<PAGE>
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UNITED STATES
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 September 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 0-28706
-------
FIRST ALLIANCE CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0721183
- - ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
17305 Von Karman Avenue, Irvine, California 92614
-------------------------------------------------
(Address of principal executive offices including ZIP Code)
(714) 224-8500
---------------
(Registrant's telephone number
including area code)
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 October 31, 1996, registrant had outstanding 4,025,000 shares of Class A
Common Stock and 10,750,000 shares of Class B Common Stock, respectively.
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<PAGE>
FIRST ALLIANCE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited) as of
September 30, 1996 and December 31, 1995.......................... 1
Consolidated Statements of Income (Unaudited) for the quarters
and the nine months ended September 30, 1996 and 1995............. 2
Consolidated Statements of Cash Flows (Unaudited) for the quarters
and the nine months ended September 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 ("MD&A").................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 17
Item 2. Changes in Securities............................................. 17
Item 3. Defaults Upon Senior Securities................................... 17
Item 4. Submission of Matters to a Vote of Security Holders............... 17
Item 5. Other Information................................................. 17
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits..................................................... 18
b. Reports on Form 8-K.......................................... 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
(Unaudited)
ASSETS
Cash and cash equivalents............... $26,709 $ 4,019
Receivable from trusts.................. 7,362 4,664
Loans held for sale..................... 8,279 24,744
Loans receivable held for investment.... 1,485 2,261
Residual interests in securities at fair
value.................................. 25,508 19,705
Mortgage servicing rights............... 5,594 4,021
Real estate owned, net.................. 658 1,474
Property, net........................... 2,984 2,141
Deferred taxes.......................... 3,260
Prepaid expenses and other assets....... 1,607 3,882
------- -------
Total assets............................ $83,446 $66,911
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse financing facility............ $ $18,233
Accounts payable and accrued liabilities 4,818 5,234
Income taxes payable.................... 4,314
Notes payable........................... 471 1,123
S distribution notes.................... 2,475
------- -------
Total liabilities....................... 12,078 24,590
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value per
share; 1,000,000 shares authorized;
no shares outstanding..................
Class A Common Stock, $.01 par value per
share; 25,000,000 shares authorized;
shares issued and outstanding:
4,025,000 at September 30, 1996, no
shares at December 31, 1995............ 40
Class B Common Stock, $.01 par value per
share; 15,000,000 shares authorized;
shares issued and outstanding:
10,750,000 at September 30, 1996,
10,642,500 at December 31, 1995....... 108 42
Additional paid in capital............. 64,643
Retained earnings...................... 7,741 42,279
Deferred stock compensation............ (1,164)
------- -------
Total stockholders' equity............. 71,368 42,321
------- -------
Total liabilities and stockholders'
equity................................ $83,446 $66,911
======= =======
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(Unaudited)
REVENUE:
Loan origination and sale............... $ 13,008 $ 2,379 $ 34,259 $ 16,306
Loan servicing and other fees........... 2,236 2,230 6,723 6,333
Interest................................ 3,664 3,631 9,699 9,662
Other................................... 14 40 75 116
---------- ---------- ---------- ----------
Total revenue......................... 18,922 8,280 50,756 32,417
---------- ---------- ---------- ----------
EXPENSE:
Compensation and benefits............... 4,421 2,650 11,148 7,878
Professional services................... 318 113 869 578
Advertising............................. 1,060 1,185 2,818 3,307
Subservicing and other fees............. 93 319 469 906
Rents................................... 387 346 1,129 961
Supplies................................ 457 351 1,098 858
Depreciation and amortization of
property............................... 238 178 555 476
Interest................................ 592 1,105 2,379 2,805
Legal................................... 319 186 771 749
Other................................... 1,146 456 2,463 1,462
---------- ---------- ---------- ----------
Total expense......................... 9,031 6,889 23,699 19,980
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX PROVISION........ 9,891 1,391 27,057 12,437
INCOME TAX PROVISION...................... 1,258 21 1,515 187
---------- ---------- ---------- ----------
NET INCOME................................ $ 8,633 $ 1,370 $ 25,542 $ 12,250
========== ========== ========== ==========
NET INCOME PER SHARE...................... $ 0.64 $ 0.13 $ 2.20 $ 1.15
========== ========== ========== ==========
Weighted average number of common 13,562,891 10,650,407 11,620,417 10,650,407
shares outstanding.......................
