net
new equity. As part of the 1995 Recapitalization, Fidelity adopted an
Accelerated Asset Resolution Plan which is designed to aggressively dispose of,
resolve or otherwise manage a pool of primarily multifamily loans. See "--
Accelerated Asset Resolution Plan."
Reorganization into Holding Company Structure
In May 1996, Fidelity completed the Reorganization pursuant to which all of
the outstanding common stock of Fidelity was converted on a one-for-one basis
into all of the outstanding common stock of Bank Plus, a recently formed
Delaware corporation, and Bank Plus became the holding company for Fidelity.
Effective May 17, 1996, Bank Plus Common Stock was listed on the Nasdaq National
Market ("NASDAQ") under the symbol "BPLS".
OTS Examinations
The Office of Thrift Supervision ("OTS") has completed its annual safety and
soundness examination and the Company is addressing the OTS' concerns.
Following the examination, the Company received notice that it is no longer
considered by the OTS to be an institution "requiring more than normal
supervision."
In the fourth quarter of 1995, the OTS completed the Compliance and Community
Reinvestment Act ("CRA") examinations of the Bank. The Bank has received a
satisfactory compliance rating. The Bank initially received a "needs
improvement" CRA rating. Management strongly disagreed with the examiners' CRA
findings, and the Bank formally requested the OTS to reevaluate its "needs
improvement" rating through the appeals process. On July 18, 1996, the OTS,
upon an internal review, reassessed the Bank's overall performance and upgraded
its rating to satisfactory. Notwithstanding this upgrade, the OTS indicated
that unless the Bank improves its lending activities in delineated lending
areas, it would likely receive an adverse rating in future examinations. The
Bank is evaluating various options to respond to the OTS' concerns. These
actions may include the purchase of whole loans for the Bank's portfolio and
other actions.
Business Strategy
The Company's business strategy is to (i) improve the quality of its loan
portfolio by reducing the level of problem assets through aggressive management
including execution of the Accelerated Asset Resolution Plan (as discussed
below), (ii) continue to increase operating efficiency by reducing and
maintaining lower levels of operating expenses and (iii) be a consumer-focused
provider of financial services, by enhancing its franchise to integrate its
traditional services and products (deposit services, checking and savings
accounts) with the offering of investment products by Gateway and consumer
credit products through strategic partners. As a part of such strategy,
management continues to explore new opportunities to expand the integrated sales
platform, to increase
8
<PAGE>
fee income growth, and to build upon the use of technology in delivering
financial products and services. The Company is examining the use of various
electronic delivery systems and software to enhance customer convenience and the
Company's fee income opportunities.
The Company continues to evaluate its plan to purchase assets (loans and
securities) for the Bank of approximately $500 to $700 million during the second
half of 1996. The plan, in general terms, is based upon certain risk adjusted
return and liquidity objectives. This action is designed to increase the
Company's securities and loan portfolios to enhance the Company's earnings
capabilities. The proposed increase in earning assets may be at a lower
interest rate spread than the Company is currently yielding depending on
available financing sources. Accordingly, if the plan is implemented, the
Company's interest rate spread may decline. If management implements the plan,
it will be undertaken in a manner that is designed to maintain the current well-
capitalized status of the Bank.
Accelerated Asset Resolution Plan
The Company's business strategy includes the reduction of risk in the
Company's multifamily portfolio. As a part of the 1995 Recapitalization, the
Bank adopted the Accelerated Asset Resolution Plan designed to aggressively
dispose of, resolve or otherwise manage a pool of primarily multifamily loans
which generally have lower debt coverage ratios than the remainder of the Bank's
multifamily loan portfolio and thereby are considered by the Bank to have higher
risk of future nonperformance or impairment relative to the remainder of the
Bank's multifamily loan portfolio. This plan reflects both an acceleration in
estimated timing of resolution of assets within the pool, as well as a potential
change in recovery method from that which would be anticipated through the
normal course of business.
The Accelerated Asset Resolution Pool originally consisted of 411 assets with
an aggregate gross book value of approximately $213.3 million with Accelerated
Asset Resolution Pool reserves of $45 million. As of June 30, 1996, the
Accelerated Asset Resolution Pool consisted of 250 assets with an aggregate
gross book value of approximately $131.5 million, comprised primarily of
accruing and nonaccruing multifamily real estate loans and REO properties. As
of June 30, 1996, the Company had resolved assets with an aggregate gross book
value of $80.2 million, and utilized $13.5 million in Accelerated Asset
Resolution Pool reserves.
In an effort to maximize recovery on loans included in the accelerated
resolution pool, the Accelerated Asset Resolution Plan provides for a range of
possible methods of resolution including, but not limited to (i) the bulk sale
of loans, (ii) individual loan restructuring, which may include additional
extensions of credit or write-off of existing principal, (iii) foreclosure and
sale of collateral properties, and (iv) securitization of loans. While
resulting in reduced recoveries on certain assets, the Accelerated Asset
Resolution Plan is intended to reduce, among other things, levels of problem
assets, the related utilization of management resources, and direct and indirect
costs of credit administration and problem asset management. Execution of this
plan will allow management to focus on the Company's core operations.
Continued Reduction of Operating Expenses
During the first six months of 1996 as compared to the same 1995 period, the
Company reduced operating expenses by 13.2%, including reductions in personnel
expenses of 23.4%, which reflects a reduction of 25.5% in the six month average
number of full-time-equivalent employees (from 697 during 1995 to 519 during
1996).
During the second quarter of 1996, loan servicing rights were sold on
approximately $1.0 billion of the Company's single family loans. The gain on
the sale of the servicing is being deferred over the estimated life of the loans
included in the sale. As a result of this transaction, the Company reduced the
number of full-time equivalent employees in the servicing department by 14.
Insurance Premium Assessments
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
directed the Federal Deposit Insurance Corporation ("FDIC") to establish a risk-
based system for setting deposit insurance premium assessments. The FDIC has
implemented such a system, under which an institution's insurance assessments
will
9
<PAGE>
vary depending on the level of capital the institution holds and the degree
to which it is the subject of supervisory concern to the FDIC.
Congress has discussed proposing legislation to address the disparity in bank
and thrift deposit insurance premiums. The proposed legislation would, among
other things, impose a requirement on all Savings Association Insurance Fund
("SAIF") member institutions to fully recapitalize the SAIF by paying a one-time
special assessment of approximately 80 basis points on all assessable deposits
as of a certain date.
While the outcome of the proposed legislation cannot be predicted with
certainty, it is possible that some kind of legislative or regulatory action
will be taken that will impact the Bank's insured deposits. A one-time special
assessment of 80 basis points would result in the Bank paying approximately $22
million in additional SAIF premiums, gross of related tax benefits, if any. The
enactment of such legislation may have the effect of immediately reducing the
regulatory capital of SAIF member institutions by the amount of the fee,
although provisions are included in the legislation that could exempt a savings
association from paying the assessment in a lump sum if the payment would result
in the association becoming undercapitalized. As of June 30, 1996, after giving
effect to the payment and deduction of an 80 basis point assessment, the Bank's
core and risk-based capital ratios would have been approximately 6.23% and
11.49%, respectively, and the Bank would have remained well capitalized under
the Prompt Corrective Action ("PCA") regulations.
Due to the uncertainty of the legislative process generally, management cannot
predict whether legislation reducing SAIF premiums and/or imposing a special
one-time assessment will be adopted, or, if adopted, the amount of the
assessment, if any, that would be imposed on the Bank.
RESULTS OF OPERATIONS
The Company reported earnings before dividends on preferred stock of
subsidiary of $2.2 million ($0.04 per common share after giving effect to the
dividends on preferred stock of subsidiary of $1.6 million, computed on the
basis of 18,242,465 weighted average common shares outstanding) for the quarter
ended June 30, 1996, and earnings before dividends on preferred stock of
subsidiary of $3.8 million ($0.04 per common share after giving effect to the
dividends on preferred stock of subsidiary of $3.1 million, computed on the
basis of 18,242,465 weighted average common shares outstanding) for the six
months ended June 30, 1996. This compares to a loss of $9.0 million ($1.39 per
common share; computed on the basis of 6,492,465 weighted average common shares
outstanding) for the second quarter of 1995 and a loss of $8.0 million ($1.23
per common share; computed on the basis of 6,492,465 weighted average common
shares outstanding) for the six months ended June 30, 1995.
Results of operations for the quarter ended June 30, 1996, as compared to the
same period in 1995, were favorably impacted by: (a) increased net interest
income of $4.9 million due primarily to the impact of increased interest rates
on the Company's interest-earning assets and lower interest rates on interest-
bearing liabilities; (b) decreased provisions for estimated loan losses of $7.2
million and (c) decreased operating expenses of $2.5 million. These favorable
variances were partially offset by a decrease in noninterest income of $3.3
million.
Results of operations for the six months ended June 30, 1996, as compared to
the same period in 1995, were favorably affected by: (a) increased net interest
income of $8.8 million, primarily due to the impact of increased interest rates
on the Company's interest-earning assets and lower interest rates on interest-
bearing liabilities; (b) decreased provisions for estimated loan losses of $7.3
million, and (c) decreased operating expenses of $5.0 million. These favorable
variances were partially offset by a reduction in noninterest income of $9.3
million, primarily due to: (a) decreased gains on sales of loans, investment
securities and mortgage-backed securities of $4.6 million; and (b) a gain on
sale of servicing of $4.3 million in the first quarter of 1995 with no
comparable amounts in 1996.
10
<PAGE>
NET INTEREST INCOME
Net interest income is the difference between interest earned on loans,
mortgage-backed securities and investment securities ("interest-earning assets")
and interest paid on savings deposits and borrowings ("interest-bearing
liabilities").
For the quarter ended June 30, 1996, net interest income totaled $21.8
million, increasing by $4.9 million from $16.9 million for the comparable period
in 1995. For the six months ended June 30, 1996, net interest income totaled
$43.6 million, increasing by $8.8 million from $34.8 million for the comparable
period in 1995.
Net interest income is affected by (a) the average volume and repricing
characteristics of the Company's interest-earning assets and interest-bearing
liabilities, (b) the level and volatility of market interest rates, (c) the
level of nonaccruing loans ("NPLs") and (d) the interest rate spread between the
yields earned and the rates paid.
The following table presents the primary determinants of the Company's net
interest income for the three months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
DAILY YIELD/ DAILY YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- -------- -------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.............................................. $2,932,512 $54,096 7.38% $3,248,418 $57,504 7.08%
MBS................................................ 42,642 756 7.09 94,182 1,489 6.32
Investment securities.............................. 230,317 3,977 6.94 196,722 3,085 6.29
Investment in FHLB stock........................... 50,638 727 5.77 48,058 443 3.70
---------- ------- ---------- -------
Total interest-earning assets.................... 3,256,109 59,556 7.32 3,587,380 62,521 6.97
------- -------
Noninterest-earning assets........................... 70,712 93,879
---------- ----------
Total assets..................................... $3,326,821 $3,681,259
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits................................... $ 300,560 761 1.02 $ 302,336 662 0.88
Savings deposits.................................. 142,438 918 2.59 163,118 1,087 2.67
Time deposits..................................... 2,109,557 28,108 5.34 2,248,958 31,101 5.54
---------- ------- ---------- -------
Total deposits................................... 2,552,555 29,787 4.68 2,714,412 32,850 4.85
---------- ------- ---------- -------
Borrowings.......................................... 509,699 8,003 6.30 783,163 12,775 6.54
---------- ------- ---------- -------
Total interest-bearing liabilities............... 3,062,254 37,790 4.95 3,497,575 45,625 5.23
---------- ------- ---------- -------
Noninterest-bearing liabilities...................... 38,334 29,131
Stockholders' equity................................. 226,233 154,553
---------- ----------
Total liabilities and equity......................... $3,326,821 $3,681,259
========== ==========
Net interest income; interest rate spread............ $21,766 2.37% $16,896 1.74%
======= ==== ======= ====
Net yield on interest-earning assets
("net interest margin")............................. 2.66% 1.87%
==== =====
Average nonaccruing loan balance
included in average loan balance.................... $ 60,591 $ 81,711
=========== ===========
Net delinquent interest reserve removed
from interest income................................ $ 1,627 $ 1,713
======= =======
Reduction in net yield on interest-earning
assets due to delinquent interest
(in basis points)................................... 20 19
==== ===
</TABLE>
11
<PAGE>
The following table presents the primary determinants of the Company's net
interest income for the six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
1996 1995
------------------------------------ ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
DAILY YIELD/ DAILY YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans.................................. $2,968,577 $110,276 7.43% $3,295,653 $112,959 6.86%
MBS.................................... 36,536 1,260 6.90 77,853 2,464 6.33
Investment securities.................. 188,978 6,699 7.13 202,847 6,492 6.45
Investment in FHLB stock............... 50,252 1,375 5.50 47,780 1,176 4.96
---------- -------- ---------- --------
Total interest-earning assets........ 3,244,343 119,610 7.38 3,624,133 123,091 6.80
-------- --------
Noninterest-earning assets.............. 61,364 92,964
---------- ----------
Total assets......................... $3,305,707 $3,717,097
========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits....................... $ 302,602 1,516 1.00 $ 306,038 1,318 0.87
Savings deposits...................... 148,581 1,817 2.45 177,168 2,376 2.70
Time deposits......................... 2,112,847 57,489 5.46 2,209,599 57,589 5.24
---------- -------- ---------- --------
Total deposits....................... 2,564,030 60,822 4.76 2,692,805 61,283 4.59
---------- -------- ---------- --------
Borrowings............................. 477,145 15,184 6.38 839,439 26,983 6.48
---------- -------- ---------- --------
Total interest-bearing liabilities... 3,041,175 76,006 5.01 3,532,244 88,266 5.04
---------- -------- ---------- --------
Noninterest-bearing liabilities......... 37,153 29,637
Stockholders' equity.................... 227,379 155,216
---------- ----------
Total liabilities and equity......... $3,305,707 $3,717,097
========== ==========
Net interest income; interest rate
spread................................. $ 43,604 2.37% $ 34,825 1.76%
======== ===== ======== =====
Net yield on interest-earning assets
("net interest margin")................ 2.68% 1.89%
===== =======
Average nonaccruing loan balance
included in average loan balance....... $ 66,458 $ 81,035
========== ==========
Net delinquent interest reserve removed
from interest income................... $ 3,318 $ 3,010
======== =========
Reduction in net yield on
interest-earning assets due to
delinquent interest (in basis points).. 20 17
===== =====
</TABLE>
12
<PAGE>
The following tables present the dollar amount of changes in interest income
and expense for each major component of interest-earning assets and interest-
bearing liabilities and the amount of change attributable to changes in average
balances and average rates for the periods indicated. Because of numerous
changes in both balances and rates, it is difficult to allocate precisely the
effects thereof. For purposes of these tables, the change due to volume is
initially calculated as the change in average balance multiplied by the average
rate during the prior period and the change due to rate is calculated as the
change in average rate multiplied by the average volume during the prior period.
Any change that remains unallocated after such calculations is allocated
proportionately to changes in volume and changes in rates.
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1996 SIX MONTHS ENDED JUNE 30, 1996
COMPARED TO JUNE 30, 1995 COMPARED TO JUNE 30, 1995
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE)
------------------------------------ -------------------------------------
VOLUME RATE NET VOLUME RATE NET
----------- -------- ----------- ------------ -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans............................ $(5,768) $2,360 $(3,408) $(11,685) $ 9,002 $(2,683)
Mortgage-backed securities....... (896) 163 (733) (1,409) 205 (1,204)
Investment securities............ 555 337 892 (461) 668 207
Investment in FHLB stock......... 25 259 284 64 135 199
------- ------ ------- -------- ------- -------
Total interest income......... (6,084) 3,119 (2,965) (13,491) 10,010 (3,481)
------- ------ ------- -------- ------- -------
Interest expense:
Deposits:
Demand deposits................. 4 (103) (99) 14 (212) (198)
Savings deposits................ 136 33 169 355 204 559
Time deposits................... 1,853 1,140 2,993 2,447 (2,347) 100
------- ------ ------- -------- ------- -------
Total deposits................ 1,993 1,070 3,063 2,816 (2,355) 461
Borrowings....................... 3,885 887 4,772 10,275 1,524 11,799
------- ------ ------- -------- ------- -------
Total interest expense........ 5,878 1,957 7,835 13,091 (831) 12,260
------- ------ ------- -------- ------- -------
Increase in net interest income... $ (206) $5,076 $ 4,870 $ (400) $ 9,179 $ 8,779
======= ====== ======= ======== ======= =======
</TABLE>
The $4.9 million increase in net interest income between the second quarter
1996 and the second quarter 1995 was primarily the result of increased rates on
average interest-earning assets combined with decreased rates and level of
average interest-bearing liabilities. This was partially offset by a decline in
the level of interest-earning assets. The $8.8 million increase in net interest
income between the six months ended June 30, 1996 and the comparable period in
1995 was primarily due to increased rates on average interest-earning assets
combined with a decline in the average level of interest-bearing liabilities.
This was partially offset by a decline in the level of interest-earning assets
and increased rates on interest-bearing liabilities.
The rates on interest-earning assets and interest-bearing liabilities of the
Company both tend to rise or fall in step with the Federal Home Loan Bank
("FHLB") Eleventh District Cost of Funds Index ("COFI"), the index to which most
of the Company's loans are tied. However, due to reporting and contractual
look-back periods contained in the Company's loan documents, the 93% of the
Company's loans which are indexed to COFI, as with all COFI portfolios in the
industry, do not reprice until some time after the industry liabilities
composing COFI reprice. The Company's liabilities reprice in the same period as
the cost of funds of institutions which comprise the FHLB Eleventh District. In
the Company's case, the lag between the repricing of its liabilities and its
adjustable rate mortgage ("ARM") loans indexed to COFI is approximately four
months. As such, when rates rise sharply there will be upward pressure on rates
paid on deposit accounts and wholesale borrowings, and the Company's net
interest income will be adversely affected until the majority of its interest-
earning assets fully reprice. Conversely, in a falling interest rate
environment, net interest income will be positively affected. As interest rates
continued to fall in the second quarter 1996, the Company's liabilities
continued to reprice at lower rates throughout the quarter.