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1996 1995 1996 1995
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 8,633 $ 1,370 $ 25,542 $ 12,250
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Loan origination and sale revenue, net
of other fees........................... (13,005) (2,206) (33,957) (16,604)
Deferred income taxes.................... (3,260) (3,260)
Net accretion of residual interests in
securities.............................. (537) (253) (354) (1,720)
Deferred stock compensation.............. 436 436
Accretion of discounts on loan receivable (29) (256) (165) (767)
Amortization of mortgage servicing
rights.................................. 427 197 1,216 441
Depreciation and amortization of
property................................ 238 178 555 476
Loss on sales of real estate owned and
property................................ 266 52 402 58
Loans originated or purchased for sale,
net of loan fees........................ (70,672) (54,450) (211,310) (148,039)
Sale of regular interests in securities.. 69,979 197,370 67,744
Proceeds from sale of loans.............. 14,290 18,038 55,700 42,387
Changes in assets and liabilities:
Receivable from trusts................ (379) (402) (2,698) (943)
Prepaid expenses and other assets...... 1,370 (1,016) 2,275 (1,350)
Accounts payable and accrued
liabilities........................... (299) 266 (416) (2,651)
Income taxes payable................... 4,314 4,314
-------- -------- --------- ---------
Net cash provided by (used in)
operating activities................ 11,772 (38,482) 35,650 (48,718)
-------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................... (993) (289) (1,889) (785)
Loans receivable issued.................. (43) (1,174)
Collections on loans receivable.......... 397 739 1,154 2,544
Additions to real estate owned........... (220) (236)
Proceeds from sales of real estate
owned and property...................... 493 142 1,287 476
-------- -------- --------- ---------
Net cash (used in) provided by
investing activities................ (103) 329 552 825
-------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings on
warehouse financing facility............ (10,493) 44,932 (18,233) 57,976
Payments on notes payable................ (301) (59) (823) (360)
Cash dividends........................... (3,653) (2,606) (15,085) (8,595)
Proceeds from issuance of notes payable
to stockholder.......................... 1,000 4,500
Payments on notes payable to
stockholder............................. (4,500) (1,000) (4,500)
Proceeds from issuance of stock (net of
issuance costs)......................... 63,149 63,149
Payments on S distribution notes......... (42,520) (42,520)
-------- -------- --------- ---------
Net cash provided by (used in)
financing activities................ 6,182 37,767 (13,512) 49,021
-------- -------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................... 17,851 (386) 22,690 1,128
CASH AND CASH EQUIVALENTS, beginning of
period.................................. 8,858 6,812 4,019 5,298
-------- -------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period................................. $ 26,709 $ 6,426 $ 26,709 $ 6,426
======== ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(Unaudited)
SUPPLEMENTAL INFORMATION:
Interest paid........................... $ 603 $ 819 $ 2,445 $ 2,443
======== ======== ======== ========
Income taxes paid....................... $ 25 $ 341 $ 115
======== ======== ========
SUPPLEMENTAL INFORMATION ON NONCASH
INVESTING AND FINANCING ACTIVITIES:
Exchange of loans for regular and
residual interests in securities....... $ 69,985 $197,660 $ 67,831
======== ======== ========
Distribution of S distribution notes.... $ 975 $ 2,475
======== ========
Acquisition of real estate through
foreclosure of loans................... $ 137
========
Loan funded to facilitate sales of real
estate owned........................... $ 19
========
Transfer of property to real estate
owned.................................. $ 260
========
Assumption of debt through acquisition
of real estate through foreclosure..... $ 24 $ 171 $ 50
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NOTE 1. GENERAL
The accompanying unaudited consolidated financial statements, which include
the accounts of First Alliance Corporation ("FACO") and its subsidiaries
(collectively the "Company"), have been prepared in accordance with the
instructions to Form 10-Q and include all information and footnotes required for
interim financial statement presentation. All adjustments (consisting only of
various normal accruals) necessary to present fairly the Company's consolidated
financial position, results of operations and cash flows have been made. All
significant intercompany transactions and balances have been eliminated and
certain reclassifications have been made to prior periods consolidated financial
statements to conform to the current period presentation. The results of
operations for the nine months ended September 30, 1996 are not necessarily
indicative of the results of operations to be expected for the year ending
December 31, 1996.
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 these interim consolidated financial statements have read, or have
access to, the Company's recent filing on Form S-1 which contains the latest
available audited consolidated financial statements and notes thereto, as of and
for the period ended December 31, 1995, together with the MD&A for such period.
On July 31, 1996, FACO completed an initial public offering (the "Offering")
whereby 3,500,000 shares of its Class A Common Stock were sold to the public
resulting in gross proceeds of $59.5 million. Concurrently, 10,750,000 shares of
the Class B Common Stock of FACO were issued in exchange for all of the issued
and outstanding shares of First Alliance Mortgage Company ("FAMCO") as part of a
reorganization whereby FAMCO became a wholly owned subsidiary of FACO. On August
9, 1996, the underwriters' over-allotment option to purchase 525,000 shares of
Class A Common Stock was exercised resulting in additional gross proceeds of
$8.9 million. The acquisition of FAMCO has been accounted for similar to a
pooling of interests. The consolidated financial position and results of
operations of the Company for periods prior to the date of the reorganization
substantially consist of those of FAMCO. After deducting underwriting discounts
and offering costs of $5.3 million, net proceeds from the Offering were $63.1
million.
During the second quarter of 1996, FAMCO distributed S distribution notes of
$44.0 million to its stockholders. During the third quarter of 1996, in
accordance with the terms of the S distribution notes, the Company recorded a
$1.0 million adjustment to increase the amount of the S distribution notes as a
result of the reconciliation of S corporation income taxes through the date of
the termination of the Company's S corporation status. Such amount has been
recorded as a dividend to Class B common stockholders. In July 1996, payments on
the S distribution notes of $42.5 million were made by the Company using
proceeds from the Offering.
In June 1996, FAMCO granted 107,500 shares of restricted common stock to an
officer of the Company. These shares, which were exchanged for 107,500 shares
of FACO Class B Common Stock in conjunction with the Offering, vest over a
period of five years or earlier upon the occurrence of certain events. A value
of $1.6 million has been ascribed to such shares by the Company. This amount
has been recorded in the accompanying financial statements as increases to Class
B Common Stock and paid in capital with an offsetting amount included in
deferred stock compensation. In July and August 1996, 29,285 shares of such
restricted Class B Common Stock vested as a result of the Offering and $0.4
million of compensation expense was recognized.
5
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
HEDGING ACTIVITIES
As part of its interest rate risk management strategy, the Company may from
time to time hedge its interest rate risk related to its fixed rate loans held
for sale and its commitments to fund fixed rate loans. The Company classifies
these transactions as hedges of specific loans held for sale and commitments to
fund loans to be held for sale. The gains and losses derived from these
transactions are deferred and included in the carrying amounts of loans held for
sale and are recognized in earnings upon sale of the loans. There were no
deferred gains or losses on hedging activities at September 30, 1996 and
December 31, 1995. Realized gains and (losses) on hedging activities were $0.1
million and $0.6 million for the quarter and nine months ended September 30,
1996, respectively, and ($0.3) million for the nine months ended September 30,
1995. Hedging transactions during these periods were comprised solely of short
sales of United States Treasury Securities.
STOCK INCENTIVE PLAN
On July 24, 1996, the shareholders approved a stock incentive plan (the
"Stock Incentive Plan"), previously adopted by the stockholders of FAMCO for the
issuance of FAMCO Common Stock, which enables directors, officers and other key
employees of the Company to participate in the ownership of the Company. Under
the Stock Incentive Plan, 642,500 shares of Common Stock were available for
grant on July 24, 1996. On July 25, 1996, the Company granted options to acquire
an aggregate of 529,065 shares of Class A Common Stock at an exercise price of
$17.00 per share. These options vest 25% six months from the date of grant and
25% each year thereafter until fully vested and expire on the earlier of ten
years from the date of grant or 90 days after an optionee's termination of
service.
In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
123 "Accounting for Stock-Based Compensation," which encourages companies to
account for stock compensation awards based on their fair value at the date the
awards are granted. SFAS No. 123 does not require the application of the fair
value method for stock compensation granted to employees and allows for the
continuance of the current accounting practice, which requires accounting for
stock compensation awards based on their intrinsic value as of the grant date.
However, SFAS No. 123 requires pro forma disclosure of net income and earnings
per share, as if the fair value based method of accounting defined in this
Statement had been applied. The Company has decided not to adopt the fair value
provisions of SFAS No. 123.
INCOME TAXES
Effective upon the closing of the Offering in July, 1996, the Company's tax
status changed from that of an S corporation to a C corporation. As a result,
the Company recorded $3.2 million of net deferred tax assets related to
temporary differences between the Company's income tax provision and income
taxes paid or payable in the current or future periods. This amount has been
included as a reduction of the income tax provision for the third quarter of
1996. The difference between the federal statutory tax rate and the rate of the
Company's income tax provision for periods after the Company became a C
corporation is primarily due to state income and franchise taxes, net of federal
income tax benefits. No valuation allowances have been provided for the net
deferred tax assets.
6
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET INCOME PER SHARE COMPUTATION
Net income per share has been computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. In
accordance with regulations of the Securities and Exchange Commission, which
require that stock issued within a one year period prior to the initial filing
of a registration statement relating to an Initial Public Offering be treated as
outstanding for all reported periods, the weighted average number of common
shares for all periods includes the dilutive impact of the restricted stock
issued in June 1996. The dilutive impact has been computed using the treasury
stock approach, with the Offering price of $17 per share used as the repurchase
price for all periods prior to the date of the Offering. In addition, the
dilutive effect of the options issued under the Stock Incentive Plan has been
included in computing earnings per share for the quarter and nine months ended
September 30, 1996.
SUPPLEMENTARY NET INCOME PER SHARE DATA
Assuming that the 4,025,000 shares of Class A Common Stock issued in the
Offering, including shares issued pursuant to the underwriters' exercise of
their over-allotment option, were issued at the beginning of 1995, net income
per share would have been $0.60 and $1.78 for the quarter and nine months ended
September 30, 1996, respectively, and $0.09 and $0.83 for the corresponding
periods in 1995. The computation of supplementary net income per share assumes
that proceeds from the Offering would have been used to pay the S distribution
notes at the date of their issuance in May 1996. Therefore, the interest expense
incurred on the S distribution notes, net of tax benefits, of $0.2 million and
$0.6 million for the quarter and nine months ended September 30, 1996,
respectively, was added to net income for purposes of computing supplementary
net income per share.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
OVERVIEW
The Company originates, purchases, sells and services non-conventional
mortgage loans secured primarily by first mortgages on single family residences.
The Company originates loans through its retail branch network which is
comprised of one office in the United Kingdom and 21 offices in the United
States, six of which are located in California, two of which are located in each
of Florida, Illinois and New York and one of which is located in each of Oregon,
Washington, Colorado, Utah, Arizona, New Jersey, Ohio, Georgia and Pennsylvania.
In addition, the Company purchases loans from qualified mortgage bankers and
brokers. The Company sells the majority of its loans in the secondary market
primarily through securitization and, to a lesser extent, through wholesale loan
sales in which the Company does not retain the rights to service such loans.
The Company retains the right to service loans which it securitizes.
The Company's strategy of originating, as compared to purchasing, the majority
of its loan volume results in the generation of a significant amount of loan
origination fees. This fee income has allowed the Company to generate positive
cash flow. There can be no assurance, however, that the Company's cash flow will
continue to be positive in the future.
Gains on servicing retained sales of loans through securitization equal the
difference between the net proceeds to the Company in the securitization and the
allocated cost of loans securitized. Such net proceeds received in
securitizations consist of the fair value of regular interests (determined by
the cash price for which they are then sold to the public) and the fair value of
the residual interests retained by the Company net of transaction
costs. The allocated cost of the loans securitized is determined by allocating
their acquisition cost (for purchased loans) or net carrying value (for
originated loans) between the loans securitized and the mortgage servicing
rights retained with respect thereto based upon their relative fair values.
The net proceeds of a securitization consist of the regular and residual
interests received by the Company. The regular interests are immediately sold
for cash by the Company. As the holder of the residual interests, the Company
is entitled to receive certain excess cash flows. These excess cash flows are
calculated as the difference between (a) principal and interest paid by
borrowers and (b) the sum of (i) pass-through principal and interest to be paid
to holders of the regular interests, (ii) trustee fees, (iii) third-party credit
enhancement fees, (iv) servicing fees and (v) loan pool losses. The Company's
right to receive this excess cash flow begins after certain reserve
requirements, which are specific to each securitization and are used as a means
of credit enhancement, have been met.
The Company's retained right to service loans entitles the Company to receive
servicing fees, prepayment penalties and other miscellaneous fees associated
with the collection of such loans.
RECENT DEVELOPMENTS
In July 1996, the Company completed the Offering whereby 3,500,000 shares of
Class A Common Stock were sold to the public and, concurrently, 10,750,000
shares of Class B Common Stock were exchanged for all of the outstanding shares
of FAMCO. In August 1996, the underwriters over-allotment option to purchase
525,000 shares of Class A Common Stock was exercised. Total gross proceeds from
these sales of Class A Common Stock were $68.4 million.
8
<PAGE>
During the second quarter of 1996, FAMCO distributed S distribution notes of
$44.0 million to its stockholders. During the third quarter of 1996, in
accordance with the terms of the S distribution notes, the Company
recorded a $1.0 million adjustment to increase the amount of the S distribution
notes as a result of the reconciliation of S corporation income taxes through
the date of the termination of the Company's S corporation status. Such amount
has been recorded as a dividend to Class B common stockholders. In July 1996,
payments on the S distribution notes of $42.5 million were made by the Company
using proceeds from the Offering.