13
<PAGE>
ASSET/LIABILITY MANAGEMENT
To reduce fluctuations in net interest income, the Company maintains a loan
portfolio with a yield that generally fluctuates in step with the cost of its
liabilities. The Company has traditionally accomplished this by originating and
purchasing primarily ARM loans for its portfolio. ARM loans comprised 97% of
the total loan portfolio at June 30, 1996. All else being equal, to the extent
that the composition of the Company's liabilities parallels the composition of
COFI, changes in the Company's cost of funds should parallel changes in COFI.
However, due to the lag in COFI-based ARMs repricing discussed above and
depending upon the level of increase or decrease in interest rates, interim
disparities do occur. The decline in short-term rates from 1990 to early 1993
contributed significantly to the Company's net interest margin. Subsequent
increases in rates have caused a reduction in net interest income. If interest
rates were to increase again, the Company's net interest income may again be
negatively impacted.
The Company may employ interest rate swaps, caps and floors in the management
of interest rate risk. Interest rate swaps generally involve the exchange of
fixed or floating interest payments without the exchange of the underlying
principal amounts. Interest rate caps and floors generally involve the payment
of a one-time premium to a counterparty who, if interest rates rise or fall
above or below a predetermined level, will make payments to the Company at an
agreed upon rate for the term of the agreement until such time as interest rates
fall below or rise above the cap or floor level.
During the first quarter of 1995, the Bank terminated interest rate swap
agreements with a notional amount of $700 million, resulting in a deferred gain
of $1.2 million, which was fully amortized in 1995. Also, during the fourth
quarter of 1995, the Bank terminated the remaining interest swap agreements with
a notional amount of $446.7 million and as a result recorded a deferred loss of
$3.2 million being amortized over the original term of the interest swap
agreements. There were no outstanding interest rate swap agreements at June 30,
1996.
14
<PAGE>
The following table sets out the maturity and rate sensitivity of the
Company's interest-earning assets and interest-bearing liabilities as of June
30, 1996. "Gap," as reflected in the table, represents the estimated difference
between the amount of interest-earning assets and interest-bearing liabilities
repricing during future periods and based on certain assumptions, including
those stated in the notes to the table.
MATURITY AND RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
MATURITY OR REPRICING
---------------------------------------------------------------------------------------
WITHIN 3 4-12 1-5 6-10 OVER 10
MONTHS MONTHS YEARS YEARS YEARS TOTAL
---------- ---------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Cash................................... $ 13,973 $ -- $ -- $ -- $ -- $ 13,973
Investment securities(1)(2)............ 50,752 2,240 166,359 9,977 42,031 271,359
MBS(1)................................. 41,312 2,517 -- -- 3,693 47,522
Loans receivable:
ARMs and other adjustables(3)........ 2,320,940 349,670 143,782 2,678 113 2,817,183
Fixed rate loans..................... 459 2,364 7,532 13,276 55,055 78,686
---------- ----------- -------- -------- -------- ----------
Total gross loans receivable....... 2,321,399 352,034 151,314 15,954 55,168 2,895,869
---------- ------------ -------- -------- -------- ----------
Total............................ 2,427,436 356,791 317,673 25,931 100,892 $3,228,723
---------- ------------ -------- -------- -------- ==========
INTEREST-BEARING LIABILITIES:
Deposits:
Checking and savings accounts(4)..... 351,960 -- -- -- -- $ 351,960
Money market accounts(4)............. 78,870 -- -- -- -- 78,870
Fixed maturity deposits:
Retail customers................. 423,181 1,562,282 121,595 432 254 2,107,744
Wholesale customers............. 3,079 3,125 8,168 -- -- 14,372
---------- ------------ -------- -------- -------- ----------
Total deposits................... 857,090 1,565,407 129,763 432 254 2,552,946
---------- ------------ -------- -------- -------- ----------
Borrowings:
FHLB advances(3)..................... 212,700 -- 20,000 -- -- 232,700
Other................................ 112,357 140,000 -- -- -- 252,357
---------- ------------ -------- -------- -------- ----------
Total borrowings................. 325,057 140,000 20,000 -- -- 485,057
---------- ------------ -------- -------- -------- ----------
Total.......................... 1,182,147 1,705,407 149,763 432 254 $3,038,003
---------- ------------ -------- -------- -------- ==========
REPRICING GAP............................ $1,245,289 $(1,348,616) $167,910 $ 25,499 $100,638
========== ============ ======== ======== ========
GAP TO TOTAL ASSETS...................... 37.77% (40.91)% 5.09% .77% 3.05%
========== ============ ======== ======== ========
CUMULATIVE GAP TO TOTAL ASSETS........... 37.77% (3.14)% 1.95% 2.72% 5.77%
========== ============ ======== ======== ========
</TABLE>
- ------------------
(1) Repricings shown are based on the contractual maturity or repricing
frequency of the instrument.
(2) Investment securities include FHLB stock of $50.8 million.
(3) ARMs and variable rate borrowings from the FHLB system ("FHLB advances") are
primarily in the shorter categories as they are subject to interest rate
adjustments.
(4) These liabilities are subject to daily adjustments and are therefore
included in the "Within 3 Months" category.
Analysis of the Gap provides only a static view of the Company's interest rate
sensitivity at a specific point in time. The actual impact of interest rate
movements on the Company's net interest income may differ from that implied by
any Gap measurement. The actual impact on net interest income may depend on the
direction and magnitude of the interest rate movement, as well as competitive
and market pressures.
The Company's interest rate risk is reviewed on an ongoing basis. At March 31,
1996, the latest date for which information is available, the Company's interest
rate sensitivity measure was in the 5th percentile (only 10% of institutions
were less sensitive) of all institutions supervised by the OTS, as measured by
the OTS' interest rate risk model. Due to the Company's level of interest rate
risk, the Bank would not have been required to include an interest rate risk
component in its risk-based capital had the new regulation regarding such
inclusion been in effect at June 30, 1996. See "-- Regulatory Capital
Compliance."
15
<PAGE>
ASSET QUALITY
The Company's loan portfolio is primarily located in Southern California and
is comprised principally of single family and multifamily (2 units or more)
residential loans. At June 30, 1996, 19% of the Company's real estate loan
portfolio consisted of California single family residences, while another 11%
and 62% consisted of California multifamily dwellings of 2 to 4 units and 5 or
more units, respectively. At June 30, 1995, 20% of the Company's real estate
loan portfolio consisted of California single family residences while another
11% and 61% consisted of California multifamily dwellings of 2 to 4 units and 5
or more units, respectively.
The performance of the Company's multifamily and commercial loan portfolios
has been adversely affected by Southern California economic conditions. These
portfolios are particularly susceptible to the potential for further declines in
the Southern California economy, such as increasing vacancy rates, declining
rents, increasing interest rates, declining debt coverage ratios, and declining
market values for multifamily and commercial properties. In addition, the
possibility that investors may abandon properties or seek bankruptcy protection
with respect to properties experiencing negative cash flow, particularly where
such properties are not cross-collateralized by other performing assets, can
also adversely affect the multifamily loan portfolio.
California has been hit particularly hard by adverse economic conditions and
Southern California has experienced the brunt of the economic downturn in the
state. The Southern California economy continued to be characterized by higher
unemployment than the national and state averages and real estate values that,
in some cases, continue to decline. There can be no assurances that these
economic conditions will improve in the near future as many factors key to
recovery may be impacted adversely by the Federal Reserve Board's interest rate
policy as well as other factors. Consequently, rents and real estate values may
not stabilize, which may affect future delinquency and foreclosure levels and
may adversely impact the Company's asset quality, earnings performance and
capital levels.
16
<PAGE>
During the second quarter of 1996, total delinquent loans increased $8.0
million, or 12.0%, from March 31, 1996. The following table presents loan
delinquencies by number of days delinquent and by property type as of the dates
indicated. All assets are reported net of specific reserves and writedowns.
Management believes the increase at June 30, 1996 in the 30 to 59 days
delinquent category was primarily the result of the sale of servicing of the
single family portfolio to an outside party which resulted in a temporary
disruption of the collection process.
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31,
1996 1996 1995
--------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Delinquencies by number of days:
30 to 59 days.......................................... 0.82%(1) 0.59% 0.43%
60 to 89 days.......................................... 0.28 0.33 0.24
90 days and over....................................... 1.52 1.37 1.74
------- ------- -------
Loan delinquencies to net loan portfolio................. 2.62% 2.29% 2.41%
======= ======= =======
Delinquencies by property type:
Single family:
30 to 59 days.......................................... $10,099 (1) $ 4,285 $ 4,283
60 to 89 days.......................................... 2,052 1,704 924
90 days and over....................................... 6,306 5,897 7,226
------- ------- -------
18,457 11,886 12,433
------- ------- -------
Percent to applicable loan portfolio.................. 3.38% 2.09% 2.10%
Multifamily (2 to 4 units):
30 to 59 days.......................................... 2,169 1,914 1,748
60 to 89 days.......................................... 1,508 1,735 282
90 days and over....................................... 4,453 4,951 6,671
------- ------- -------
8,130 8,600 8,701
------- ------- -------
Percent to applicable loan portfolio.................. 2.50% 2.60% 2.57%
Multifamily (5 to 36 units):
30 to 59 days.......................................... 8,978 8,427 5,434
60 to 89 days.......................................... 4,466 5,128 5,801
90 days and over....................................... 24,989 20,698 14,312
------- ------- -------
38,433 34,253 25,547
------- ------- -------
Percent to applicable loan portfolio.................. 2.65% 2.33% 1.71%
Multifamily (37 units and over):
30 to 59 days.......................................... -- 698 304
60 to 89 days.......................................... -- -- --
90 days and over....................................... 4,019 4,720 3,190
------- ------- -------
4,019 5,418 3,494
------- ------- -------
Percent to applicable loan portfolio.................. 1.27% 1.67% 1.07%
Commercial and Industrial:
30 to 59 days.......................................... 2,221 1,811 958
60 to 89 days.......................................... -- 985 213
90 days and over....................................... 3,525 3,845 20,511 (2)
------- ------- -------
5,746 6,641 21,682
------- ------- -------
Percent to applicable loan portfolio.................. 2.67% 2.94% 9.26%
Total loan delinquencies, net............................ $74,785 $66,798 $71,857
======= ======= =======
Loan delinquencies to net loan portfolio................. 2.62% 2.29% 2.41%
======= ======= =======
</TABLE>
- -------------------
(1) Management believes the increase at June 30, 1996 in the 30 to 59 days
delinquent category was primarily the result of the sale of servicing of the
single family portfolio to an outside party which resulted in a temporary
disruption of the collection process.
(2) Includes two loans on one hotel property with a total balance of $15.9
million.
17
<PAGE>
The following table presents net delinquent loans at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1996 1996 1995(1) 1995(1) 1995(1)
------------- --------- ------------- -------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Number of days delinquent:
30 to 59 days.............. $23,467(2) $17,135 $12,727 $17,963 $ 9,567
60 to 89 days.............. 8,026 9,552 7,220 8,379 10,343
90 days and over........... 43,292 40,111 51,910 54,313 64,827
------- ------- ------- ------- -------
Total delinquencies..... $74,785 $66,798 $71,857 $80,655 $84,737
======= ======= ======= ======= =======
</TABLE>
- --------------------
(1) Includes two loans on one hotel property with a total balance of $15.9
million for all 1995 periods presented.
(2) Management believes the increase at June 30, 1996 in the 30 to 59 days
delinquent category was primarily the result of the sale of servicing of the
single family portfolio to an outside party which resulted in a temporary
disruption of the collection process.
Total classified assets increased $99.7 million or 45.5% from December 31,
1995, to $318.8 million at June 30, 1996. This increase was primarily due to an
increase of $104.2 million in performing classified assets during the first six
months of 1996 as a result of the continued implementation of the loan grading
system. This enhanced grading process, started in the second half of 1995,
involved a substantial portion of the loan portfolio and as a result downgraded
a considerable number of loans to Special Mention or Substandard for reasons
other than degradation of collateral or the borrower's ability to fully repay
the debt. This increase was partially offset by a decrease in nonperforming
assets ("NPAs") of $7.6 million during the first six months of 1996. The ratio
of NPAs to total assets decreased from 2.16% at December 31, 1995, to 1.94% at
June 30, 1996. This decrease is primarily due to reduced levels of
nonperforming loans ("NPLs") at June 30, 1996, compared to December 31, 1995.
This level of classified assets continues to cause management concern and will
continue to receive specific attention. See "-- Accelerated Asset Resolution
Plan." All assets and ratios are reported net of specific reserves and
writedowns unless otherwise stated. The following table presents asset quality
details at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1996 1996 1995(1) 1995(1) 1995(1)
------------- --------- ------------- -------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NPAs by Type:
NPLs.............................. $ 43,292 $ 40,111 $ 51,910 $ 55,114 $ 64,944
REO, net of REO general valuation
allowance ("GVA")................ 20,519 23,533 19,521 37,550 27,808
-------- -------- -------- -------- --------
Total NPAs....................... $ 63,811 $ 63,644 $ 71,431 $ 92,664 $ 92,752
======== ======== ======== ======== ========
NPAs by Composition:
Single family residences.......... $ 9,108 $ 9,461 $ 10,178 $ 12,396 $ 10,627
Multifamily 2 to 4 units.......... 7,750 10,197 9,269 11,266 10,593
Multifamily 5 units and over...... 37,730 34,202 25,923 36,956 37,987
Commercial and other.............. 9,923 10,184 28,361 32,046 33,545
REO GVA........................... (700) (400) (2,300) -- --
-------- -------- -------- -------- --------
Total NPAs....................... 63,811 63,644 71,431 92,664 92,752
Total troubled debt restructurings
("TDRs")......................... 57,079 53,745 32,691 47,340 47,991
-------- -------- -------- -------- --------
Total TDRs and NPAs.............. $120,890 $117,389 $104,122 $140,004 $140,743
======== ======== ======== ======== ========
Classified Assets:
NPAs.............................. $ 63,811 $ 63,644 $ 71,431 $ 92,664 $ 92,752
Performing classified loans....... 251,847 222,279 147,646 88,337 74,140
Other classified assets........... 3,100 2,979 -- -- --
-------- -------- -------- -------- --------
Total classified assets.......... $318,758 $288,902 $219,077 $181,001 $166,892
======== ======== ======== ======== ========
Classified Asset Ratios:
NPLs to total assets.............. 1.31% 1.22% 1.57% 1.63% 1.88%
NPAs to total assets.............. 1.94% 1.94% 2.16% 2.74% 2.68%
TDRs to total assets.............. 1.73% 1.64% 0.99% 1.40% 1.39%
NPAs and TDRs to total assets..... 3.67% 3.58% 3.16% 4.14% 4.06%
Classified assets to total assets. 9.67% 8.81% 6.64% 5.35% 4.82%
REO to NPAs....................... 32.16% 36.98% 27.33% 40.52% 29.98%
NPLs to NPAs...................... 67.84% 63.02% 72.67% 59.48% 70.02%
</TABLE>
- -----------------
(1) Includes two loans on one hotel property with a total balance of $15.9
million for all 1995 periods presented.
18
<PAGE>
Direct costs of foreclosed real estate operations totaled $1.2 million and
$1.4 million for the three months ended June 30, 1996, and 1995, respectively,
and $3.0 million for both the six months ended June 30, 1996 and 1995. The
following table provides information about the change in the book value and the
number of properties owned and foreclosed for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE QUARTER AT OR FOR THE SIX
ENDED JUNE 30, MONTHS ENDED JUNE 30,
---------------------- -----------------------
1996 1995 1996 1995
------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REO net book value....................................... $20,519 $27,808 $20,519 $27,808
(Decrease) increase in REO for the period................ $(3,014) $ 6,458 $(1,302) $13,693
Number of real properties owned.......................... 120 128 120 128
(Decrease) increase in number of properties owned
for the period.......................................... (11) 55 11 64
Number of properties foreclosed for the period........... 53 91 122 129
Gross book value of properties foreclosed................ $15,819 $25,756 $36,383 $42,498
Average gross book value of properties foreclosed........ $ 298 $ 283 $ 298 $ 329
</TABLE>
19
<PAGE>
The following table summarizes the Company's reserves, writedowns and certain
coverage ratios at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1996 1995 1995
-------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans:
GVA................................................................. $32,053 $48,921 $40,000
Specific reserves................................................... 41,669(1) 40,514 22,955
------- ------- -------
Total allowance for estimated losses.............................. $73,722 $89,435(2) $62,955
======= ======= =======
Writedowns (3)...................................................... $ 316 $ 316 $ 322
======= ======= =======
Total allowance and loan writedowns to gross loans.................. 2.54% 2.96% 2.01%
Total loan allowance to gross loans (3)............................. 2.53% 2.95% 2.00%
Loan GVA to loans (4)............................................... 1.13% 1.64% 1.28%
Loan GVA to NPLs.................................................... 74.04% 94.24% 61.59%
NPLs to total loans................................................. 1.54% 1.77% 2.11%
Real Estate Owned:
REO GVA............................................................. $ 700 $ 2,300 $ --
Specific reserves................................................... 3,050 1,192 832
------- ------- -------
Total allowance for estimated losses.............................. $ 3,750 $ 3,492 $ 832
======= ======= =======
Writedowns (3)...................................................... $17,321 $17,584 $19,937
======= ======= =======
Total REO allowance and REO writedowns to gross REO................. 50.66% 51.92% 42.75%
Total REO allowance to gross REO (5)................................ 15.45% 15.17% 2.91%
REO GVA to REO (4).................................................. 3.30% 10.54% --%
Total Loans and REO:
GVA................................................................. $32,753 $51,221 $40,000
Specific reserves................................................... 44,719 41,706 23,787
------- ------- -------
Total allowance for estimated losses.............................. $77,472 $92,927 $63,787
======= ======= =======
Writedowns (3)...................................................... $17,637 $17,900 $20,259
======= ======= =======
Total allowance and writedowns to gross loans and REO............... 3.22% 3.60% 2.62%
Total allowance to gross loans and REO (4).......................... 2.64% 3.04% 2.00%
Total GVA to loans and REO.......................................... 1.14% 1.70% 1.27%
Total GVA to NPAs................................................... 50.77% 69.47% 43.13%
</TABLE>
- ---------------
(1) Includes specific reserves on non-mortgage loans totaling $0.02 million.