On July 24, 1996, the shareholders approved a stock incentive plan (the
"Stock Incentive Plan"), previously adopted by the stockholders of FAMCO for the
issuance of FAMCO Common Stock, which enables directors, officers and other key
employees of the Company to participate in the ownership of the Company. Under
the Stock Incentive Plan, 642,500 shares of Common Stock were available for
grant on July 24, 1996. On July 25, 1996, the Company granted options to acquire
an aggregate of 529,065 shares of Class A Common Stock at an exercise price of
$17.00 per share. These options vest 25% six months from the date of grant and
25% each year thereafter until fully vested and expire on the earlier of ten
years from the date of grant or 90 days after an optionees termination of
service.
LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
-------------------- ----------------------
1996 1995 1996 1995
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Loan originations and purchases:
Retail branch originations............. $71,092 $60,975 $194,627 $136,916
Portfolio refinancing originations..... 2,960 507 14,572 15,329
Wholesale purchases.................... 5,089 657 25,880 14,933
-------- -------- --------- ---------
Total originations and purchases......... $79,141 $62,139 $235,079 $167,178
======== ======== ========= =========
Number of retail branches as of the end
of the period:
United States:
California........................... 6 9
Other States......................... 15 9
United Kingdom......................... 1
--------- ---------
Total.............................. 22 18
========= =========
Weighted average initial interest rate... 9.7% 10.2% 9.6% 10.6%
Weighted average initial combined
loan-to-value ratio:
Retail branch and portfolio
refinancing originations............... 61.0% 60.3% 61.4% 58.0%
Wholesale purchases.................... 67.0% 63.3% 67.3% 64.9%
Average retail branch origination loan
size................................... $ 80 $ 71 $ 82 $ 66
Weighted average loan origination and
processing fees as a percent of gross
loans originated:
Retail branch originations............. 14.9% 15.2% 14.9% 15.6%
Portfolio refinancing originations..... 5.2% 12.9% 5.1% 13.7%
Combined weighted average.............. 14.6% 15.2% 14.2% 15.4%
</TABLE>
For the quarter and nine months ended September 30, 1996, originations and
purchases increased 27% and 41%, respectively, as compared to the corresponding
periods in 1995. Retail branch originations increased 17% and 42% for the
quarter and nine months ended September 30, 1996, respectively. Increased loan
origination volume is primarily from new retail branch offices opened in 1996
and 1995.
9
<PAGE>
LOAN SALES
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Securitizations......................... $ 69,985 $ $197,660 $ 67,831
Wholesale loan sales.................... 13,936 15,887 55,467 30,772
Private loan sales...................... 551 1,879 1,420 11,361
-------- -------- -------- --------
Total............................... $ 84,472 $ 17,766 $254,547 $109,964
======== ======== ======== ========
</TABLE>
Loan sales, including securitizations of loans, for the quarter and nine
months ended September 30, 1996, increased 375% and 131%, respectively, over the
corresponding periods in 1995. Securitization volume for the quarter and nine
months ended September 30, 1996 was $70.0 million and $197.7 million,
respectively, as compared to $67.8 million for the nine months ended September
30, 1995. No securitizations were completed in the third quarter of 1995. The
increases in loan sales for the quarter and nine month periods ended September
30, 1996, as compared to the same periods in 1995, are the result of the sale of
the increased volume of originations and purchases and the absence of a
securitization closing in the 1995 third quarter.
COMPOSITION OF REVENUE AND EXPENSE
The following table summarizes certain components of the Company's
consolidated statements of income set forth as a percentage of total revenue for
the periods indicated:
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
1996 1995 1996 1995
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Loan origination and sale:
Gain on sale of loans............... 18.5% 3.2% 13.3% 12.0%
Net loan origination and other fees. 50.2 25.5 54.2 38.3
Loan servicing and other fees......... 11.8 26.9 13.2 19.5
Interest.............................. 19.4 43.9 19.1 29.8
Other 0.1 0.5 0.2 0.4
----- ----- ----- -----
Total revenue....................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
EXPENSE:
Compensation and benefits............. 23.4 32.0 22.0 24.3
Professional services................. 1.7 1.4 1.7 1.8
Advertising........................... 5.6 14.3 5.6 10.2
Subservicing and other fees........... 0.5 3.9 0.9 2.8
Rent.................................. 2.0 4.2 2.2 3.0
Supplies.............................. 2.4 4.2 2.2 2.6
Depreciation and amortization of
property............................. 1.3 2.1 1.1 1.5
Interest............................. 3.1 13.3 4.7 8.7
Legal................................. 1.7 2.2 1.5 2.3
Other................................. 6.0 5.6 4.8 4.4
----- ----- ----- -----
Total expense........................ 47.7 83.2 46.7 61.6
----- ----- ----- -----
Income before income tax provision...... 52.3 16.8 53.3 38.4
Income tax provision.................... 6.7 0.3 3.0 0.6
----- ----- ----- -----
Net Income.............................. 45.6% 16.5% 50.3% 37.8%
===== ===== ===== =====
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
REVENUE
The following table sets forth the components of the Companys revenue for the
periods indicated:
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1996 1995 1996 1995
------ ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loan origination and sale:
Gain on sale of loans (1).............. $ 3,505 $ 264 $ 6,761 $ 3,880
Net loan origination and other fees.... 9,503 2,115 27,498 12,426
Loan servicing and other fees............ 2,236 2,230 6,723 6,333
Interest................................. 3,664 3,631 9,699 9,662
Other.................................... 14 40 75 116
------- ------- ------- -------
Total revenue.......................... $18,922 $ 8,280 $50,756 $32,417
======= ======= ======= =======
</TABLE>
(1) Excluding net loan origination and other fees.
Total revenue increased 129% or $10.6 million for the quarter and 57% or
$18.3 million for the nine months ended September 30, 1996, as compared to
the corresponding periods in 1995. The increase was primarily due to higher
loan origination and sale revenue.
Loan origination and sale revenue increased to $13.0 million for the third
quarter of 1996 from $2.4 million for the third quarter of 1995 and increased to
$34.3 million for the nine months ended September 30, 1996 as compared to $16.3
million for the nine months ended September 30, 1995 primarily due to an
increase in loan sales.