(2) The allowance for estimated loan losses includes the effect of the $45
million reserve established in 1995 in connection with the adoption of the
Accelerated Asset Resolution Plan.
(3) Writedowns include cumulative charge-offs on outstanding loans and REO as of
the date indicated.
(4) Loans and REO, as applicable, in these ratios are calculated prior to their
reduction for loan and REO GVA, respectively, but are net of specific
reserves and writedowns.
(5) Net of writedowns.
20
<PAGE>
The following schedules summarize the activity in the Company's allowances for
estimated loan and real estate losses:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
-----------------------------------------------------------------------------
1996 1995
------------------------------------- ------------------------------------
REAL ESTATE REAL ESTATE
LOANS OWNED TOTAL LOANS OWNED TOTAL
---------- ------------ ---------- ---------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance on April 1, .......... $ 81,430 $ 3,093 $ 84,523 $ 62,834 $ 2,029 $ 64,863
Provision for losses......... 3,905 579 4,484 11,131 1,153 12,284
Charge-offs.................. (10,582) (1,904) (12,486) (11,923) (2,350) (14,273)
Allocation from GVA to REO... (1,982) 1,982 -- -- -- --
Recoveries and other......... 951 -- 951 913 -- 913
-------- ------- -------- -------- ------- --------
Balance on June 30,........... $ 73,722 $ 3,750 $ 77,472 $ 62,955 $ 832 $ 63,787
======== ======= ======== ======== ======= ========
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
1996 1995
------------------------------------- ------------------------------------
REAL ESTATE REAL ESTATE
LOANS OWNED TOTAL LOANS OWNED TOTAL
---------- ------------ ---------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance on January 1, ........ $ 89,435 $ 3,492 $ 92,927 $ 67,202 $ 2,318 $ 69,520
Provision for losses......... 7,805 1,247 9,052 15,151 1,544 16,695
Charge-offs.................. (22,704) (3,295) (25,999) (21,396) (3,030) (24,426)
Allocation from GVA to REO... (2,306) 2,306 -- -- -- --
Recoveries and other......... 1,492 -- 1,492 1,998 -- 1,998
-------- ------- -------- -------- ------- --------
Balance on June 30,........... $ 73,722 $ 3,750 $ 77,472 $ 62,955 $ 832 $ 63,787
======== ======= ======== ======== ======= ========
</TABLE>
The following table details the activity affecting specific loss reserves for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
------------------------------------ -------------------------------------
REAL ESTATE REAL ESTATE
LOANS OWNED TOTAL LOANS OWNED TOTAL
---------- ------------ --------- -------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period........................ $ 43,228 $ 2,693 $ 45,921 $ 40,514 $ 1,192 $ 41,706
Allocations from GVA to
specific reserves........... 9,023 2,261 11,284 23,859 5,153 29,012
Charge-offs.................. (10,582) (1,904) (12,486) (22,704) (3,295) (25,999)
-------- ------- -------- -------- ------- --------
Balance at end of period
indicated..................... $ 41,669 $ 3,050 $ 44,719 $ 41,669 $ 3,050 $ 44,719
======== ======= ======== ======== ======= ========
</TABLE>
21
<PAGE>
NONINTEREST INCOME (EXPENSE)
Noninterest income has three major components: (a) noninterest income from
ongoing operations, which includes loan fee income, gains or losses on loans
held for sale, fees earned on the sale of securities and annuities and retail
banking fees, (b) income/expenses associated with REO, which includes both the
provision for real estate losses as well as income/expenses incurred by the
Company associated with the operation of its REO properties and (c) gains and
losses on the sales of loan servicing, investment securities and mortgage-backed
securities. Items (b) and (c) can fluctuate widely, and could therefore mask the
underlying fee generating performance of the Company on an ongoing basis.
Net noninterest income decreased by $3.3 million from net noninterest income
of $4.2 million in the second quarter 1995 to net noninterest income of $0.9
million in the second quarter 1996. The major components of this decrease are:
(a) net gains on loan sales decreased in the second quarter of 1996 by $0.9
million from the second quarter of 1995; (b) net gains on sales of mortgage-
backed securities decreased in the second quarter of 1996 by $1.0 million from
the 1995 second quarter and (c) net gains on securities activities in the second
quarter of 1996 decreased by $1.9 million from the 1995 second quarter. The
increased sales activity in loans, mortgage-backed securities and investment
securities in 1995 was primarily for regulatory capital maintenance purposes.
This was partially offset by decreased real estate provisions and costs of $0.7
million as a result of decreased levels of REO properties.
Net noninterest income decreased by $9.3 million from net noninterest income
of $10.5 million in the six months ended June 30, 1995 to net noninterest income
of $1.2 million in the six months ended June 30, 1996. The major components of
this decrease are: (a) other noninterest income (expense) decreased by $4.0
million as a result of a net gain of $4.3 million realized from the sale of
$435.8 million in rights to service loans for others in the first quarter of
1995, with no comparable amounts in 1996; (b) loan service fees decreased by
$1.1 million in the first six months of 1996 from the 1995 six month period
primarily as a result of the sale of the rights to service loans in the first
quarter of 1995; (c) net gains on loan sales decreased in the first six months
of 1996 by $0.6 million from first six months of 1995; (d) net gains on sales of
mortgage-backed securities decreased in the first six months of 1996 by $1.0
million from the 1995 six month period and (e) net gains on securities
activities in the first six months of 1996 decreased by $2.9 million from the
1995 six month period. The increased sales activity in loans, mortgage-backed
securities and investment securities in 1995 was primarily for regulatory
capital maintenance purposes. This was partially offset by decreased real
estate provisions and costs of $0.3 million as a result of decreased levels of
REO properties.
OPERATING EXPENSES
Operating expenses decreased by $2.5 million to $16.5 million for the second
quarter 1996 compared to $19.0 million for the second quarter 1995. The change
was primarily due to (a) a $1.8 million decrease in personnel and benefit
expense due to a decline of 177 or 26.0% in the three month average number of
full-time equivalent employees; (b) a decrease of $0.5 million in occupancy
costs; (c) a decrease of $0.6 million in marketing expenses and (d) a decrease
of $0.3 million in office-related expenses. These favorable variances were
partially offset by an increase of $0.7 million in professional services and
other costs.
Operating expenses decreased by $5.0 million to $33.2 million for the six
months ended June 30, 1996 compared to $38.2 million for the same six months of
1995. The change was primarily due to (a) a $4.2 million decrease in personnel
and benefit expense due to a decline of 178 or 25.5% in the six month average
number of full-time equivalent employees; (b) a decrease of $0.7 million in
occupancy costs; (c) a decrease of $0.9 million in marketing expenses and (d) a
decrease of $0.5 million in office-related expenses. These favorable variances
were partially offset by an increase of $1.3 million in professional services
and other costs.
Decreased operating expenses resulted in a decrease in the annualized
operating expense ratio to 2.00% for the six months ended June 30, 1996 from
2.07% for the same period in 1995, notwithstanding the decrease in total average
asset size of the Company (from $3.7 billion for the six months ended June 30,
1995 to $3.3 billion for the six months ended June 30, 1996).
22
<PAGE>
Due to the sensitivity of the operating expense ratio to changes in the size
of the balance sheet, management also looks at trends in the efficiency ratio to
assess the changing relationship between operating expenses and income. The
efficiency ratio measures the amount of cost expended by the Company to generate
a given level of revenues in the normal course of business. It is computed by
dividing total operating expense by net interest income and noninterest income,
excluding infrequent items. A decrease in the efficiency ratio is favorable as
it indicates that less expenses were incurred to generate a given level of
revenue.
The efficiency ratio improved to 68.06% for the second quarter 1996 from
95.73% for the second quarter 1995. The efficiency ratio also improved between
the six months ended June 30, 1995 and June 30, 1996 from 92.46% to 67.77%.
This decrease was due to increased net interest income and decreased operating
expense, which were partially offset by decreased net noninterest income
(expense).
INCOME TAXES
The Company's combined federal and state statutory tax rate is approximately
42.4% of earnings before income taxes. The effective tax rates of 2.3% and 2.4%
on earnings before income taxes for the quarter and six months ended June 30,
1996, respectively, reflect the utilization of federal and state net operating
loss carryforwards offset by alternative minimum tax for financial reporting
purposes. The income tax provision for both the quarter and six months ended
June 30, 1995, reflects only the state minimum corporation taxes.
Due to the 1995 Recapitalization and the restructuring and recapitalization
completed in the third and fourth quarters of 1994 (the "1994 Restructuring and
Recapitalization"), the utilization in future periods of net operating loss
carryforwards generated prior to these events will be limited.
REGULATORY CAPITAL COMPLIANCE
The FDICIA required the OTS to implement a system providing for regulatory
sanctions against institutions that are not adequately capitalized. The severity
of these sanctions increases to the extent that an institution's capital
continues to decline. Under FDICIA, the OTS issued the PCA Regulations which
established specific capital ratios for five separate capital categories as set
forth below:
<TABLE>
<CAPTION>
CORE CAPITAL TO CORE CAPITAL
ADJUSTED TO TOTAL CAPITAL
TOTAL ASSETS RISK-WEIGHTED TO
(LEVERAGE RATIO) ASSETS RISK-WEIGHTED ASSETS
---------------- -------------- ---------------------
<S> <C> <C> <C>
Well capitalized................. 5% or above 6% or above 10% or above
Adequately capitalized........... 4% or above 4% or above 8% or above
Undercapitalized................. Under 4% Under 4% Under 8%
Significantly undercapitalized... Under 3% Under 3% Under 6%
Critically undercapitalized...... Ratio of tangible equity to adjusted total assets of 2% or less
</TABLE>
The following table summarizes the capital ratios required by FDICIA for an
institution to be considered well capitalized and the Bank's regulatory capital
at June 30, 1996 as compared to such ratios.
<TABLE>
<CAPTION>
TANGIBLE CAPITAL CORE CAPITAL TO CORE CAPITAL TO TOTAL CAPITAL TO
TO ADJUSTED ADJUSTED RISK-WEIGHTED RISK-WEIGHTED
TOTAL ASSETS TOTAL ASSETS ASSETS ASSETS
--------------------- --------------------- ---------------------- ----------------------
BALANCE % BALANCE % BALANCE % BALANCE %
----------- ------- ----------- ------- ----------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity's regulatory capital... $ 225,600 6.85% $ 225,900 6.86% $ 225,900 11.32% $ 250,900 12.58%
Well capitalized requirement.... 98,800 3.00% 164,700 5.00% 119,700 6.00% 199,600 10.00%
---------- ----- ---------- ---- ---------- ------ ---------- -----
Excess capital.................. 126,800 3.85% $ 61,200 1.86% $ 106,200 5.32% $ 51,300 2.58%
========== ===== ========== ==== ========== ====== ========== =====
Adjusted assets (1)............. $3,293,200 $3,293,500 $1,995,500 $1,995,500
========== ========== ========== ==========
</TABLE>
- ----------------
(1) The term "adjusted assets" refers to the term "adjusted total assets" as
defined in 12 C.F.R. section 567.1(a) for purposes of tangible and core
capital requirements, and refers to the term "risk-weighted assets" as
defined in 12 C.F.R. section 567.1(bb) for purposes of risk-based capital
requirements.
23
<PAGE>
The proposed changes discussed in "Recent Developments--Insurance Premium
Assessments" would also have an impact on the Bank's capital ratios. As of June
30, 1996, after giving effect to the payment and deduction of an 80 basis point
SAIF deposit assessment, the Bank's core and risk-based capital ratios would
have been approximately 6.23% and 11.49%, respectively, and the Bank would have
continued to meet the minimum numerical requirements to remain well-capitalized
under the PCA Regulations.
FDICIA also required the OTS and the federal bank regulatory agencies to
revise their risk-based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit risk, and risks
of nontraditional activities. Effective January 1, 1994, the OTS incorporated an
interest rate risk component into its regulatory capital rule. Under the revised
rule, savings institutions with "above-normal" interest rate risk exposure would
be subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. An institution's interest rate risk is measured
by the decline in the net present value ("NPV") of its assets that would result
from a hypothetical 200-basis point increase or decrease in market interest
rates divided by the estimated economic value of a bank's assets, as calculated
in accordance with guidelines set forth by the OTS. An institution whose
measured interest rate risk exposure exceeds 2% would be required to deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of a bank's assets. That dollar
amount would be deducted from a bank's total capital in calculating compliance
with its risk-based capital requirement. Under the rule, there is a lag between
the reporting date of an institution's financial data and the effective date for
the new capital requirement based on that data. However, the OTS has temporarily
postponed the implementation of the new rule until the OTS has collected
sufficient data to determine whether the rule is effective in monitoring and
managing interest rate risk. No interest rate risk component would have been
required to be added to the Bank's risk-based capital requirement at March 31,
1996, the latest date for which this information is available, had the rule been
in effect at that time. Effective in January 1995, the OTS amended the risk-
based capital standards by explicitly identifying concentration of credit risk
and the risks arising from nontraditional activities, as well as an
institution's ability to manage those risks, as important factors to be taken
into account by the agency in assessing an institution's overall capital
adequacy.
24
<PAGE>
The Bank is also subject to OTS capital regulations under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). These
regulations require the Bank to maintain: (a) tangible capital of at least 1.5%
of adjusted total assets (as defined in the regulations), (b) core capital of at
least 3% of adjusted total assets (as defined in the regulations) and (c) total
capital of at least 8.0% of risk-weighted assets (as defined in the
regulations).
<TABLE>
<CAPTION>
RISK-BASED
TANGIBLE CAPITAL CORE CAPITAL CAPITAL
--------------------- --------------------- -------------------------
BALANCE % BALANCE % BALANCE %
---------- -------- ----------- ------ ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity (1).................... $ 224,000 $ 224,000 $ 224,000
Unrealized losses on securities............. 2,100 2,100 2,100
Adjustments
Intangible assets......................... (300) -- --
Nonqualifying mortgage servicing rights... (100) (100) (100)
Nonincludable subsidiaries................ (100) (100) (100)
General valuation reserves................ -- -- 25,000
---------- ---------- ----------
Regulatory capital (2)...................... 225,600 6.85% 225,900 6.86% 250,900 12.58%
Required minimum............................ 49,400 1.50% 98,800 3.00% 159,600 8.00%
---------- ---- ---------- ---- ---------- -----
Excess capital.............................. $ 176,200 5.35% $ 127,100 3.86% $ 91,300 4.58%
========== ==== ========== ==== ========== =====
Adjusted assets (3)......................... $3,293,200 $3,293,500 $1,995,500
========== ========== ==========
</TABLE>
(1) The Bank's total stockholders' equity, in accordance with generally accepted
accounting principles, was 6.80% of its total assets at June 30, 1996.
(2) Both the OTS and the FDIC may examine the Bank as part of their legally
prescribed oversight of the industry. Based on their examinations, the
regulators can direct that the Bank's financial statements be adjusted in
accordance with their findings.
(3) The term "adjusted assets" refers to the term "adjusted total assets" as
defined in 12 C.F.R. section 567.1(a) for purposes of tangible and core
capital requirements, and refers to the term "risk-weighted assets" as
defined in 12 C.F.R. section 567.1(bb) for purposes of risk-based capital
requirements.
CAPITAL RESOURCES AND LIQUIDITY
Sales of Loans: There were no sales of loans from the held for sale
portfolio in the six months ended June 30, 1996 compared to $46.4 million for
the six months ended June 30, 1995. Sales of loans are dependent upon various
factors, including volume of loans originated, interest rate movements, investor
demand for loan products, deposit flows, the availability and attractiveness of
other sources of funds, loan demand by borrowers, desired asset size and
evolving capital and liquidity requirements. Due to the volatility and
unpredictability of these factors, the volume of the Company's sales of loans
has fluctuated significantly and no estimate of future sales can be made at this
time. At June 30, 1996, the Company had no loans held for sale. Sales of loans
from the held for investment portfolio would be caused by unusual events. The
level of future sales, if any, is difficult to predict.
During the first and second quarters of 1995, the Bank securitized $46.4
million and $66.4 million, respectively, of single-family adjustable rate
mortgages through a swap of whole loans for mortgage-backed securities which are
held in the Bank's available for sale portfolio.
FHLB Advances: The Company had net repayments of FHLB advances of $60.0
million for the six months ended June 30, 1996. This compares to net repayments
of $40.0 million for the six months ended June 30, 1995.
Commercial paper: Commercial paper outstanding was increased by $49.0 million
for the six months ended June 30, 1996 from December 31, 1995 and reduced by
$241.4 million for the six months ended June 30, 1995 from December 31, 1994.
25
<PAGE>
Loan payments and payoffs: Loan principal payments, including prepayments and
payoffs, provided $125.0 million for the six months ended June 30, 1996 compared
to $87.8 million for the same period in 1995. The Company expects that loan
payments and prepayments will remain a significant funding source.
Sales of securities: The sale of investment securities and MBS provided $20.2
million for the six months ended June 30, 1996 compared to $264.4 million in
sales during the same period in 1995. The Company held $268.1 million in its
available for sale portfolio as of June 30, 1996, compared to $126.0 million at
December 31, 1995, and $144.6 million at June 30, 1995.
Undrawn sources: The Company maintains other sources of liquidity to draw
upon, which at June 30, 1996 include (a) a line of credit with the FHLB with
$137.9 million available (assuming all of the $500.0 million commercial paper
capacity is used); (b) unused commercial paper facility capacity of $401.0
million; (c) $180.0 million in unpledged securities available to be placed in
reverse repurchase agreements or sold; and (d) $684.0 million of unpledged
loans, some of which would be available to collateralize additional FHLB or
private borrowings, or be securitized.
Deposits: At June 30, 1996, the Company had deposits of $2.6 billion. The
following table presents the distribution of the Company's deposit accounts:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------------------- ------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Money market savings accounts............................. $ 76,184 3.0% $ 93,901 3.6%
Checking accounts......................................... 294,839 11.5 309,065 11.8
Passbook accounts......................................... 59,807 2.4 62,934 2.4
---------- ----- ---------- -----
Total transaction accounts.............................. 430,830 16.9 465,900 17.8
---------- ----- ---------- -----
Certificates of Deposit $100,000 and over................. 538,743 21.1 528,320 20.3
Certificates of deposit less than $100,000................ 1,583,373 62.0 1,606,649 61.9
---------- ----- ---------- -----
Total certificates of deposit........................... 2,122,116 83.1 2,134,969 82.2
---------- ----- ---------- -----
Total deposits......................................... $2,552,946 100.0% $2,600,869 100.0%
========== ===== ========== =====
</TABLE>
Repurchase Agreements: From time to time the Company enters into reverse
repurchase agreements by which it sells securities with an agreement to
repurchase the same securities at a specific future date (overnight to 30 days).