Gain on sale of loans increased to $3.5 million for the third quarter of
1996 from $0.3 million for the third quarter of 1995 primarily as a result of
the increased volume of loans sold. For the nine months ended September 30,
1996, gain on sale of loans increased 74% to $6.8 million as compared to $3.9
million for the corresponding period in 1995 primarily as a result of the
increased volume of loans sold offset by lower premiums realized on loan sales.
For the nine months ended September 30, 1996 the weighted average gain on sales
of loans as a percentage of loan principal balances sold decreased to 2.7% from
3.5% for the corresponding period in 1995. This decrease was primarily due to
the decrease in the weighted average initial interest rate spreads (the
difference between the initial weighted average loan interest rates for the
loans included in the securitization and the initial weighted average pass-
through rates paid to holders of the regular interests of the securitization) in
residual interests originated in securitizations which decreased to 2.6% for the
nine months ended September 30, 1996 from 3.6% for the nine months ended
September 30, 1995. Interest rate spreads decreased due to increasing interest
rates during the first nine months of 1996 as compared to decreasing interest
rates during the first nine months of 1995. These decreased spreads were offset
by the results of the Company's hedging activities which had realized gains of
$0.6 million for the nine months ended September 30, 1996 as compared to
realized losses of $0.3 million for the corresponding period in 1995. During
1996 and 1995, the Company did not continuously hedge fixed rate loans held for
sale and commitments to fund fixed rate loans. Since April 1996, the Company has
continuously hedged fixed rate loans held for sale and commitments to fund fixed
rate loans.
Net loan origination and other fees increased $7.4 million to $9.5 million
and $15.1 million to $27.5 million for the quarter and nine months ended
September 30, 1996, respectively, as compared to corresponding periods in 1995
due primarily to increases in loan sales in such periods of 375% and 131%,
respectively.
11
<PAGE>
Loan servicing and other fees for the third quarters of 1996 and 1995 were
$2.2 million. An increase in loan servicing fees, and other fees of $0.3 million
was offset by increases in the amortization of mortgage servicing rights of $0.2
million, and in compensating interest, paid by the Company as servicer with
respect to prepayments of securitized loans, of $0.1 million. For the nine
months ended September 30, 1996 loan servicing and other fees increased to $6.7
million from $6.3 million for the corresponding period in 1995 as a result of an
increase in loan servicing fees, prepayment fees and other fees of $1.6 million
offset by increases in the amortization of mortgage servicing rights of $0.8
million and in compensating interest of $0.4 million. The increase in loan
servicing fees, prepayment fees and other fees was primarily due to the
increased rate of prepayment of loans and an overall increase in the servicing
portfolio. The increase in the rate of prepayment of loans also increased
compensating interest. The increase in the amortization of mortgage servicing
rights was the result of the increase in the balance of mortgage servicing
rights which increased to $5.6 million at September 30, 1996 from $1.7 million
at September 30, 1995. This increase is primarily due to the adoption in January
of 1995 of Statement of Financial Standards ("SFAS") No. 122, "Accounting For
Mortgage Servicing Rights," which requires the Company to capitalize the fair
value of originated mortgage servicing rights and amortize the capitalized
amount over the life of such assets.
Interest income represents the recognition of the yield on residual interests
in securities retained by the Company, interest earned on loans originated or
purchased during the warehousing period from their origination or purchase until
their sale and interest earned on loans receivable held for investment. Interest
income from residual interests increased $0.5 million and $2.0 million for the
quarter and nine months ended September 30, 1996, respectively, when compared to
the corresponding periods in 1995. These increases are due primarily to the
growth of the Company's portfolio of residual interests which grew from an
average balance of $14.2 million for the nine months ended September 30, 1995 to
$22.1 million for the nine months ended September 30, 1996. Interest income on
loans held for sale and on loans receivable held for investment decreased $0.5
million and $2.0 million for the quarter and nine months ended September 30,
1996, respectively, when compared to the corresponding periods in 1995, due
primarily to the decrease in the average holding period of loans held for sale
as a result of the completion of more securitizations in 1996 versus 1995.
EXPENSE
The following table sets forth the components of the Company's expenses for
the periods indicated:
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1996 1995 1996 1995
------ ------ ------- -------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Compensation and benefits.................. $4,421 $2,650 $11,148 $ 7,878
Professional services...................... 318 113 869 578
Advertising................................ 1,060 1,185 2,818 3,307
Subservicing and other fees................ 93 319 469 906
Rent....................................... 387 346 1,129 961
Supplies................................... 457 351 1,098 858
Depreciation and amortization of property.. 238 178 555 476
Interest................................... 592 1,105 2,379 2,805
Legal...................................... 319 186 771 749
Other...................................... 1,146 456 2,463 1,462
------ ------ ------- -------
Total expense......................... $9,031 $6,889 $23,699 $19,980
====== ====== ======= =======
</TABLE>
Total expense increased 31% to $9.0 million for the third quarter of 1996
from $6.9 million for the third quarter of 1995 and increased 19% to $23.7
million for the nine months ended September 30, 1996 from $20.0 million for the
corresponding period in the prior year. These increases were primarily due to
increases in compensation and benefits and in other expense.
12
<PAGE>
Compensation and benefits increased $1.8 million and $3.3 million for the
quarter and nine months ended September 30, 1996, respectively, as compared to
the corresponding periods in 1995 and advertising expenses decreased $0.1
million and $0.5 million for same periods, respectively, primarily as a result
of increases in personnel to support the Company's retail branch office
expansion and the Company's decision to reduce the use of outside telemarketing
services in 1996 and increase the number of employees in its internal
telemarketing operations. In addition, during the third quarter of 1996, $0.4
million of compensation expense was recognized in connection with the vesting of
restricted stock.
Subservicing and other fees decreased 71% and 48% for the quarter and nine
months ended September 30, 1996, respectively, as compared to the corresponding
periods in 1995. Effective February 1, 1996, servicing of adjustable rate
loans, previously sub-serviced by a third party, was transferred to the Company
after the Company had installed new loan servicing software which enabled it to
service such loans thereby eliminating subservicing fees.