The Company deals only with dealers perceived by management to be financially
strong and who are recognized as primary dealers in U.S. Treasury securities by
the Federal Reserve Board. Repurchase agreements outstanding at June 30, 1996,
totaled $53.4 million with no comparable amount at June 30, 1995. In the six
months ended June 30, 1996, the Company borrowed net funds from repurchase
agreements of $53.4 million compared to $43.6 million of funds borrowed and
repaid during the six months ended June 30, 1995.
Loan Fundings: The Company funded $1.4 million of gross loans (excluding the
Company's refinancings) in the six months ended June 30, 1996 compared to $15.4
million in the same period of 1995. The closing of the Company's wholesale and
correspondent lending operations in the fourth quarter of 1994 resulted in
reduced loan fundings in 1995 and a significant decrease in loan fundings during
the first six months of 1996.
Contingent or potential uses of funds: The Company had no unfunded loans at
June 30, 1996, compared to $2.2 million at June 30, 1995.
Liquidity: OTS regulations require the maintenance of an average regulatory
liquidity ratio of at least 5% of deposits and short-term borrowings. the Bank's
average regulatory liquidity ratio was 6.36% and 5.28% for the six months ended
June 30, 1996 and 1995, respectively.
26
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Bank was named as a defendant in a purported class action lawsuit alleging
violations of federal securities laws in connection with the offering of common
stock by the Bank in 1994 as part of the Bank's previously reported 1994
Restructuring and Recapitalization. The suit was filed by Harbor Finance
Partners ("Harbor") in an alleged class action complaint in the United States
District Court-Central District of California on July 28, 1995 and originally
named as defendants the Bank, Citadel Holding Co., Richard M. Greenwood (the
Bank's chief executive officer and Citadel's former chief executive officer), J.
P. Morgan Securities, Inc., and Deloitte & Touche. The suit alleged that false
or misleading information was provided by the defendants in connection with the
Bank's 1994 Restructuring and Recapitalization and stock offering and that the
defendants knew and failed to disclose negative information concerning the Bank.
A motion to dismiss the original complaint was filed by the Bank, and was
granted without opposition. The amended complaint did not include J. P. Morgan
Securities, Inc. and Deloitte & Touche as defendants and contained some factual
and legal contentions which were different from those set forth originally. On
May 21, 1996, the court granted the Bank's motion to dismiss the first amended
complaint, but granted leave to amend. Following the filing of a second amended
complaint, the Bank filed a motion to dismiss. At a hearing on July 22, 1996,
the court ruled that the case should be dismissed with prejudice and a formal
order to that effect was submitted to the court for execution. Harbor lodged
certain objections to the proposed order, including objections that the state
law claims in the second amended complaint should not be dismissed with
prejudice. The court's Order of Dismissal was entered on August 5, 1996 and
provided that all claims asserted in the second amended complaint under federal
law were dismissed with prejudice and those under state law were dismissed
without prejudice to their renewal in state court pursuant to 28 U.S.C.
(S)1367(b)(3).
Both the original complaint filed by Harbor and the amended complaints raised
certain issues previously pleaded in a wrongful termination and defamation
action brought by William Strocco against the Bank and Citadel, which was filed
in Los Angeles County Superior Court on March 9, 1995 although the nature and
use of the same varies in the three pleadings. Plaintiff in the Strocco case is
a former manager of the Bank's REO department who alleged, among other things,
that his employment was terminated in violation of public policy and was a
result of breaches of his implied employment contract and the implied covenant
of good faith and fair dealing based on the notion that he objected to various
aspects of the Bank's 1994 Restructuring and Recapitalization, including the
selling of REO properties in bulk sales, as not in the best interests of the
Bank, and that he asserted that the same were not fully disclosed to potential
investors and to the OTS. Plaintiff also seeks damages for defamation and
interference with contractual relationship. In July 1996, the Los Angeles
Superior Court granted Citadel's motion for summary judgment to dismiss it as a
defendant in the Strocco litigation. A motion for summary adjudication of
issues, which is directed at the major issues of the case, has been filed by the
Bank and is set for hearing on September 4, 1996.
The William Strocco complaint seeks damages, including punitive damages, in an
unspecified amount. The Bank believes that Mr. Strocco's claims are meritless
and plans to vigorously contest them.
In addition, the Bank is a defendant in several individual and purported class
actions brought by several borrowers which raise similar claims with respect to
the manner in which the Bank serviced certain adjustable rate mortgages which
were originated during the period 1983 through 1988. The actions have been filed
between July 1, 1992 and February of 1995. In one case the Bank won a summary
judgement in Federal District Court. This judgment was appealed. On July 25,
1996, the Ninth Circuit Court of Appeals filed its opinion which affirmed in
part, reversed in part and remanded back to the Federal District Court for
further hearing. In three Los Angeles Superior Court cases, judgment in favor
of the Bank was recently entered. Plaintiff has appealed in all three cases.
Two other cases are pending in the Los Angeles Superior Court. The plaintiffs'
principal claim is that the Bank selected an inappropriate review date to
consult the index upon which the rate adjustment is based that was one or two
months earlier than what was required under the terms of the notes. In a
declining interest rate environment, the lag effect of an earlier review period
defers the benefit to the borrower of such decline, and the reverse would be
true in a rising interest rate environment. The Bank strongly disputes these
contentions and is
27
<PAGE>
vigorously defending these suits. The legal responsibility and financial
exposure of these claims presently cannot be reasonably ascertained and,
accordingly, there is a risk that the final outcome of one or more of these
claims could result in the payment of monetary damages which could be material
in relation to the financial condition or primarily results of operations of the
Bank. At this point, the Bank does not believe the likelihood of such a result
is probable and has not established any specific litigation reserves with
respect to such lawsuits.
The Bank has settled an aggregate of $18.3 million of claims asserted by a
purchaser of assets from the Bank in a 1994 bulk sale transaction. Pursuant to
the terms of the settlement, the Bank received $0.4 million and the parties
executed mutual releases with respect to all claims arising out of that
particular bulk sale transaction.
In the normal course of business, the Company and certain of its
subsidiaries have a number of other lawsuits or claims pending. The Company's
management and its counsel believe that none of the lawsuits or claims pending
will have a materially adverse impact on the financial condition or business of
the Company.
An adverse outcome with respect to the foregoing claims could have a
material adverse effect on the Company's financial condition, results of
operations and the Bank's regulatory capital.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At an annual meeting of shareholders held on April 24, 1996, the
shareholders reelected George Gibbs, Jr., Lilly V. Lee, Mark K. Mason, Gordon V.
Smith and W. Pendleton Tudor, to the Board of Directors of Fidelity to serve for
one to three year terms, approved an Agreement and Plan of Reorganization under
which all of the outstanding common stock of the Bank will be converted
automatically, on a one-for-one basis, into all of the outstanding common stock
of a newly formed Delaware corporation, Bank Plus, with Bank Plus becoming the
holding company for the Bank, and ratified the appointment of Deloitte & Touche
LLP as Fidelity's independent public accountants for 1996. Of the 18,242,465
shares of Class A Common Stock outstanding as of the record date, March 26,
1996, the following indicates the number of votes cast for and against, as well
as the number of votes abstaining and broker non-votes, with respect to each of
the five directors, the formation of Bank Plus as the holding company for the
Bank and the ratification of Deloitte & Touche LLP:
<TABLE>
<CAPTION>
NUMBER OF VOTES
----------------------------------------------------
BROKER
FOR AGAINST ABSTAIN NON-VOTES
---------- ------- ------- ---------
<S> <C> <C> <C> <C>
Proposal 1 - Election of Directors:
George Gibbs, Jr. ....................................... 16,343,125 6,300 -- N/A
Lilly V. Lee............................................. 16,343,025 6,400 -- N/A
Mark K. Mason............................................ 16,342,925 6,500 -- N/A
Gordon V. Smith.......................................... 16,343,125 6,300 -- N/A
V. Pendleton Tudor....................................... 16,343,125 6,300 -- N/A
Proposal 2 - Agreement and Plan of Reorganization............. 11,363,165 94,537 552 4,891,171
Proposal 3 - Ratification of Independent Public Accountants... 16,195,514 89,362 952 63,597
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page Number
- ------- ----------- -----------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization, dated as of March 27, *
1996, among Fidelity, Bank Plus Corporation and Fidelity
Interim Bank.
3.1 Amended and Restated Charter S of the Bank (incorporated by *
reference to Exhibit 4.1 to the Form 10-K filed with the
OTS for the fiscal year ended December 31, 1994 (Docket No.
5770)(the "1994 Form 10-K")).
3.2 Amended and Restated Bylaws of the Bank, as amended *
(incorporated by reference to Exhibit 3.2 of the Form OC of
which the Offering Circular dated November 9, 1995 is a
part (Docket No. 5770)(the "1995 Form OC")).
3.3 Form of Certificate of Resolutions adopting the First *
Supplemental Section to Section 5(B) of the Amended and
Restated Charter S of the Bank relating to Series A
Preferred Stock (incorporated by reference to Exhibit 3.3
to the 1995 Form OC).
4.1 Specimen of Class A Common Stock Certificate (incorporated *
by reference to Exhibit 4.1 to the Form OC of which the
Offering Circular dated July 12, 1994 is a part (Docket
No. 5770)(the "1994 Form OC")).
4.2 Specimen of Class C Common Stock Certificate (incorporated *
by reference to Exhibit 4.3 to the 1994 Form OC).
4.3 Specimen of Right to purchase Class A and Class C Common *
Stock (incorporated by reference to Exhibit 4.3 of the 1995
Form OC).
4.4 Registration Rights Agreement dated as of June 30, 1994, *
between Fidelity, Citadel and certain holders of Class C
Common Stock of Fidelity Federal Bank (incorporated by
reference to Exhibit 4.3 to the Form 10-Q filed with the OTS
for the quarterly period ended on June 30, 1994 (Docket No.
5770)(the "Form 10-Q")).
4.5 Stockholders Agreement, dated as of June 30, 1994, between *
Citadel and Fidelity (incorporated by reference to Exhibit
4.4 to the Form 10-Q).
4.6 Form of Indenture relating to senior notes (incorporated by *
reference to Exhibit 4.6 of the 1995 Form OC).
10.1 Settlement Agreement between Fidelity, Citadel and certain *
lenders, dated as of June 3, 1994 (the "Letter Agreement")
(incorporated by reference to Exhibit 10.18 to the 1994
Form OC).
10.2 Amendment No. 1 to Letter Agreement, dated as of June 20, *
1994 (incorporated by reference to Exhibit 10.2 to the
Form 10-Q).
10.3 Amendment No. 2 to Letter Agreement, dated as of July 28, 1994 *
(incorporated by reference to Exhibit 10.3 to the Form 10-Q).
10.4 Amendment No. 3 to Letter Agreement, dated as of August 3, 1994 *
(incorporated by reference to Exhibit 10.4 to the Form 10-Q).
10.5 Mutual Release, dated as of August 4, 1994, between Fidelity, *
Citadel and certain lenders (incorporated by reference to
Exhibit 10.5 to the Form 10-Q).
10.6 Mutual Release between Fidelity, Citadel and The Chase *
Manhattan Bank, NA, dated June 17, 1994, (incorporated by
reference to Exhibit 10.6 to the Form 10-Q).
10.7 Loan and REO Purchase Agreement (Primary), dated as of July 13, *
1994, between Fidelity and Colony Capital, Inc. (incorporated
by reference to Exhibit 10.7 to the Form 10-Q).
10.8 Real Estate Purchase Agreement, dated as of August 3, 1994, *
between Fidelity and CRI (incorporated by reference to Exhibit
10.8 to the Form 10-Q).
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page Number
- ------- ----------- -----------
<S> <C> <C>
10.9 Loan and REO Purchase Agreement (Secondary), dated as of July 12, *
1994, between Fidelity and EMC Mortgage Corporation (incorporated
by reference to Exhibit 10.9 to the Form 10-Q).
10.10 Loan and REO Purchase Agreement (Secondary), dated as of July 21, *
1994, between Fidelity and International Nederlanden (US) Capital
Corporation, Farallon Capital Partners, L.P., Tinicum Partners,
L.P. and Essex Management Corporation (incorporated by reference
to Exhibit 10.10 to the Form 10-Q).
10.11 Purchase of Assets and Liability Assumption Agreement by and *
between Home Savings of America, FSB and Fidelity, dated as of
July 19, 1994 (incorporated by reference to Exhibit 10.11 to the
Form 10-Q).
10.12 Promissory Note, dated July 28, 1994, by CRI in favor of Fidelity *
and related loan documents (3943 Veselich Avenue)(incorporated by
reference to Exhibit 10.12 to the Form 10-Q).
10.13 Promissory Note, dated July 28, 1994, by CRI in favor of Fidelity *
and related loan documents (23200 Western Avenue)(incorporated by
reference to Exhibit 10.13 to the Form 10-Q).
10.14 Promissory Note, dated August 3, 1994, by CRI in favor of Fidelity *
and related loan documents (1661 Camelback Road)(incorporated by
reference to Exhibit 10.14 to the Form 10-Q).
10.15 Guaranty Agreement, dated August 3, 1994, by Citadel in favor of *
Fidelity (incorporated by reference to Exhibit 10.15 to the Form
10-Q).
10.16 Tax Disaffiliation Agreement, dated as of August 4, 1994, by and *
between Citadel and Fidelity (incorporated by reference to
Exhibit 10.16 to the Form 10-Q).
10.17 Option Agreement, dated as of August 4, 1994, by and between *
Fidelity and Citadel (incorporated by reference to Exhibit 10.17
to the Form 10-Q).
10.18 Executive Employment Agreement, dated as of June 2, 1995, between *
Richard M. Greenwood and Fidelity (incorporated by reference to
Exhibit 10.18 to the 1995 Form OC).
10.19 Amended Service Agreement between Fidelity and Citadel dated as *
of August 1, 1994 (incorporated by reference to Exhibit 10.19 to
the Form 10-Q).
10.20 Side letter, dated August 3, 1994, between Fidelity and CRI *
(incorporated by reference to Exhibit 10.20 to the Form 10-Q).
10.21 Placement Agency Agreement, dated July 12, 1994, between Fidelity, *
Citadel and J.P. Morgan Securities Inc. (incorporated by reference
to Exhibit 10.21 to the Form 10-Q).
10.22 Stock Purchase Agreement, dated as of August 3, 1994, between *
Fidelity and Citadel (incorporated by reference to Exhibit 10.22
to the Form 10-Q).
10.23 Litigation and Judgement Assignment and Assumption Agreement, *
dated as of August 3, 1994, between Fidelity and Citadel
(incorporated by reference to Exhibit 10.23 to the Form 10-Q).
10.24 1996 Equity Incentive Plan. *
10.25 Retirement Plan for Non-Employee Directors (incorporated by *
reference to Exhibit 10.26 to the 1994 Form 10-K).
10.26 Form of Severance Agreement between the Bank and each of Messrs. *
Johnson and Osborne (incorporated by reference to Exhibit 10.27
to the Form 1994 10-K).
10.27 Form of Severance Agreement between the Bank and each of Messrs. *
Condon, Evans, Mason, Stutz and Taylor (incorporated by reference
to Exhibit 10.27 to the 1995 Form OC).
10.28 Form of Severance Agreement between the Bank and each of Messrs. *
Michel and Renstrom (incorporated by reference to Exhibit 10.28
to the 1995 Form OC).
10.29 Form of Incentive Stock Option Agreement between the Bank and *
certain officers (incorporated by reference to Exhibit 10.28
to the 1994 Form 10-K).
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page Number
- ------- ----------- -----------
<S> <C> <C>
10.30 Form of Non-Employee Director Stock Option Agreement between the *
Bank and certain directors (incorporated by reference to Exhibit
10.29 to the 1994 Form 10-K).
10.31 Loan and REO Purchase Agreement, dated as of December 15, 1994 *
between Fidelity and Berkeley Federal Bank & Trust FSB (incor-
porated by reference to Exhibit 10.30 to the 1994 Form 10-K).
10.32 Standard Office Lease-Net, dated July 15, 1994, between the *
Bank and 14455 Ventura Blvd., Inc. (incorporated by reference
to Exhibit 10.31 to the 1994 Form 10-K).
10.33 Loan Servicing Purchase and Sale Agreement dated March 31, 1995 *
between the Bank and Western Financial Savings Bank, FSB
(incorporated by reference to Exhibit 10.32 to the Form 10-Q filed
with the OTS for the quarterly period ended March 31, 1995).
10.34 Supervisory Agreement dated June 28, 1995 between Fidelity and *
the OTS (incorporated by reference to Exhibit 10.33 to the Form
10-Q filed with the OTS for the quarterly period ended June 30,
1995).
10.35 Form of Indemnity Agreement between the Bank and its directors *
and senior officers (incorporated by reference to Exhibit 10.35
to the 1995 Form OC).
10.36 Letter from the OTS to the Bank dated December 8, 1995, termin- *
ating the Supervisory Agreement as of the date of the letter
(incorporated by reference to Exhibit 10.36 to the Form 10-K
filed with the OTS for the fiscal year ended December 31,
1995 (Docket No. 5770)).
10.37 Loan Servicing Purchase and Sale Agreement dated May 15, 1996
between Fidelity and Western Financial Savings Bank.
27. Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None
* Previously filed
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BANK PLUS CORPORATION
Registrant
Date: August 8, 1996 /s/ Richard M. Greenwood
---------------------------------------
Richard M. Greenwood
President and Chief Executive Officer;
Vice Chairman of the Board
Date: August 8, 1996 /s/ William L. Sanders
---------------------------------------
William L. Sanders
Executive Vice President and
Chief Financial Officer
32
<PAGE>
EXHIBIT 10.37
LOAN SERVICING PURCHASE AND SALE AGREEMENT
This Loan Servicing Purchase and Sale Agreement for the purchase and sale
of mortgage loan servicing rights (the "Agreement") is made and entered into as
of this 15th day May, 1996 by and between Western Financial Savings Bank F.S.B.,
a federally chartered savings institution("Buyer"), having a place of business
at 23 Pasteur, Irvine, California, 92718, and Fidelity Federal Bank F.S.B., a
federally chartered bank savings institution, ("Seller"), having its principal
place of business at 4565 Colorado Boulevard, Los Angeles, California 90039.
W I T N E S S E T H:
WHEREAS, Buyer desires to buy and Seller desires to sell the Servicing
Rights Seller has in certain Mortgage Loans secured by first or second liens on
real estate;
WHEREAS, the Seller has (i) originated, (ii) purchased and underwritten or
(iii) purchased the Servicing Rights to the Mortgage Loans and serviced the
Mortgage Loans which are the subject of this Agreement and herein makes certain
representations relative thereto; and
WHEREAS, Buyer and Seller have agreed upon the terms set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties do hereby agree as
follows:
ARTICLE I.
Definitions
All words or phrases defined in this Article I. (except as herein otherwise
expressly provided or unless the context otherwise requires) shall, for all
purposes of the Agreement, have the respective meanings specified in this
Article.
Section 1.01. Accounts Receivable means, including but without limitation,
principal and interest Advances with respect to the Mortgage Loans, escrow
account receivables and foreclosure account receivables net of escrow Advances.
Section 1.02. Advances means payments of principal, interest, taxes, insurance,
ground rents, assessments and similar charges advanced on behalf of the
Mortgagor under a Mortgage Loan by Seller or Buyer, as the case may be, with
respect to the Mortgage Loans.
<PAGE>
Section 1.03. Agreement means this Loan Servicing Purchase and Sale Agreement
and any written, executed and delivered amendments or modifications thereto.
Section 1.04. Borrower means the obligor on a mortgage note.
Section 1.05. Business Day means any day of the week other than Saturday,
Sunday or a legal holiday or a day or portion thereof during which the Purchaser
or the Seller is not open for business.
Section 1.06. Custodian is an entity acting as a Mortgage Loan document
Custodian under any custodial agreement or pursuant to Agency requirements, or
any successor in interest to the Custodian.
Section 1.07. Cut-off Date means the date each month coinciding with the
applicable Investor accounting cycle on which a reconciliation is performed of
all funds received on behalf of any Investor during the proceeding accounting
cycle.
Section 1.08. Defect means any untruth, omission or incorrectness, in any
material and adverse respect, of any representation or warranty contained
herein.
Section 1.09. Eligible Mortgage Loan is defined in Section 2.02.01.
Section 1.10. Escrows or Escrow Accounts means all escrow, impound and
custodial accounts maintained under the Servicing Agreements or otherwise
relating to the Mortgage Loans including, without limitation, all buydown
accounts and all accounts established for purposes of receiving funds for the
payment of principal, interest, taxes, insurance premiums, assessments and
similar charges, suspense, buydown funds, completion escrow monies and unearned
fees, provided such fees are deemed earned as collected relating to the Mortgage
Loans and interest accrued on such funds for the benefit of the Mortgagors under
the terms of the Mortgage Loan or applicable law or otherwise.
Section 1.11. Estimated Purchase Price means the amount calculated as described
in Section 2.03.01 as of the Sale Date.
Section 1.12. FHLMC means the Federal Home Loan Mortgage Corporation, or any
successor thereto.
Section 1.13. FNMA means the Federal National Mortgage Association, or any
successor thereto.
Section 1.14. Foreclosure Mortgages means all loans which have been either
recommended to the Investor for foreclosure by Seller, or are 90 days or more
past due as of the Sale Date, or are actually in foreclosure.
2
<PAGE>
Section 1.15. Interim Period is the period between the Sale Date and the
Transfer Date.
Section 1.16. Investor means FNMA (Federal National Mortgage Association), or
FHLMC (Federal Home Loan Mortgage Corporation), or any other person, party or
entity that owns in whole or in part the Mortgage Loans.
Section 1.17. Liquidate means, with reference to a Mortgage Loan, to remit to
Buyer all funds necessary to remove the Mortgage Loan from the Pool and to cover
out-of-pocket costs and expenses for such removal paid by Buyer with respect to
such Mortgage Loan.
Section 1.18. Loan Servicing Purchase and Sale Agreement means this Agreement
between Buyer and Seller whereby Buyer agrees to buy from Seller and Seller
agrees to sell, transfer and assign to Buyer all right, title and interest of
Seller in the Servicing Rights.
Section 1.19. Mortgage means a mortgage, Deed of Trust or other instrument
pledging property as security for payment of a Mortgage Note.
Section 1.20. Mortgage Documents means all documents specified in the Transfer
Procedures set forth in Exhibit C and by reference made a part hereof,
pertaining to a particular Mortgage Loan.
Section 1.21. Mortgage Loan means an individual Mortgage Loan the Servicing
Rights of which are sold by Seller to Buyer under this Agreement as more fully
identified in Exhibit A, attached hereto and incorporated herein by reference.
--
This term includes Eligible Mortgage Loans and Non-Eligible Mortgage Loans, but
excludes Foreclosure Mortgages, even if the latter are identified on Exhibit A.
--
Section 1.22. Mortgage Loan File means all documents relating to the Mortgage
Loan that are necessary or customary for servicing in accordance with Investor
guidelines and procedures, applicable law and regulatory requirements,
including, but not limited to those documents described in Exhibit C.
-
Section 1.23. Mortgage Note means a promissory note secured by a Mortgage.
Section 1.24. Mortgagor means any pledgor of the real estate encumbered as
security for a Mortgage Note.
Section 1.25. Non-Eligible Mortgage Loan means a loan that is not an Eligible
Mortgage Loan as defined in Section 2.02.01.
Section 1.26. Original Mortgage Loan Files means all documents relating to the
Mortgage Loan that are necessary or customary for servicing in accordance with
Investor guidelines and procedures,
3
<PAGE>
applicable law and regulatory requirements, including, but not limited to those
documents described in Exhibit C.
-
Section 1.27. P & I means principal and interest.
Section 1.28. PMI means private mortgage insurance and refers to the companies
providing such insurance.
Section 1.29. Pool means a group of Mortgage Loans that collateralized a
mortgage-backed security issue.
Section 1.30. Private Investor means any investor, including the Seller, other
than FHLMC and FNMA.
Section 1.31. Purchase Price is defined in Section 2.03.
Section 1.32. Records means Mortgage Loan Files, insurance files, tax records,
collection records, Mortgage Documents, ledgers, computer printouts and other
records, data or information relating to the Mortgage Loans, the Escrow
Accounts, the Pools or as otherwise provided in this Agreement.
Section 1.33. Loan Repurchase or Repurchase means that Buyer shall return to
Seller all Servicing Rights related to the applicable Mortgage Loan(s) and
Seller shall refund to Buyer the Purchase Price of such Servicing Rights to
include the following:
For the first five years, after the Sale Date, Seller shall reimburse
Buyer the then current unpaid principal balance times 1.142%, (or .85% if the
----- ----
loan is from Exhibit G), plus the unpaid principal balance and any premium for
Mortgage Loans requested and paid for by the Investor, accrued unpaid interest
paid by Buyer to Investor, plus any unpaid advances. Subsequent to the end of
the five year period after the Sale Date, repurchases shall be consummated by
payment of all unpaid advances then in existence, reimbursements of any premiums
to Investor, the unpaid principal balance and accrued, unpaid interest paid by
Buyer to Investor.
Any loan repurchase shall be completed by the parties according to Investor
requirements or at the latest, within 30 days after any valid written Investor
repurchase demand is made by Buyer or Investor, and after Seller has exhausted
any appeal processes with Investor as provided for herein. If there is no
Investor on a Mortgage Loan being repurchased, the loan repurchase shall be
completed within 30 days after any demand by Buyer.
Section 1.34. Sale Date is defined in Section 2.04.
Section 1.35. Subservicing Fee is defined in Section 3.01.
Section 1.36. Servicing Rights means all of Seller's right to receive the
servicing fee income and any and all ancillary or other
4
<PAGE>
income including, without limitation, late charge income, and all of Seller's
right to hold and administer any related Escrows and the Records arising from or
connected to any of the servicing of the Mortgage Loans identified on Exhibit A,
--
attached hereto and incorporated herein by reference, as of the Sale Date.
Section 1.37. Settlement Date shall be defined as five (5) Business Days after
Transfer Date.
Section 1.38. T & I means taxes and insurance.
Section 1.39. Transfer means, Buyer receives from Seller originals or copies,
as applicable, of all documents as outlined on Exhibit C. Seller will insure an
-
orderly transfer of servicing and comply with Buyer's transfer Instructions,
(Exhibit E attached hereto and incorporated herein by reference) and such other
-
reasonable requirements pertaining to the processing and shipping of the loan
files, insurance files, tax records, collection records and any other records,
including tapes and disks, that Buyer reasonably deems proper and necessary to
transfer records in order to service the Mortgage Loans.
Section 1.40. Transfer Date is defined in Section 2.05.
ARTICLE II.
Terms and Conditions
Section 2.01. Purchase and Sale
Buyer hereby agrees to buy from Seller and Seller hereby agrees to sell,
transfer and assign to Buyer all right, title and interest of Seller in and to
the Servicing Rights.
Section 2.02. Eligible Mortgage Loans
2.02.01. Eligible Mortgage Loans are limited to Mortgage Loans, as of the
Sale Date, which are not (i) two monthly installments or more past due, (ii)
Foreclosure Mortgages, (iii) in bankruptcy, or (iv) in litigation, (except
disclosed ARM litigation, Exhibit F). Any Mortgage Loan, the facts of which
place it within the situation described in (i), (ii), (iii), and/or (iv) above,
shall be deemed a Non-Eligible Mortgage Loan for purposes of this Agreement.
Buyer shall have no obligation on the Sale Date or at any date subsequent
thereto, to pay for the Servicing Rights to any Non-Eligible Mortgage Loans;
however, Non-Eligible Mortgage Loans may be transferred to and accepted at
Buyer's option under and subject to all terms of this Agreement. For any
Mortgage Loan for which a payoff statement was issued on or prior to the Sale
Date and subsequently pays off within 30 days after the Sale Date, the loan
becomes ineligible and Seller will refund any Purchase
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Price paid less servicing income earned to the Purchaser. Foreclosure
Mortgages, as of the Sale Date, and the Servicing Rights to such Foreclosure
Mortgages, shall not be transferred to or purchased by the Buyer, as
contemplated herein or if not repurchased prior to the Transfer Dates, Seller
agrees to pay Buyer the sum of $500 for each Foreclosure Mortgage transferred.
Seller will exercise its best reasonable efforts to see that Foreclosure
Mortgages and the Servicing rights thereto are not included in Mortgage Loans
identified for transfer to Buyer.
2.02.02. Buyer reserves the right to reject, prior to the Sale Date, any
Mortgage Loans where properties, based on the sole discretion of the Buyer, are
delinquent or require substantial repairs due to natural disasters (including
but not limited to earthquakes and floods).
Section 2.03. Purchase Price and Terms of Payments
2.03.01. Purchase Price. The Purchase Price shall be the result of
multiplying 1.142% by the unpaid principal balance of all Eligible Mortgage
-----
Loans as defined in Section 2.02., with the exception of that group of loans
identified in Exhibit G and by reference made a part hereof, totalling 687 loans
for approximately $63 million which shall be priced by multiplying .85% by the
----
unpaid principal balance. Notwithstanding anything to the contrary, should any
Mortgage Loan(s), the Servicing Rights of which are sold hereunder, be removed
from this Agreement prior to the Sale Date, pursuant to applicable provisions of
the Agreement, then, in such event, the Purchase Price shall be adjusted
accordingly by Buyer using the same pricing methodology used by Buyer to
calculate the original Purchase Price.
2.03.02. Terms of Payment. The payment of the Purchase Price shall be as
follows:
(A) 20% of the Purchase Price ("Initial Deposit") will be paid to Seller as a
credit against the Purchase Price, within three (3) business days after the
execution of the Purchase and Sale Agreement, by wire transfer of
immediately available funds.
The Initial Deposit shall be refunded to Buyer together with accrued
interest at the average Federal Funds Rate as published in the Wall Street
Journal during the period from payment by Buyer through refund to Buyer, in
the event that the Buyer declines to consummate the transaction prior to
the transfer pursuant to its rights as set forth herein. The refund shall
be paid within three business days from the notice by Buyer that it is
declining to consummate the transaction. The Servicing fees remitted to
Buyer during the Interim Period (Sale Date through Transfer Date) shall be
refunded to Seller and the Subservicing fees paid to Seller during the
Interim Period shall be refunded to Buyer.
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(B) 70% of the Purchase Price shall be paid to Seller by wire transfer of
immediately available funds, at the later of five (5) business days after
the Transfer Date or upon receipt of materially all records related to the
servicing of the Mortgage Loans by Buyer or Buyer's designated Custodian.
The respective Transfer Dates will be the dates on which the Servicing
functions are actually assumed by the Buyer and is anticipated to be June
1, 1996 for the FNMA and Private Investor loans, and June 16, 1996 for the
FHLMC loans.
(C) The balance of the Purchase Price shall be paid to Seller by wire transfer
of immediately available funds, at the later of 30 days after the Transfer
Date or upon receipt of all remaining records and loan documents related to
the servicing of the Mortgage Loans by Buyer or Buyer's custodian as
directed in Section 3.03. If all documentation, other than recorded
assignments from Seller to Buyer, has not been received within ten (10)
business days after the Transfer Date, Purchaser shall be entitled to
retain and pay upon receipt of such documentation, the pro-rata portion of
the remaining Purchase Price as specified in the Agreement with respect to
such Mortgage Loans for which not all documentation has been delivered to
Buyer.
Section 2.03.03. Verification of Estimated Purchase Price and Other Amounts to
be Transferred (a) As soon as possible, but no later than within five (5)
Business Days after the Sale Date, Seller shall determine with respect to the
Mortgage Loans as of the Sale Date from its books and Records and promptly
notify Buyer in writing of : (i) the aggregate outstanding principal balance of
all Mortgage Loans; (ii) the aggregate principal balance of all Non-Eligible
Mortgage Loans; (iii) the amount of all Accounts Receivable; and (iv) the
amount of Escrow Accounts. All such amounts shall be reconciled by Seller to
reports generated by the Seller's automated servicing system and to reports made
to the Investors and all such reports shall be sent to the Buyer within five (5)
Business Days after the Sale Date. Buyer shall notify Seller of any
discrepancies within ten (10) Business Days of receipt thereof.
Section 2.03.04. Verification of Purchase Price and Other Amounts Transferred
(a) As soon as possible, but no later than within five (5) Business Days after
the Transfer Date, Seller shall determine with respect to the Mortgage Loans as
of the Cutoff Date immediately preceding the Transfer Date from its books and
Records and promptly notify Buyer in writing of: (i) the aggregate outstanding
principal balance of all Mortgage Loans; (ii) the aggregate principal balance of
all Non-Eligible Mortgage Loans; (iii) the amount of all Accounts Receivable;
and (iv) the amount of Escrow Accounts. All such amounts shall be reconciled by
Seller to reports generated by Seller's automated servicing system and to
reports made to the Investors and all such reports and reconcilements shall be
sent to the Buyer within five (5) Business Days after the Transfer Date. Upon
receipt of the above, Buyer
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shall notify Seller of any discrepancies within ten (10) Business Days.
Section 2.04. Sale Date
The Sale Date shall be May 31, 1996, for the FNMA and FHLMC and Private
-------------
Investor Servicing Rights as described in Exhibit A. Ownership of all the
Servicing Rights shall be transferred to Buyer on the Sale Date and Seller shall
subservice the Mortgage Loans on behalf of Buyer, pursuant to Section 3.01
below, from the Sale Date to the Transfer Date.
Section 2.05. Transfer Date
The Transfer Date shall be the date on which the Buyer assumes the physical
servicing administration of the Mortgage Loans. The transfer date shall be June
----
1, 1996 for the FNMA and Private Investor loans and June 16, 1996 for the FHLMC
- ------- -------------
loans assuming that the conditions to such transfer have been met. On the
Transfer Date, Buyer shall relieve Seller of its subservicing responsibilities
for the Mortgage Loans transferred. The latest date for the posting of
transactions by the Seller shall be the close of business May 31, 1996 for the
------------
FNMA and Private Investor loans and June 15, 1996 for the FHLMC loans.
-------------
Section 2.06. Conditions of Sale
2.06.01. The obligations of Buyer hereunder shall be subject to the
satisfaction of the following conditions or Buyer's written waiver thereof:
(A) Delivery by Seller to Buyer of Investor's written approval of the transfer
of Servicing Rights and responsibilities to Buyer prior to Transfer Date.
(B) The material accuracy of all Seller representations and warranties as of
the Sale Date and Transfer Date.
(C) Material compliance by Seller with all its obligations hereunder as of the
Transfer Dates.
(D) Except as disclosed in Exhibit "F", Seller has no knowledge of any
litigation, legal or regulatory proceeding pending, threatened or
contemplated against the Seller which would have a material adverse effect,
in the Buyer's reasonable opinion, upon the related Servicing Agreements,
the Mortgage Loans, the Servicing Rights, or the transactions contemplated
herein, or the ability of the Seller to consummate the transaction
contemplated herein or to perform the obligations of the Seller under this
Agreement as of the Sale Date and the Transfer Date.
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(E) Prior to Sale Date, Buyer's receipt of the resolution of the Board of
Directors of the Seller approving the execution of the delivery and
performance of this Agreement certified by the Secretary or an Assistant
Secretary of the Seller (Exhibit D).
-
2.06.02. In the event of the failure of any condition set forth in Section
2.06.01 prior to the Transfer Date, after notice and a thirty (30) day period
during which Seller shall have the right to cure such failure, Buyer may elect
to cancel and terminate this Agreement and forthwith receive refund of all sums
paid to Seller including but not limited to the any deposits together with per
diem interest at the average Federal Funds Rate as published in the Wall Street
Journal during the period from payment by the Buyer through refund to the Buyer,
and subservicing fees paid to Seller less any servicing fees actually remitted
to Buyer in accordance with 3.01 from the date such funds were deposited with
Seller through the date of cancellation or termination.
2.06.03 The obligations of Seller hereunder shall be subject to the
satisfaction of each of the following conditions or Seller's written waiver
thereof:
(A) Prior to Sale Date, Seller's receipt of the resolutions of the Board
of Directors of Buyer approving the execution, delivery and
performance of this Agreement certified by the Secretary or Assistant
Secretary of Buyer.
(B) The material accuracy of all of Buyer's representations
and warranties as of the Sale Date and Transfer Date.
(C) Compliance by Buyer with all of its obligations hereunder.
(D) Approval by Investor to transfer the Servicing Rights to
the Buyer as contemplated herein.
(E) Execution of a mutually acceptable Servicing Agreement with respect to
Seller's Mortgage Loans.
Section 2.07. Division of Costs
Seller shall pay all costs incurred by Seller in the performance of its
obligations under this Agreement, including but not limited to fees for Seller's
attorneys, accountants, Seller's computer service and related costs and broker,
Countrywide Servicing Exchange. Seller shall pay the applicable Investor
transfer fee(s) for the Mortgage Loans transferred to the Buyer. Seller shall
prepare individual assignments and interim or intervening assignments as
required on each of the Mortgage Loans to complete the chain of title to the
Buyer and/or Investor as
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applicable and as required by Investor guidelines, regulations or requirements,
or state or federal law. Seller shall record all such assignments, except those
from Buyer to Investor, and deliver all unrecorded assignments to Buyer, within
five (5) business days after Transfer Date, at its own expense. Prior to the
Settlement Date the Seller will deliver to the Buyer the Seller's certification
that such assignments have been prepared as provided herein and mailed for
recording and Seller shall deliver copies of such assignments sent for recording
to the Buyer. All assignments sent for recording or copies thereof sent to
Buyer shall contain the Seller's and Buyer's loan numbers. Substitutions of
Trustee are to be prepared and recorded on each individual loan, in each
respective county at Seller's expense. On Seller owned Mortgage Loans, a Power
of Attorney will be provided to Buyer to allow Buyer to execute all necessary
documents to process foreclosures and or documents to discharge the lien and or
any other documents needed to service the Mortgage Loans pursuant to the
Agreement.
Buyer shall pay all costs incurred by Buyer in the performance of its
obligations under this Agreement including, but not limited to, fees for Buyer's
attorneys, accountants, computer services, and related costs.
Section 2.07.01 Transportation Costs
Seller shall pay for all costs associated with the shipment of all Records
and Mortgage Loan Files required to be transferred to Buyer or Buyer's Custodian
hereunder. Seller shall bear the risk of loss during transit until such Records
and files are received by the Buyer, or Buyer's Custodian.
ARTICLE III.
Covenants of Servicer
Section 3.01. Servicing Duties Prior to and Subsequent to Transfer Date
Seller shall subservice for Buyer, during the Interim Period, the Mortgage
Loans in accordance with all applicable Investor regulations and procedures,
laws and regulations, and generally accepted prudent servicing standards.
During the Interim Period, Seller shall not accept, with respect to any Mortgage
Loan, any payment insufficient to maintain or restore the Mortgage Loan to a
state of current status, including partial payments and short payments of full
P.I.T.I. except as required by applicable law or regulation, existing
agreements, or Investor requirements. During the Interim Period, Buyer shall be
entitled to receive all (100%) of the Servicing Fees net of the sum of
curtailment interest expense on FHLMC loans less the Subservicing Fee of $5.50
-----
per loan plus ancillary income including but not limited to late charges,
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assumption fees, and miscellaneous fees. The Servicing Fees are to be
calculated and reported to the Buyer no later than the third (3rd) Business Day
after the Investor cutoff. All service fees shall be paid to the Buyer and
shall be paid within five (5) business days after the Investor's cutoff date.
The Seller will retain all escrow balances and any benefit derived therefrom
including, but not limited to, late charges collected during the Interim Period.
Seller shall prepare and deliver such reports as reasonably requested by the
Buyer during the Interim Period. Examples of such reports are described in
3.01.02 below. Within two (2) Business Days after the Transfer Date, Seller
shall deliver to Buyer, Seller's trial balance or a substitute acceptable to
Buyer of Mortgage Loans as of the Cutoff Date immediately preceding the Transfer
Date and all other Records described herein if not previously delivered to Buyer
as required hereunder.
3.01.01 Except as required by applicable law or regulation, Seller shall
not waive any individual escrow requirements on the Mortgage Loans during the
Interim Period without the express written consent of the Buyer.
3.01.02 The Seller's possession of any portion of the Mortgage Documents
and Mortgage Loan Files after the Sale Date shall be at the will of the Buyer
for the sole purpose of facilitating Servicing of the Mortgage Loans during the
Interim Period, and such retention and possession by the Seller is in a
custodial capacity only. During the Interim Period, on the terms set forth in
Section 3.01 above, Seller shall deliver to Buyer, on a monthly basis for each
month commencing on the Sale Date, the reports specified as investor reporting
documentation requirements in Exhibit B.
-
Section 3.02. Investor reporting documentation and remittance requirements are
specified in Exhibit B.
-
1. The T&I and buydown custodial account balances shall be based on the
positive escrow balance plus accrued escrow interest through the Transfer Date,
less escrow advances. Seller shall deliver such funds to Buyer within five (5)
business Days after the Transfer Date.
2. The P&I funds shall be paid to Buyer five (5) Business Days after the
Cutoff Date immediately preceding the Transfer Date via wire transfer of
immediately available funds.
3. No adjustments are to be made to the Pools and the Mortgage Loans in the
Pools between the Sale Date and the Transfer Date without Buyer's written
consent and Investor approval unless such adjustments are normal and customary
and are made in accordance with Investor guidelines.
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Buyer will verify the P&I, T&I and Buydown Custodial Account balances
within five (5) Business Days after receipt of the supporting documentation.
Any discrepancies between Buyer and Seller will be resolved within ten (10)
Business Days.
4. Seller will complete all investor reporting and remitting for the activity
up to and including the Transfer Date.
Section 3.03. Transfer of Records.
3.03.01. At its sole expense, Seller shall deliver to Buyer all documents,
files, reports and similar items as set forth in Exhibit B and Exhibit C
- -
attached hereto and by reference made a part hereof. All Original Mortgage Loan
Files and Microfiche Jackets must be delivered to Buyer's office no later than
the fifth (5th) Business Day after the respective Investor Transfer Date.
Mortgage Loan Files shall be delivered to:
Western Financial Savings Bank, F.S.B.
23 Pasteur
Irvine, CA 92718
Attn: Paul Mattheson, 3rd Floor, Loan Service
3.03.02. All custodial files held by the Seller's Custodian shall be
delivered to the office of Buyer's Custodian, or as otherwise directed by the
Buyer, within five (5) Business Days after the Transfer Date.
Custodial files for FNMA shall be delivered to: Same
3.03.03. Payments and Notices received After Transfer Date
Seller and Buyer acknowledge that, during the sixty (60) day period after
the Transfer Date, all correspondence and funds received by Seller in connection
with the Mortgage Loans, including, but not limited to, tax bills, insurance
premiums, principal, interest, mortgage guaranty or mortgage insurance payment
bills, insurance loss drafts, tax refunds and all other types of payments, are
to be immediately paid over to the Buyer without offset or deduction. Buyer
shall be entitled to the service fees and other servicing related income on all
such payments. During the first thirty (30) day period such correspondence and
funds shall be identified by the Seller by the Seller's loan numbers and shall
be immediately delivered to the Buyer at the Seller's expense by overnight
courier, for the next Business Day delivery, at the address for notice to Buyer.
During the second thirty (30) day period, Seller shall use regular mail to make
such delivery to Buyer. In addition, the Seller shall deliver or cause to be
delivered to the Buyer, as promptly as practicable after receipt by the Seller,
copies of all correspondence received from any Borrower or otherwise relating to
the Mortgage Loans. Following such sixty (60) day period, all such funds and
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<PAGE>
correspondence shall be returned by Seller to the sender with a letter of
explanation, a copy of which letter shall be sent to the Buyer. Funds accepted
by Seller shall be forwarded to Buyer with a letter of explanation.
Section 3.04. Service Bureau Cooperation
The Seller and Buyer will cause their respective service bureaus and/or EDP
departments to cooperate with each other. Seller shall deliver a test tape,
trial tape and an accurate conversion tape at the request of the Buyer. Seller
will provide a written report of all such reports, computer file layouts, and
definitions as needed to facilitate automated transfer, which may be reasonably
requested. Costs incurred by the Seller in the performance of these
aforementioned requirements will be borne by the Seller.
Section 3.05. Investor Approvals and Costs
3.05.01. Prior to the respective FNMA Private Investor and FHLMC Transfer
Dates, Seller shall have secured and delivered to the Buyer, the written
Investor approvals, satisfactory to Buyer, to transfer the Servicing Rights
contemplated hereunder, together with all requisite approvals for the transfer
of custodial and trust documentation and funds (i.e., P&I and T&I) to Buyer.
3.05.02. Seller will satisfy all Investor requirements to transfer
effectively the Servicing Rights from Seller to Buyer and pay and bear any and
all reasonable fees imposed by the Investor to effect the transfer.
Section 3.06. Year-end Reporting
Seller shall be responsible for all government and regulatory reporting
pertaining to servicing activities prior to the Transfer Date including but not
limited to all 1996 year-end Statements to the Mortgagors and to government
----
agencies, such as Form 1099s, 1098s, K-1s and HMDA reporting. Buyer shall be
responsible for all such reporting pertaining to servicing activities after the
Transfer Date.
Section 3.07. Interest on Escrow
Seller shall indemnify and hold Buyer harmless from any and all claims,
damages, costs and/or liabilities arising out of or in connection with Seller's
obligations to pay interest on Escrow Accounts up to the Sale Date. Within five
(5) business days after the Transfer Date, Seller shall remit to Buyer a sum
equal to the interest accrued on impounds as of the Sale Date along with reports
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<PAGE>
separately detailing the accrued but unpaid interest as of the Sale Date and as
of the Transfer Date.
Section 3.08. Notification to Mortgagors
No later than fifteen (15) days prior to the Transfer Date, Seller shall
mail to all Mortgagors, at Seller's cost and expense, a notice advising them of
the occurrence of the sale contemplated hereby and when and where to make
payments on and after the Transfer Date and such other disclosures as required
by Investor or Federal or State law. The letter effecting such notification
shall be reviewed and accepted by Buyer prior to mailing to Mortgagors. In any
event, such notification will be in compliance with all Investor, Federal and
State requirements. Buyer shall at its own expense, within the time period
provided by applicable Federal or State law provide such notification required
to be given by Buyer with respect to the transfer of Servicing Rights pursuant
to this Agreement.
Section 3.09. Notification to Insurance Carriers
Seller shall mail a notice to all appropriate insurance companies, with
respect to the property securing each Mortgage Loan of the occurrence of the
sale contemplated hereby and request the following:
3.09.01. The fire and extended coverage policy with respect to the
property securing each Mortgage Loan, shall name Buyer, its successors and
assigns as mortgagee.
3.09.02. The Private Mortgage Insurance companies and optional insurance
companies Records reflect Buyer as servicer of the Mortgage Loans.
3.09.03. Any flood insurance policy and the catastrophe insurance policy,
with respect to the property securing each Mortgage Loan, shall name Buyer, its
successors and assigns as an insured and contain a lender's loss payable
endorsement in favor of Buyer, its successors and assigns.
Section 3.10. Payment of Property Insurance and Mortgage Insurance Premiums
Seller shall pay, or cause to be paid, prior to the Transfer Dates, all
property and mortgage insurance premiums due prior to and including the Transfer
Date and those due 30 days after the Transfer Date. On the Transfer Date,
Seller shall provide to Buyer a list of those loans on which insurance premiums
are due but, despite Seller's best efforts, it has been unable to pay due to non
receipt of premium billing or for other reasons outside of Sellers control.
Seller agrees to forward to Buyer within three (3)
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Business Days of receipt all such insurance bills received by Seller.
3.11. Payment of Property Taxes
3.11.01. Seller shall pay or cause to be paid, on all impounded loans,
prior to the Transfer Date, all real estate tax bills issued by the
jurisdictions (including all interest, late payments and penalties in connection
therewith) that are due to each taxing authority and relating to the property
securing the Mortgage Loan prior to the Transfer Date. All delinquent taxes will
be advanced on those non-impounded loans with the exception of those tax
installments due April 10, 1996 and December 10, 1996 and those tax installments
due December 10, 1995 and April 10, 1996 for the Seller owned loans. Seller
agrees to forward to Buyer within three (3) Business Days of receipt thereof of
all tax bills received by the Seller. Mortgage Loans with five year pay plans
for delinquent taxes are not acceptable. Mortgage Loans for which Seller is the
Investor and for which Seller has entered into agreements for the repayment of
advances, and five year payment plans for delinquent taxes are acceptable.
3.11.02. Seller shall forward to Buyer, within three (3) Business Days
after Seller's receipt thereof, all property tax bills received by Seller
relating to the Mortgage Loans and which are due more than thirty (30) days
after the Transfer Dates.
3.11.03. For the first sixty (60) days following the Transfer Date, such
delivery shall be made by overnight express service and shall be delivered to
the address referenced in Section 3.03.01.
3.11.04. Seller will insure that all tax identification information for
each Mortgage Loan is maintained on Seller's servicing system to allow the
automated transfer of such data on the Transfer Date.
3.11.05. Seller will load all available hazard insurance policy numbers in
a manner that will allow automated transfer of such data on the Transfer Date.
3.11.06. Seller shall load all PMI Certificate numbers on Seller's
servicing system to allow the automated transfer of such data on the Transfer
Date.
3.11.07. Seller, prior to Transfer Date, shall correctly code all
conventional insured loans on its system to allow the automated transfer of such
data on the Transfer Date.
3.11.08. Seller shall insure that the appraisal values maintained on its
system are accurate, as of the date of the last appraisal, prior to the
Transfer Date.
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3.11.09. Seller shall cause Lereta Tax Service to perform an audit of all
------------------
loans to determine if there are any unpaid taxes outstanding as of the Transfer
Date, and issue a certification to Buyer stating all taxes due have been paid,
or list all such outstanding taxes due with explanations of why the taxes are
not paid. Buyer has the option to decline to accept any Mortgage Loan that has
outstanding taxes owed.
3.11.10. On the Transfer Date, Seller shall cause Seller's tax service to
provide Buyer's tax service with all necessary data to facilitate the transfer
of service.
Section 3.12. Assumptions
Simultaneously with the delivery of the Mortgage Loan Files after the
Transfer Date, Seller shall deliver to Buyer a list of Mortgage Loans on which
Seller has received written notice of pending assumptions. Such list shall
include the assuming Mortgagor's name and social security number, Seller's
Mortgage Loan number, and, if any, the name and social security number of co-
borrowers. Additionally, Seller shall provide to Buyer copies of any assumption
instructions Seller has issued.
Section 3.13. No Solicitation Rights of Buyer and Seller
Solicitation Prohibition
From and after the Sale Date, Buyer and any of its affiliates, has the
unconditional right to directly or indirectly solicit, by means of direct mail,
telephonic or personal solicitation, or otherwise, the Borrowers/Mortgagors of
any of the Mortgage Loans subject to this Agreement, for purposes of prepayment,
refinance, modification of such Mortgage Loans, optional insurance or for any
related or other types of products or services offered by Buyer or any of its
affiliates, for the life of such Mortgage Loans.
From and after the Sale Date, Seller, its agents and affiliates, shall not
directly or indirectly, solicit, and Seller shall exercise reasonable efforts to
prevent any of its agents and affiliates from directly or indirectly soliciting,
by means of direct mail, telephonic, personal solicitation, or otherwise, the
Mortgagors/Borrowers of any of the Mortgage Loans subject to this Agreement, for
purposes of prepayment, refinance, or modification of such Mortgage Loans,
optional insurance or for any related or other types of products or services
offered by Seller or any of its affiliates or agents, for the life of such
Mortgage Loans. Notwithstanding the foregoing prohibition on Seller, it is
understood and agreed that promotions undertaken by Seller or any affiliate or
agent of Seller which are directed at the general public at large or to Seller's
depositors and other non-mortgage customers, including without limitation mass-
mailings based on commercially acquired mailing lists, and newspaper, radio and
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television advertisements, shall not constitute solicitation under this section.
In spite of the above, Seller does not grant Buyer the right to send a
solicitation that solely solicits the borrower for prepayment, refinance or
modification of a Mortgage Loan which is owned by the Seller. Buyer may,
however, make a solicitation that includes a solicitation for prepayment,
refinance or modification on any and all Mortgage Loans owned by Seller that are
subject to this Agreement, so long as such solicitation includes other types of
products, services, and/or insurance offered by Buyer or any of its affiliates.
Section 3.14. Powers of Attorney
On the Transfer Date, Seller shall deliver to Buyer a special Power of
Attorney, in a form satisfactory to Buyer and its counsel, empowering Buyer to
endorse in the name of Seller, Mortgage Loan payment checks, loss draft checks
relating to Mortgage Loans, and similar items to Buyer. Such Powers of Attorney
shall expire on December 30, 1996.
-----------------
Section 3.15. Escrow and Escrow Analysis
3.15.01 Seller shall refund any escrow overages (surpluses) in excess of
$50 as a result of escrow analysis prior to the Transfer Date. All negative
balances will be researched and analyzed prior to transfer.
ARTICLE IV.
Representations and Warranties
Section 4.01. General Representation and Warranties of Seller
Seller hereby represents and warrants that as of the Sale Date and as the
Transfer Date:
4.01.01. Seller is a duly organized and validly existing federally
chartered savings institution.
4.01.02. This Agreement has been duly authorized on behalf of Seller by
all requisite corporate action as a valid and existing obligation of Seller,
enforceable against Seller in accordance with its terms, subject to laws
respecting bankruptcy, receivership, insolvency and other laws affecting
creditor's rights generally.