Combined, rent and supplies increased $0.4 million for the nine months ended
September 30, 1996 as compared to the nine months ended September 30, 1995
primarily as a result of the opening of new retail branch offices. The number
of retail branch offices increased from 13 at December 31, 1994 to 18 at
September 30, 1995 to 22 at September 30, 1996.
Interest expense represents interest on the Company's warehouse financing
facility, interest on notes payable and interest on notes payable to
stockholders, including the S distribution notes. Interest on the warehouse
financing facility decreased $0.7 million for the quarter and nine months ended
September 30, 1996 as compared to the corresponding periods in 1995.
During the quarter and nine months ended September 30, 1996 the weighted average
interest rate on the warehouse financing facility decreased 6% and
12%, respectively, and the average balance outstanding on the warehouse
financing facility decreased 60% and 15%, respectively, as compared to the
corresponding periods in 1995. The average balance outstanding on the warehouse
financing facility decreased due to the application of proceeds from the
Offering. This decrease was offset by an increase in the interest paid on notes
payable to stockholders including S distribution notes. During the quarter and
nine months ended September 30, 1996, the Company paid interest on the notes
payable to stockholders of $0.2 million, and $0.6 million respectively,
representing $0.2 million and $0.4 million increases, respectively, over the
corresponding periods in 1995.
Other expenses increased by $0.7 million and $1.0 million for the quarter and
nine months ended September 30, 1996, respectively, as compared to the
corresponding periods in 1995. The third quarter 1996 increase was primarily the
result of a $0.1 million increase in travel and relocation expenses resulting
from the Company's expansion of its retail branch operations and a $0.6 million
increase in REO losses. For the nine month period, the increase was primarily
the result of a $0.2 million increase in travel and relocation expenses
resulting from the Company's expansion of its retail branch operations, a $0.6
million increase in REO losses, and expenses incurred in moving the Company's
administrative offices in February of 1996. REO losses recognized in the third
quarter of 1996 were primarily related to the disposition of certain REO
properties the Company had previously operated as rental properties. At
September 30, 1996, only four such properties remained.
SERVICING
At September 30, 1996, total delinquent loans were 5.3% of the Company's
servicing portfolio, as compared to 5.8% at December 31, 1995 and 5.6% at
September 30, 1995. Loan losses as a percentage of the average servicing
portfolio were 0.13% and 0.26%, respectively for the quarter and nine months
ended September 30, 1996, as compared to 0.01% and 0.02% for the corresponding
periods in 1995. The increases in loan losses in 1996 were principally due
to the disposition of properties acquired through foreclosures of certain
wholesale loans purchased in 1993 and 1994 from one originator from whom the
Company no longer purchases loans.
13
<PAGE>
The following tables provide data on loan delinquency, real estate owned
(REO) and net losses for the Company's servicing portfolio:
<TABLE>
<CAPTION>
As of
---------------------------------------------------------------------------------------------
September 30, 1996 December 31, 1995 September 30, 1995
--------------------------- --------------------------- ---------------------------
% of % of % of
(Dollars in Servicing (Dollars in Servicing (Dollars in Servicing
thousands) Portfolio thousands) Portfolio thousands) Portfolio
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Servicing Portfolio........ $ 618,511 100.0% $ 613,791 100.0% $ 590,079 100.0%
=========== =========== =========== =========== =========== ===========
30-59 days delinquent...... 7,371 1.2% $ 8,339 1.4% $ 9,521 1.6%
60-89 days................. 6,402 1.0 6,538 1.0 7,108 1.2
90 days or more delinquent. 19,148 3.1 21,002 3.4 16,405 2.8
----------- ----------- ----------- ----------- ----------- -----------
Total delinquencies..... $ 32,921 5.3% $ 35,879 5.8% $ 33,034 5.6%
=========== =========== =========== =========== =========== ===========
REO (1)................. $ 5,091 0.8% $ 7,854 1.3% $ 5,540 0.9%
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
-------------------------------- -----------------------------
1996 1995 1996 1995
------------ -------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average servicing portfolio balance outstanding (2).... $ 611,181 $ 587,526 $ 610,573 $ 577,946
Net losses (3)......................................... 779 57 1,565 116
Percentage of average servicing portfolio.............. 0.13% 0.01% 0.26% 0.02%
</TABLE>
- - ---------------
(1) Includes REO of the Company as well as REO of the REMIC Trusts serviced by
the Company; however, excludes private investor REO not serviced by the
Company.
(2) Average servicing portfolio balance equals the quarterly average of the
servicing portfolio computed as the average of the balance at the beginning
and end of each quarter.
(3) Net losses means actual net losses realized with respect to the disposition
of REO.
INCOME TAXES
From May 1, 1988, and until the closing of the Offering, the Company had
elected to be treated for Federal income and certain state tax purposes as an S
corporation under Subchapter S of the Internal Revenue Code and comparable state
laws. As a result, the Company's provisions for income taxes have in the past
reflected modest corporate level state income or franchise taxes for those
states in which the Company operates. The taxable income of the Company during
such periods has been included in the individual taxable income of its
shareholders for Federal and state income tax purposes.
Effective upon the closing of the Offering in July 1996, the Company's S
corporation status was terminated and the Company is now fully subject to
Federal and state taxes. In conjunction with the termination of the Company's S
corporation status, the Company recorded $3.2 million of net deferred tax assets
related to temporary differences between the Company's income tax provision and
income taxes paid or payable in the current and future periods. The Company's
effective income tax rate is anticipated to approximate the Federal and
composite state income and franchise tax rates (net of Federal benefit). If the
Company had been fully subject to Federal and state taxes in 1995 and in the
first six months of 1996, net income on a pro forma basis would have been $5.8
million and $16.0 million for the quarter and nine months ended September 30,
1996, respectively, and $0.8 million and $7.3 million for the corresponding
periods in 1995.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the third quarter of 1996, the Company completed the Offering whereby
4,025,000 shares of Class A Common Stock were sold resulting in gross proceeds
of $68.4 million. After deducting underwriting discounts and offering costs, the
net proceeds of $63.1 million were used to pay $42.5 million of S distribution
notes, to pay down $12.9 million of the Company's warehouse financing facility
and to fund current operations.
Historically, the Company has generated positive cash flow. The Company's
sources of cash include loan sales, sales of regular interests in securities,
borrowings under its warehouse financing facility, distributions received from
residual interests, interest income and loan servicing income. The Company's
uses of cash include the funding of loan originations and purchases, payments of
interest, repayment of the warehouse financing facility, funding of any initial
overcollateralization deposit requirements for securitizations, capital
expenditures, operating and administrative expenses and payment of income taxes.
At origination of a loan, the Company includes the loan origination fees in the
principal balance, and then, if not utilizing available cash, borrows the
principal balance of the loan under its warehousing financing facility. As the
amount funded to the borrower is net of the loan origination fees, the Company
generates cash approximating the loan origination fees at time of funding of the
loan under the warehouse financing facility. Cash generated from the sales of
loans and regular interests in securities is then used to pay down the warehouse
financing facility. For the nine months ended September 30, 1996, cash provided
by operating activities plus net borrowings (repayments) on the warehouse
financing facility increased to $17.4 million from $9.3 million for the nine
months ended September 30, 1995, primarily due to the increase in loan
originations.
The Company's ability to continue to originate and purchase loans is
dependent upon adequate credit facilities and upon its ability to sell the loans
in the secondary market in order to generate cash proceeds for new originations
and purchases. The value of and market for the Company's loans are dependent
upon a number of factors, including general economic conditions, interest rates
and governmental regulations. Adverse changes in such factors may affect the
Company's ability to sell loans for acceptable prices within a reasonable period
of time. A prolonged, substantial reduction in the size of the secondary market
for loans of the type originated or purchased by the Company may adversely
affect the Company's ability to sell loans in the secondary market with a
consequent adverse impact on the Company's results of operations, financial
condition and ability to fund future originations and purchases.
The Company's $125 million warehouse financing facility, which is secured by
loans originated or purchased by the Company and currently bears interest at the
rate of 0.80% over 30 day London Interbank Offered Rate ("LIBOR"), currently
expires on December 31, 1996. Management expects, although there can be no
assurance, that the Company will be able to maintain this warehouse financing
facility (or obtain replacement or additional financing) in the future. The
Company recently obtained a supplemental warehousing facility with another
lender which provides for borrowings up to $25 million. Advances under this
warehousing facility will bear interest at 0.80% over 30 or 90 day LIBOR.
As of September 30, 1996 the Company had commitments to fund loans of $7.0
million. Historically, approximately 55% of such commitments have been funded.
Capital expenditures totaled $1.0 million and $1.9 million for the quarter and
nine months ended September 30, 1996, respectively and $0.3 million and $0.8
million in the corresponding periods in 1995.
The Company paid dividends, including amounts to be used by the stockholders
for the payment of personal income taxes on the earnings of the S corporation,
of $3.7 million and $2.6 million for the quarters ended September 30, 1996 and
1995, respectively, and of $15.1 million and $8.6 million for the nine months
ended September 30, 1996 and 1995, respectively. In addition, in the second and
third quarters of 1996, in anticipation of the revocation of the Company's S
corporation status at the time of the Offering, the Company distributed S
distribution notes to the stockholders of the Company totaling $45.0 million. In
July 1996, payments of $42.5 million were made on the S distribution notes with
proceeds from the Offering. In the fourth quarter of 1996 an additional $2.5
million was paid.
15
<PAGE>
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
123 "Accounting for Stock-Based Compensation," which encourages companies to
account for stock compensation awards based on their fair value at the date the
awards are granted. SFAS No. 123 does not require the application of the fair
value method for stock compensation granted to employees and allows for the
continuance of the current accounting practice, which requires accounting for
stock compensation awards based on their intrinsic value as of the grant date.
However, SFAS No. 123 requires pro forma disclosure of net income and earnings
per share, as if the fair value based method of accounting defined in this
Statement had been applied. The Company has decided not to adopt the fair value
provisions of SFAS No. 123.
In June 1996, the FASB issued SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" effective
January 1, 1997. The accounting standards included in SFAS 125 will, among other
things, apply to the Company's securitization of loans and subsequent sale of
the regular interests in these securitizations as well as its retained servicing
assets and investments in residual interests. The Company does not anticipate
any material effect on the consolidated results of operations or financial
condition resulting from the adoption of SFAS 125.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
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
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- - ------- ---------------------------------------- -----------
<C> <S> <C>
3.1 Certificate of Incorporation of the
Company *
3.2 Bylaws of the Company *
4.1 Stock Certificate Specimen *
10.1 Warehouse Financing Facility dated
October 29, 1993 *
10.2 Form of Pooling and Servicing Agreement *
10.3 Corporate Headquarters Lease (Irvine,
California) *
10.4 S Distribution Notes *
10.5 Mason Employment Agreement *
10.6 Form of Directors' and Officers'
Indemnity Agreement *
10.7 Mortgage Loan Master Transfer Agreement
dated as of June 30, 1995 between
Nationscapital Mortgage Corporation and
the Company *
10.8 Mortgage Loan Master Transfer Agreement
dated as of June 30, 1995 between Coast
Security Mortgage Inc. and the Company *
10.9 Chisick Employment Agreement *
10.10 Reimbursement Agreement *
10.11 1996 Stock Incentive Plan *
10.12 Warehouse Financing Facility dated
September 5, 1996 22
11.1 Statement re: computation of net
income per share for the
quarters and the nine months ended
September 30, 1996 and 1995 68
27 Financial Data Schedule 69
</TABLE>
(b) Reports on Form 8-K
None
.. Incorporated by reference from the Company's Registration Statement on
form S-1, Commission File No. 333-3633.
18
<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.