4.01.03. Seller has good and marketable title to all the Servicing Rights,
and is aware of no adverse claims to or encumbrances on such rights. Seller has
the sole right and authority to sell the Servicing Rights to Buyer and is not
contractually or otherwise obligated to sell the Servicing Rights
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to any other party. Neither the Mortgage Loans nor the Servicing Rights are
hypothecated, assigned or pledged as collateral for any obligations of Seller,
provided, however, loans for which Seller is the Investor, (exclusive of the
Servicing Rights, therefor) may be hypothecated, assigned or pledged as
collateral.
4.01.04. Neither the execution of this Agreement nor the consummation of
this transaction results in a violation of Seller's articles of incorporation or
bylaws, is a breach of or constitutes an event of default under any contract,
loan agreement, indenture, mortgage or other undertaking to which Seller is
subject, nor violates any outstanding judgment, order, injunction, law, rule or
regulations to which Seller is subject or by which it or its properties may be
bound.
4.01.05. No authorization, approval or consent of or declaration of filing
including, but not limited to, any filing required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, with any governmental authority
or regulatory body, Federal, State or local, is necessary or required of the
Seller in connection with the execution and delivery of this Agreement or the
performance by the Seller, except approval from the Investor for the transfer of
the Servicing Rights to the Buyer.
4.01.06. The Seller's capital level exceeds the minimum regulatory
requirements for a "well capitalized" institution as of the Sale Date.
Section 4.02. Representations and Warranties of Seller Relating to the Pools
and Servicing Rights:
Seller represents and warrants that as of the Sale Date:
4.02.01. Seller has been duly and validly authorized to sell, assign and
transfer the Servicing Rights, and the sale will be in compliance with all laws,
regulations and guidelines under which Seller operates, subject to approval of
such transfer by the Investors.
4.02.02. Except for the relevant servicing contracts, the Seller has not
entered into any contract affecting the Servicing Rights which is or will be
binding to Buyer.
Section 4.03. Representations and Warranties of Seller Relating to the
Servicing of the Mortgage Loans:
Seller represents and warrants that as of the Sale Date and the Transfer
Date:
4.03.01. (i) The unpaid balances of the Mortgage Loans are as stated in
the Mortgage Documents and Mortgage Loan Files to be delivered to Buyer. All
payments received by Seller with respect
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to any Mortgage Loan have been remitted and properly accounted for as required
by the Investors.
(ii) No payment of principal or interest on any such Mortgage Loan
has been forgiven, suspended or rescheduled except as disclosed and no waiver,
alteration or modification has been made to the terms or provisions of such
Mortgage Loans except as allowed by Investor guidelines, regulations or
requirements.
4.03.02. Except as disclosed in Exhibit "F", and by reference made a part
hereof, there are no actions, claims, litigation, lawsuit or governmental
investigations pending or, to the knowledge of the Seller, threatened that
relate to the Servicing Rights, the Mortgage Loans or any of them, other than
usual and customary actions such as foreclosure proceedings.
4.03.03. Seller has and will keep in full force and effect an Errors and
Omissions policy with respect to its servicing operations and a Financial
Institution's Fidelity Blanket Bond in an amount sufficient to comply with
Investor guidelines. Such policies shall be maintained for a period of no less
than one year subsequent to the Transfer Date.
4.03.04. There is in force with respect to mortgaged property subject to
any Mortgage Loan, (i) a hazard insurance policy issued by an insurance carrier,
which provides at a minimum for fire and extended coverage in an amount not less
than the outstanding principal balance of the Mortgage Loan or guaranteed
replacement value of improvements, whichever is less, and, conforms with
Investor guidelines and applicable statutes and (ii) if required by the flood
Disaster Protection Act of 1973, a flood insurance policy in an amount
representing coverage not less than the lesser of: (1) the outstanding
principal balance, or (2) the maximum amount of insurance which is available
under such Act.
4.03.05. Accounts Receivable: The Accounts Receivable are valid and
existing accounts owing to Seller, and are carried on the books of Seller at
values determined in accordance with generally accepted accounting principles,
and are not subject to any setoffs or claims of the account debtor arising from
acts or omissions of, or otherwise known to, Seller.
4.03.06. Missing Social Security Number: Forms W-8 or W-9 The Seller
will, at the Transfer Date, provide a report satisfactory in form and content to
the Buyer to substantiate compliance with Internal Revenue Service and other
applicable U.S. Treasury Department regulations and requirements applicable to
reporting of interest and obtaining Social Security numbers. The Seller also
agrees to provide the certification of an authorized officer of the Seller
certifying that the Seller has complied with all Internal Revenue Service and
U.S. Treasury Department requirements for due diligence in obtaining and
maintaining tax
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identification numbers for each Mortgage Loan. In addition to the foregoing,
the Seller agrees to reimburse the Buyer for any and all penalties and/or costs
incurred because of Internal Revenue Service and, or, U.S. Treasury Department
requirements for any missing tax identification numbers and forms incurred as a
result of infractions which occurred prior to the Transfer Date.
4.03.07. All Investor Pools have been properly certified and/or recertified
as required by Investor requirements and otherwise comply with all Investor
requirements and regulations.
Section 4.04. Representations and Warranties Relating to Mortgage Loans:
Seller represents and warrants that as of the Sale Date and Transfer Date:
4.04.01. The Mortgage Note and the related Mortgage (or Deed of Trust) are
genuine and each is a legal, valid and binding obligation of the maker thereof,
enforceable in accordance with its terms. All parties to the Mortgage Note and
the Mortgage had legal capacity to execute the Mortgage Note and the Mortgage
and each Mortgage Note and Mortgage have been duly and properly executed by such
parties, and is properly assigned in the name of the Investor.
4.04.02. The terms of each Mortgage Note and Mortgage have not been
modified, no party thereto has been released in whole or in part and no part of
the mortgaged property has been released unless approved by the Investor, if
required. The full original principal amount of the Mortgage has been advanced
to the Mortgagor or paid to third parties on his behalf in accordance with
Investor guidelines, regulations and requirements.
4.04.03. To Seller's knowledge there are no uninsured casualty losses or
casualty losses where coinsurance has been, or Seller has reason to believe it
will be, claimed by the insurance company or where the loss, exclusive of
contents, is greater than the net recovery from the hazard insurance carrier.
No casualty insurance proceeds have been used to reduce Mortgage Loan balances
or for any other purposes except to make repairs to the mortgaged premises or as
otherwise allowed by the Investor. All damages with respect to which casualty
insurance proceeds have been received by or through Seller have been properly
repaired or are in the process of such repair with such proceeds in accordance
with Investor requirements, regulations and guidelines.
4.04.04. All other documentation with respect to the Mortgage Loans has
been properly and accurately completed and executed and all documents required
by the Investor and necessary to service the Mortgage Loans are in Mortgage Loan
Files or such documentation is held in the Seller's Pool custodial files held by
the Seller's document custodian.
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4.04.05. The PMI premiums, if applicable, have been paid. Seller has not
acted or failed to act in any manner, the effect of which with respect to each
Mortgage Loan would be to invalidate the contract of insurance or guarantee with
the PMI carriers.
4.04.06. Each Mortgage Loan meets, or is exempt from, applicable state or
federal laws, regulations and other requirements pertaining to usury and no
Mortgage Loan is usurious.
4.04.07. Each Mortgage Loan was originated by Seller or purchased by
Seller from an approved third party originator or correspondent in conformity
with the requirements of all applicable federal and state laws, rules or
regulations governing consumer credit and truth-in-lending and Investor
guidelines and requirements. Each Mortgage Loan was made in compliance with all
other laws, rules and regulations pertaining thereto and there occurred no fraud
by the Borrower, Mortgagor or any other party or entity.
4.04.08. Seller has no knowledge of damage to the property securing a
Mortgage Loan by fire, windstorm or other casualty, or any other circumstances
or conditions which would cause any Mortgage Loan to become delinquent, or
adversely affect the value or marketability of the Mortgage Loans. If timely
repair is presently being undertaken with casualty insurance proceeds or an
insurance claim is being processed with the appropriate insurance company, no
breach of this warranty shall occur provided the repaired property securing a
Mortgage Loan is restored to substantially the same condition it was in prior to
the casualty.
4.04.09. No Mortgage Loan has been originated and/or serviced in violation
of (a) any applicable federal or state law or regulation, or (b) the rules,
regulations or requirements of (i) any regulatory agency having jurisdiction
over Seller or (ii) any insurance company in any way associated with any
Mortgage Loan, the effect of which violation, (1) would impair, invalidate or
reduce (i) any Investor approvals, (ii) any private insurer (iii) any title
insurance policy, (iv) any hazard insurance policy, (v) any flood insurance
policy required by the National Flood Insurance Act of 1968 as amended, (vi) any
tax liens or assessment or (vii) any fidelity bond direct surety bond or errors
and omissions insurance required by FNMA and private Mortgage insurer, or any
investor; or (2) would result in a breach of a representation or warranty made
by Seller to Buyer or its successors and assigns hereunder or made by Seller to
any Investor; or (3) would result in Buyer, or its permitted assigns, having to
repurchase or incur curtailment of full reimbursement or enter into any form of
indemnification agreement with respect to such Mortgage Loan, or pay a fine.
4.04.10. Seller shall have properly conducted an escrow analysis for each
Mortgage Loan during the preceding twelve month period ending on the Transfer
Date in compliance with Federal,
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State and RESPA regulations. All books and conditions with respect to each
Mortgage Loan shall be in good condition and shall have been adjusted to reflect
properly the results of the escrow analysis. Seller shall have delivered
notification to the Mortgagor under each Mortgage Loan of all payment
adjustments resulting from such escrow analysis.
4.04.11. Seller has not been informed that any property subject to a
Mortgage has been or will be condemned, except if such condemnation will not
have a material adverse effect on the value of such property or its status as
security for a Mortgage Loan.
4.04.12. All documents submitted are genuine, and all other
representations as to each such Mortgage Loan are true and correct and meet the
requirements and specifications of all parts of this Agreement.
4.04.13. Seller represents that to the best of its knowledge as of the
Transfer Dates there are no properties securing Mortgage Loans subject to this
Agreement which are subject to any homeowner's assessment which impairs or could
impair the first lien priority on such properties.
4.04.14. All Mortgage Loans have been properly serviced in all material
respects in accordance with Investor guidelines, regulations and requirements.
4.04.15. Where applicable law requires the payment of interest on Escrow
Accounts, all such interest has been properly accrued and credited.
4.04.16. Left blank intentionally
4.04.17. To the best of Seller's knowledge, each Mortgage Loan that may
have been damaged due to earthquake, flood, fire or other natural disaster has
been fully repaired and restored, each loan file will have documentation to
substantiate required major repairs.
4.04.18. Each Mortgage Loan has a lender's policy of title insurance that
extends coverage to its successors and assigns as additional named insured of
said policy of title insurance running for the benefit of the Seller, its
successors or assigns.
4.04.19. All interest rate adjustments with respect to adjustable rate
mortgage loans, which have converted to fixed rate mortgage loans, including
periodic adjustments and the conversion adjustment, have been calculated
properly and made in accordance with the terms of the related Mortgage Note.
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4.04.20. All interest rate adjustments with respect to adjustable rate
mortgage loans, have been calculated properly and made in accordance with
applicable law.
Section 4.05. Representations and Warranties of Buyer
Buyer hereby represents and warrants as follows:
4.05.01. Buyer is a duly organized federally chartered savings
institution, and validly existing at 23 Pasteur, Irvine, California, 92718, in
good standing. Buyer is in good standing in each jurisdiction in which the
failure to be in such good standing would have a material adverse effect on the
consummation of the transaction contemplated hereby or the Pools, Mortgage or
Servicing Rights.
4.05.02. This Agreement has been duly authorized by all requisite
corporate and regulatory action as deemed necessary and is a valid and existing
obligation of Buyer and is enforceable against Buyer in accordance with its
terms, subject to laws respecting bankruptcy, receivership, insolvency and other
laws affecting creditors' rights generally.
4.05.03. The execution and consummation of this transaction do not result
in a violation of Buyer's articles of incorporation or bylaws, and do not result
in a breach of or constitute an event of default under any contract, loan
agreement, indenture,mortgage or other undertaking to which Buyer is subject nor
violate any outstanding judgment, order, injunction, law rule or regulation to
which Buyer is subject or by which it or it's properties may be bound.
4.05.04. Buyer, is an approved Seller-Servicer, in good standing with the
Investors and has requisite financial criteria and adequate resources necessary
to complete this transaction.
4.05.05. There is no litigation, legal proceedings, or regulatory actions
pending, or threatened against the Buyer which can reasonably be expected to
have a material adverse effect upon this Agreement, or the transaction
contemplated hereunder, or Buyer's ability to perform its obligations hereunder.
4.05.06. The Buyer will service the Mortgage Loans in compliance with all
applicable FNMA/FHLMC and PMI company guidelines and regulations and shall
comply with all applicable state laws after the Transfer Date.
4.05.07. No authorization, approval or consent of, or declaration of
filing including, but not limited to, any filing required under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended, with any governmental
authority or regulatory body, federal, state or local, is necessary or required
of Buyer in
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connection with the execution and delivery of this Agreement or the performance
by Buyer hereunder, except approval from the investor for the transfer of the
Servicing Rights to Buyer.
4.05.08. The Buyer's capital level is in full compliance with all
Regulatory and Investor requirements as of the Sale Date.
Section 4.06. Survival
All representations and warranties contained herein, and all rights of the
parties arising hereunder, shall remain in force for the life of each Mortgage
Loan and for one (1) year thereafter relative to the Mortgage Loans, Mortgage
Documents and Mortgage Loan files, and for a period of ten (10) years after
Transfer Date(s) relative to the Servicing of the Mortgage Loans.
ARTICLE V.
5.01. Indemnification of Buyer by Seller
5.01.01. Seller hereby agrees to indemnify and hold Buyer harmless,
against any claim, cause of action, suit, proceeding or demand, and any and all
losses, liabilities, costs and expenses of any nature whatsoever associated
therewith ("Buyer's Claims") arising out of, or in connection with, directly or
indirectly, any breach of any representation or warranty or any other obligation
of Seller under this Agreement or otherwise, resulting from any state of facts
and or conditions existing on or before the Transfer Dates involving the
Servicing Rights, Mortgage Loans and/or Pools subject to this Agreement,
including but not limited to:
(A) In the event any Investor requests or demands repurchase of any Mortgage
Loan and/or the Servicing Rights to which are transferred under this
Agreement, for any reason, or requires Buyer to indemnify such Investor
with respect to a Mortgage Loan, Seller shall indemnify and hold Buyer
harmless and make Buyer whole pursuant to any such repurchase and indemnity
required or demanded by Investor. This shall include, but is not limited to
Seller agreeing upon Buyer's demand to repurchase any Mortgage Loan and
Repurchase the Servicing Rights where there occurred fraud by the Borrower,
Mortgagor, or any other party, whether or not Seller had reason to believe
or know that such fraud occurred or existed.
(B) Any and all Buyer's Claims involving misrepresentations, breach of warranty
or nonfulfillment of any agreement or duty of Seller involving the Pools,
Mortgage, Mortgage Loans, or this Agreement and based upon a state of facts
existing on or before the Transfer Dates.
(C) Any and all Buyer's Claims involving unfair collection practices, failure
to disclose, deceptive acts or practices, breach
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of contract, the collection of usurious interest and the like, pertaining
to the subject matter of this Agreement, and based upon a state of fact
existing on or before the Transfer Date.
(D) Any and all Buyer's Claims involving tax and insurance payments or escrow
deposits relating to the subject matter of this Agreement upon which tax
and insurance escrow deposits are provided for in the instruments securing
the Mortgage Loans and which were payable on or before the Transfer Date.
(E) Any and all actions of prior owners or servicers of the Mortgage Loans and
of Seller, its employees, representatives and agents, whether by omission,
acts, or commission, pertaining to the subject matter of the Agreement and
occurring prior to the Transfer Date which materially adversely affect the
enforceability of the instruments securing a Mortgage Loan or the
collectability of the Mortgage Notes.
(F) Any misrepresentation made by Seller pursuant to this Agreement, or in any
schedule, statement or certificate furnished by Seller pursuant to this
Agreement.
(G) Any breach of a representation or warranty by Seller, or the nonfulfillment
of any covenant or obligation of Seller contained in this Agreement, or in
any schedule, statement or certificate furnished by Seller pursuant to this
Agreement.
(H) This indemnity of the Buyer by the Seller, provided in this Article V.
shall remain in full force and effect regardless of any investigation made
by Buyer or its representatives.
5.01.02. Seller has disclosed to Buyer that it is a defendant in several
individual and purported class actions concerning the manner in which Seller has
adjusted the applicable interest rate or other terms on adjustable rate Mortgage
Loans and that there is a potential for additional similar or different claims
or actions to be made or brought with respect to other adjustable rate Mortgage
Loans (collectively, the "ARM Claims"). Seller hereby agrees to indemnify,
defend, and hold harmless Buyer and Buyer's parent companies, subsidiaries,
affiliates, officers, directors, employees and agents from and against all ARM
Claims and any and all losses, liabilities, damages, punitive damages,
assessments, liabilities, judgments, settlements, fees, fines, court costs,
attorneys' fees and other costs and expenses of any nature whatsoever associated
herewith, including, without limitation, all ARM Claims that directly or
indirectly arise from, are associated with or relate to (a) Seller's servicing
of the adjustable rate Mortgage Loans on or before the Transfer Date(s) and (b)
after the Transfer Date(s), Buyer continuing to service the adjustable rate
Mortgage Loans substantially in the same manner as Seller did on or before the
Transfer Date(s), provided that Buyer provides reasonably prompt notice of any
such ARM Claims to Seller and provides reasonable
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cooperation to Seller and its counsel in the conduct of any defense. Seller
shall have the sole right and responsibility to select counsel to defend the ARM
Claims and such counsel may jointly represent Seller and Buyer, provided that
any such counsel shall be reasonably acceptable to Buyer. Buyer acknowledges at
the present time that it does not object to the following law firms: Gibson,
Dunn and Crutcher: Manatt, Phelps & Phillips and Sullivan & Cromwell. Anything
herein to the contrary notwithstanding, Seller's obligation to indemnify, defend
and hold harmless Buyer with respect to the ARM Claims shall include, without
limitation, (i) any restitution amounts ordered or requested by any regulatory
agency with authority over Seller or Buyer as well as any civil money penalties
and other costs and expenses incurred by Buyer and (ii) all audit, adjustment
and correction, documentation and other expenses and costs relating to the
resolution of any ARM Claim.
The parties acknowledge, recognize and agree that the Seller's manner of
servicing of the adjustable rate Mortgage Loans on or before the Transfer
Date(s) shall, as a practical matter, require the Buyer to service such Mortgage
Loans in a similar fashion after the Transfer Date(s). Accordingly, the parties
agree that the provisions of this section 5.01.02 shall apply notwithstanding
the fact that Buyer continues, after the Transfer Date(s), to service the
adjustable rate Mortgage Loans in substantially the same manner as Seller did on
or before the Transfer Date(s).
Seller's indemnification obligation under this Section 5.01.02 shall be a
payment obligation and not merely a reimbursement obligation, it being
understood that the parties have a "contrary intention" with respect to the
provisions of paragraph 2 of Section 2778 of the California Civil Code as in
effect on the date of this Agreement.
5.01.03. The indemnity of the Buyer by the Seller provided in this Section
5.01 shall remain in full force and effect for as long the representations and
warranties survive.
5.02. Indemnification of Seller by Buyer
5.02.01 Buyer hereby agrees to indemnify and hold Seller harmless against
any claim, cause of Action, suit proceedings or demand, and any and all losses,
liabilities, costs and expenses of any nature whatsoever associated therewith
Seller's ("Claims") arising out of, or in connection with, directly or
indirectly, and breach of any representation or warranty or any other obligation
of Buyer under this Agreement, any state of facts existing after the Transfer
Date which did not exist prior to the Transfer Date, involving the Servicing
Rights, Mortgage Loans and/or Pools subject to this Agreement, whether or ont
such Seller's Claims relate to the Servicing Rights, or this Agreement including
but not limited to:
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(A) Any and all Seller's Claims involving unfair collection practices, failure
to disclose, deceptive acts or practices, breach of contract, the collection of
usurious interest and the like, pertaining to the subject matter of this
Agreement, and based upon a state of facts existing after the Transfer Date,
which did not exist prior to the Transfer Date.
(B) Any misrepresentation made by Buyer pursuant to this Agreement, or in any
schedule, statement or certificate furnished by Buyer pursuant to this
Agreement.
(C) Any breach of warranty by Buyer, or the nonfulfillment of any covenant of
buyer contained in this Agreement, or in any schedule, statement or certificate
furnished by Buyer pursuant to this Agreement.
(D) Any and all actions of Buyer, its employees, representatives and agents,
whether by omission or commission, pertaining to the subject matter of the
Agreement and occurring after the Transfer Date, which did not exist prior to
the Transfer Date, which materially adversely affect the enforceability of the
instruments securing a Mortgage Loan or the collectability of the Mortgage
Notes.
Section 5.03. Notification of Claims for Indemnification
5.03.01. Buyer agrees to promptly notify Seller in writing of the
existence of any fact known to Buyer giving rise to any obligations of Seller
under Section 5.01.01, and any fact known to Buyer which may give rise to any
such obligations. Buyer agrees promptly to notify Seller of the making of such
Claim or the commencement of such action by a third party as and when same
becomes known to Buyer. Seller shall be entitled to participate in the defense
of any action brought by a third party against Buyer, which may give rise to any
obligation of Seller, and, at Buyer's and Seller's election, to direct the
defense thereof at Seller's own expense. In the event that any cost, expense,
judgment or award is incurred by or levied against Buyer where Seller has
undertaken the defense of any such action, Seller shall pay or reimburse the
full amount of any such cost, expense, judgment or award to or for the benefit
of Buyer. Seller shall have thirty (30) days from receipt of such notice, in
accordance with Section 6.05, to cure the condition or state of facts giving
rise to any obligations of Seller under Section 5.01.01. Unless Buyer or Seller
is required by an Investor to repurchase a Mortgage Loan or indemnify an
Investor with respect to a Mortgage Loan in the meantime, in no event shall
Seller be required to repurchase any Mortgage Loan, pay any money or tender any
performance under Section 5.01.01 until the expiration of this thirty (30) day
period. If Seller elects to defend any actions in accordance with this Section,
Seller shall not be liable under Section 5.01.01 for the payment of legal fees
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of Buyer with respect to such action, from and after the date that Seller
assumes such defense.
5.03.02 Seller agrees to promptly notify Buyer in writing of the existence
of any fact know to Seller giving rise to any obligations of Buyer under Section
5.02.01, hereof or elsewhere in this Agreement and, in the case of any Claim or
any litigation brought by a third party, any fact known to Seller which may give
rise to any such obligations. Seller agrees promptly to notify Buyer of the
making of such claim or the commencement of such action by a third party as and
when same becomes known to Seller. Buyer shall be entitled to participate in
the defense of any action brought by a third party against Seller which may give
rise to any obligation of Buyer, and, at its election, to direct the defense
thereof at its own expense. Buyer shall have thirty (30) days from receipt of
such notice, in accordance with Section 6.07, to cure the condition or state of
facts giving rise to any obligations of Seller under Section 5.02.01. In no
event shall Buyer be required to pay any money or tender any performance under
Section 5.02.01 until the expiration of this thirty (30) day period. If Buyer
elects to defend any actions in accordance with this Section, Buyer shall not be
liable under Article V for the payment of legal fees and expenses of Seller with
respect to such action, from and after the date that Buyer assumes such defense.
5.03.03 For purposes of Article V, the term "Mortgage Loan(s)" shall
include within its definition Foreclosure Mortgages if any Foreclosure Mortgages
are transferred to Buyer pursuant to this Agreement.
5.03.04 Should Seller fail to meet the requirements to qualify as an
adequately capitalized institution under FDICIA, (Federal Deposit Insurance
Corporation Improvement Act) or fail to meet any other minimum regulatory
capital requirement to which it is subject, Buyer may offset against any amounts
due to Seller hereunder with respect to any Mortgage Loans owned by Seller and
serviced by Buyer after the Transfer Date(s) ("Seller Owned Mortgage Loans")
such amounts as may be owed by Seller to Buyer under Section 5.01 of this
Agreement. Seller hereby grants to Buyer a security interest in and to all
amounts due to Seller hereunder with respect to the Seller Owned Mortgage Loans
as further security for Seller's performance of all of Seller's obligations
under Section 5.01 of this Agreement. In the event of any default by Seller in
the performance of any of its obligations under Section 5.01 of this Agreement,
Buyer may exercise any of the remedies provided to a secured creditor under the
California Commercial Code. Buyer's right of offset under this Section 5.03.04
and the security interest created by this Section 5.03.04 shall survive any
sale, transfer, pledge or other disposition of all or any interest in any Seller
Owned Mortgage Loan, and Seller shall so notify, in writing, each purchaser of
all or any such interest. Seller shall require each such purchaser and its
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successors) to similarly notify subsequent purchasers. Seller shall require
each such purchaser to assume, in writing, joint and several liability, for all
of Seller's obligations under Section 5.01 of this Agreement. Seller shall
require each such purchaser (and its successors) to similarly require subsequent
purchasers to assume in writing, joint and several liability under Section 5.01
of this Agreement. No such assumption of liability shall release Seller or any
subsequent purchaser from liability under section 5.01 of this Agreement.
ARTICLE VI.
Loan Repurchase
Section 6.01. Seller's Repurchase After Sale Date.
If Buyer should be required or demanded to repurchase any Mortgage Loan by
any Investor after the Sale Date for reasons resulting from improper, incorrect,
missing and or fraudulent documentation related to a Mortgage Loan, of a breach
of a Seller's representation(s) and warranties hereunder or Seller's improper
pooling, errors, omissions, origination or servicing of such Mortgage Loan prior
to the Transfer Date or for reasons relating to the certification status of the
pools, Seller, at the request of Buyer, shall provide Buyer with funds for the
repurchase of said Mortgage Loan on the earlier of thirty (30) days of Buyer's
written demand or the date by which the Investor has requested Buyer to
indemnify or to repurchase the Mortgage Loan. The funds to be provided by Seller
to Buyer pursuant to this section shall for the first five years, after the Sale
Date, be equal to the then current unpaid principal balance times 1.142% plus
------
the unpaid principal balance and any premium for the Mortgage Loan requested and
paid for by the Investor, accrued unpaid interest paid by Buyer to Investor,
plus any unpaid advances. Subsequent to the end of the five year period after
the Sale Date, repurchases would be consummated by payment of all unpaid
advances then in existence, reimbursement of any premiums to Investor, the
unpaid principal balance and accrued, unpaid interest paid by Buyer to Investor.
Section 6.02 Seller' Right to Contest Repurchase
Seller shall have the right to contest any repurchase request of any Investor,
pursuant to the Investor requirements and within the Investor time limits as
they may be extended. However, if Buyer, pursuant to an Investor request, has
to repurchase or suffers any damages in the meantime, then Seller shall,
notwithstanding any contest or defense, repurchase the Mortgage Loan and
otherwise make Buyer whole at the time of Buyer' request.
Section 6.03 Buyer's re-assignment of Mortgage Loan to Seller
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Promptly upon any repurchase of a Mortgage Loan by Buyer using Seller funds
pursuant to 6.01, Buyer shall take all appropriate actions, execute all
necessary instruments and documents to re-assign such Mortgage Loan and related
Servicing Rights to Seller and return all Mortgage Loan Files and Records to
Seller.
Section 6.04 Buyer's Repurchase
If Buyer should be required to repurchase any Mortgage Loan by any Investor, at
any time after the Sale Date for reasons resulting from the improper servicing,
error or omission of Buyer, then Seller shall not be responsible for the
repurchase of said Mortgage Loan.
Section 6.05 Seller's Cure Rights
Within 30 days of Seller's receipt of a notice from Buyer of a claim under
Article V or a repurchase or indemnity request by an investor, Seller shall cure
the condition or state of facts giving rise to such claim or if a cure cannot
reasonably be completed such within such 30 days period, Seller shall have
commenced a cure for and hereby agrees to diligently pursue such cure to
completion provided, however, Seller may continue to pursue such cure for a
reasonable time beyond the 30 days period for so long as Buyer is not required
by an investor to repurchase or indemnify the Investor with respect to the
Mortgage Loan which is the subject of the cure. However, if Buyer, pursuant to
an Investor request, has to repurchase, indemnify or if Buyer suffers any
damages in the meantime, then Seller shall, notwithstanding any cure or cure
period, repurchase the Mortgage Loan and otherwise make Buyer whole at the time
of Buyer's request.
ARTICLE VII.
Miscellaneous Provisions
Section 7.01. Integration
This Agreement constitutes a final and complete integration of the
Agreement of the parties respecting the subject matter hereof, thereby
superseding all previous or contemporaneous oral and written agreements. There
are no contemporaneous oral agreements relating to the subject matter of this
Agreement.
Section 7.02. Modification
7.02.01. This Agreement may not be changed orally but only by an agreement
in writing signed by all parties. Subject to the foregoing, any of the terms or
conditions of this Agreement may be waived or modified at any time by the party
entitled to the benefit thereof, but no such waiver, express or implied, shall
affect or
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impair the right of the waiving party to require observance, performance or
satisfaction of either (1) the same term or condition as it applied to a
subsequent or previous occasion of (2) any other term or condition hereof.
Section 7.03. Severability
If any portion of this Agreement is declared by a court of competent
jurisdiction to be invalid or unenforceable, such declaration shall not affect
the validity of the remaining provisions.
Section 7.04. Successors
This Agreement shall inure to the benefit of and be binding upon the heirs,
representatives, successors and assigns of each party.
Section 7.05. Governing Law
7.05.01. This Agreement is entered into and its construction and rights,
remedies and obligations arising by, under, through, or an account of it shall
be governed by the laws of the State of California.
Section 7.06. Assignability
Buyer shall have the right, without Seller's consent, to assign and
transfer this Agreement and all rights, obligations, benefits, privileges and
Agreements incident of Buyer provided, however, Buyer shall not be permitted to
assign and transfer this Agreement without Seller's consent, such consent not to
be unreasonably withheld, prior to the payment by Buyer to Seller of 100% of the
purchase price, and provide further that the Servicing Rights for Mortgage Loans
for which Seller is the Investor may not be assigned without Seller's consent,
such approval not to be unreasonable withheld.
Section 7.07. Notices
Any notice provided for or permitted hereunder shall be in writing and sent
by certified mail, return receipt requested, addressed to the parties at their
respective addresses set forth in the preamble hereof. All such notices shall
be addressed to the attention of the Senior Vice President of Seller and Vice
President, Loan Administration for the Buyer. The giving of notice shall be
complete three (3) Business Days after depositing of it, properly addressed and
postage prepaid, with the United States Postal Service. Failure to conform to
the requirement that mailing be done by certified mail shall not defeat the
effectiveness of notice actually received by the addressees, but such notice
shall
31
<PAGE>
be deemed given only upon such actual receipt. Address for notices may be
changed by giving notice hereunder.
Section 7.08. Attorney Fees, Costs, etc.
If any action at law or in equity, including an action for declaration
relief, is brought to enforce or interpret the provisions of this Agreement, the
prevailing party shall be entitled to recover reasonable attorney's fees from
the other party. Such fees may be set by the court in the trial of such action
or may be enforced in a separate action brought for that purpose. Such fees
shall be in addition to any other relief that may be awarded.
Section 7.09. Independent Contractor
At no time shall Seller represent that it is acting as an agent for or on
behalf of Buyer. At all times, Seller shall act as an independent contractor.
At no time shall Buyer represent that it is acting as an agent for or on behalf
of the Seller. At all times Buyer shall act as an independent contractor.
Section 7.10. Broker's Fees
Each party will indemnify the other against claims by any person claiming a
finder's fee, commission, transfer or termination fee in connection with the
negotiation or consummation of this Agreement or the transaction contemplated
hereby. The parties acknowledge that a fee is due Countrywide Servicing
Exchange and that Seller shall pay such fee.
Section 7.11 Captions
Section captions in this Agreement are for ease of reference only and shall
be given no substantive or restrictive meaning or significance whatsoever.
Section 7.12. Counterparts
This Agreement may be executed in multiple counterparts, each of which
shall be an original regardless of whether all parties sign the document.
Regardless of the number of counterparts, they shall constitute only one
Agreement.
Section 7.13. Exhibits to the Agreement
The exhibits to this Agreement are hereby incorporated and made a part
hereof and are an integral part of this Agreement.
Section 7.14. Transfer Standards
32
<PAGE>
The parties each agree to use its best efforts to execute the transfer of
the Servicing Rights contemplated in accordance with MBA's "Servicing Transfer
Standards of Practice", applicable laws and regulations, and Federal guidelines.
Transfer procedures required by Buyer and to be followed by Seller are attached
hereto as Exhibit E and by reference made a part hereof.
Section 7.15. Documentation
7.15.01. Prior to the Transfer Date, Seller shall deliver to Buyer a
certification from the Seller or its Custodian that all Pools are documented and
certified in accordance with Investor guidelines and applicable law and
regulations. Seller will deliver a copy of the inventory of Pools with such
certification. Such inventory and certification shall be in a form and content
satisfactory to Buyer. Seller will have their document custodian(s) contact
Buyer by letter to provide a status report of all Pools under their control that
are to be transferred as contemplated hereunder. Such custodian status reports
(if applicable), will be delivered to Buyer each month until the transfer is
completed and such reports will commence no later than thirty (30) days after
the Transfer Date.
7.15.02. Not later than the Transfer Date, Seller shall deliver to Buyer a
certification from the Seller that all original documents including the Mortgage
Note, PMI, title policy assignments to Investor, intervening assignments not
properly held by the custodian or Investor are held by the Seller for each of
the Mortgage Loans, and all such documents have been inventoried and accounted
for by the Seller. Seller shall deliver to Buyer a copy of said inventory with
such certification and inventory in a form and content satisfactory to the
Buyer, by placing a copy of all such documents in the Seller's servicing file,
identified with the Seller's loan number, for delivery to Buyer together with a
copy of said inventory on the Transfer Date.
7.15.03. All servicing files will be organized and fastened on file
folders that are clearly labeled with the Mortgagor's name and loan number as
specified by Buyer.
7.15.04. Original loan documents for each loan held by the custodian will
be filed in a separate file, labeled with the loan and Pool/PC number (if
applicable). In addition, all Pool documents will be filed in a separate
"Master Pool File" for each Pool held by the custodian, in compliance with all
Investor guidelines.
7.15.05. Seller shall provide Buyer a schedule indicating the location of
all the original documents described in Addendum C for the Mortgage Loans not
later than the Transfer Date.
Section 7.16. Termination
33
<PAGE>
In the event that, (i) the Seller is unable to obtain the necessary
Investor approvals to transfer the Servicing Rights to the Buyer, and such
Mortgage Loans that cannot be transferred, exceed 5% of the total, or (ii) the
Seller is unable to transfer the Servicing Rights as a result of actions taken
by regulatory authorities with appropriate jurisdiction, this Agreement shall
terminate. Upon such termination, (i) all right, title and interest in the
Servicing Rights shall revert to Seller, (ii) Seller shall refund to Buyer any
and all portions of the Purchase Price, together with interest, previously paid
to the Seller and (iii) the Buyer shall return to the Seller all Mortgage
Documents and Records previously delivered to Buyer by Seller at Seller's
expense, (iv) Buyer shall promptly execute and deliver to Seller for filing all
documents necessary to terminate the assignment to Buyer and transfer to Seller
all of Buyer's right, title and interest in the Servicing Rights and (v) Buyer
shall refund to Seller all servicing fees received by Buyer during the Interim
Period and Seller shall refund all Interim subservicing fees.
IN WITNESS WHEREOF, each of the undersigned parties to this Agreement has cause
this Agreement to be duly executed by one of its duly authorized officers as of
this 15th day of May, 1995.
---- ---------
Fidelity Federal Bank
SELLER: /s/ Julie Chacon
--------------------------
Julie Chacon
Senior Vice President
ATTEST:
Name: /s/ Robert Dalton
---------------------------
Its: Asst Secretary
----------------------------
Western Financial Savings Bank,
BUYER: /s/ Barbara J. Darling
---------------------------
Barbara J. Darling
Vice President
Loan Administration
ATTEST:
Name: /s/ Tina Dunstan
--------------------------
Its: Asst Vice President
---------------------------
34
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<PAGE>
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