FIRST ALLIANCE CORPORATION
Registrant
Date: November 11, 1996 /s/ BRIAN CHISICK
-------------------------------------
Brian Chisick
President and Chief Executive Officer
Date: November 11, 1996 /s/ MARK MASON
-------------------------------------
Mark K. Mason
Executive Vice President
Principal Financial Officer
19
<PAGE>
EXHIBIT 10.12
MASTER REPURCHASE AGREEMENT GOVERNING
PURCHASES AND SALES OF MORTGAGE LOANS
Dated as of September 5, 1996
Between
LEHMAN COMMERCIAL PAPER INC.,
as Buyer
and
FIRST ALLIANCE MORTGAGE COMPANY,
as Seller
1. APPLICABILITY
From time to time for a period of eighteen months from the date hereof, the
parties hereto may, subject to the terms hereof, enter into transactions in
which First Alliance Mortgage Company ("Seller") agrees to transfer to Lehman
------
Commercial Paper Inc. ("Buyer") Mortgage Loans against the transfer of funds by
-----
Buyer, with a simultaneous agreement by Buyer to transfer to Seller such
Mortgage Loans at a date certain not later than 150 days after the date of
transfer or on demand, as specified in the Confirmation, against the transfer of
funds by Seller. Each such transaction shall be referred to herein as a
"Transaction" and shall be governed by this Agreement and the related
-----------
Confirmation, unless otherwise agreed in writing.
2. DEFINITIONS
"Act of Insolvency" means, with respect to any party and its Affiliates, (i)
-----------------
the filing of a petition, commencing, or authorizing the commencement of any
case or proceeding under any bankruptcy, insolvency, reorganization,
liquidation, dissolution or similar law relating to the protection of creditors,
or suffering any such petition or proceeding to be commenced by another which is
consented to, not timely contested or results in entry of an order for relief;
(ii) seeking the appointment of a receiver, trustee, custodian or similar
official for such party or an Affiliate or any substantial part of the property
of either, (iii) the appointment of a receiver, conservator, or manager for such
party or an Affiliate by any governmental agency or authority having the
jurisdiction to do so; (iv) the making or offering by such party or an Affiliate
of a composition
<PAGE>
with its creditors or a general assignment for the benefit of creditors, (v) the
admission by such party or an Affiliate of such party of its inability to pay
its debts or discharge its obligations as they become due or mature; or (vi) any
governmental authority or agency or any person, agency or entity acting or
purporting to act under governmental authority shall have taken any action to
condemn, seize or appropriate, or to assume custody or control of, all or any
substantial part of the property of such party or of any of its Affiliates, or
shall have taken any action to displace the management of such party or of any
of its Affiliates or to curtail its authority in the conduct of the business of
such party or of any of its Affiliates.
"Additional Assets" has the meaning specified in Section 3(g).
-----------------
"Additional Loans" means Mortgage Loans or cash provided by Seller to Buyer or
----------------
its designee pursuant to Section 4(a).
"Affiliate" means an affiliate of a party as such term is defined in the United
---------
States Bankruptcy Code in effect from time to time.
"Agency" means FNMA or FHLMC.
------
"Agreement" means this Master Repurchase Agreement Governing Purchases and Sales
---------
of Mortgage Loans between Buyer and Seller, as amended from time to time.
"Balloon Mortgage Loan" means any Mortgage Loan that provided on the date of
---------------------
origination for scheduled payments by the Mortgagor based upon an amortization
schedule extending beyond its maturity date.
"Business Day" means a day other than (i) a Saturday or Sunday, or (ii) a day on
------------
which the New York Stock Exchange is authorized or obligated by law or executive
order to be closed.
"Buyer" has the meaning specified in Section 1.
-----
"Collateral" has the meaning specified in Section 6.
----------
"Collateral Amount" means, with respect to any Transaction, the amount obtained
-----------------
by application of the Collateral Amount Percentage to the Repurchase Price for
such Transaction.
"Collateral Amount Percentage" means the amount set forth in the Confirmation
----------------------------
which, in any event, shall not be more than 107.52% with respect to the
calculation of Market Value.
"Collateral Deficit" has the meaning specified in Section 4(a).
------------------
"Collateral Excess" has the meaning specified in Section 4(b).
-----------------
"Collateral Information" means the following information with respect to each
----------------------
Mortgage Loan: (i) the Seller's loan number, (ii) the Mortgagor's name, (iii)
the address of the Mortgaged Property, (iv) the current interest rate, (v) the
original balance, (vi) the current balance as of the
2
<PAGE>
15th day of the immediately preceding month, (vii) the paid to date that
corresponds to the current balance, (viii) the appraisal value of the Mortgaged
Property, (ix) whether interest rate is fixed or adjustable (and if adjustable,
the related ARM terms, including the index, spread, adjustment frequency, caps
and floors), (x) the lien position of the Mortgage Loan on the Mortgaged
Property, (xi) the occupancy status of the Mortgaged Property (including whether
owner occupied), (xii) whether the Mortgage Loan is a Balloon Loan, (xiii) the
first payment date, (xiv) the maturity date, (xv) the current principal and
interest payment due, (xvi) the amortization term, (xvii) the Mortgage Note
date, (xviii) the property type of the Mortgaged Property, (xix) whether the
Mortgage Loan is convertible from ARM to fixed and (xx) the outstanding balance
of the first lien, if a second lien, and such other information as Buyer may
reasonably request.
"Confirmation" has the meaning specified in Section 3(a).
------------
"Custodial Agreement" means that custodial agreement, dated as of September 5,
-------------------
1996, by and among Buyer, Seller and the Custodian.
"Custodial Delivery" means the form executed by the Seller in order to deliver
------------------
the Mortgage Loan Schedule and/or the Mortgage File to Buyer or its designee
(including the Custodian) pursuant to Section 7, a form of which is attached
hereto as Exhibit II.
"Custodian" means the custodian under the Custodial Agreement. The initial
---------
custodian is Bankers Trust Company of California, N.A.
"Delinquent" means, with respect to any Mortgage Loan, the period of time from
----------
the date on which a Mortgagor fails to pay an obligation then due under the
terms of such Mortgage Loan to the date on which such payment is made.
"Event of Default" has the meaning specified in Section 13.
----------------
"FHA" means the Federal Housing Administration, an agency within HUD.
---
"FHLMC" means the Federal Home Loan Mortgage Corporation.
-----
"FHLMC Guide" means the FHLMC Sellers/Servicers Guide, as amended from time to
-----
time.
"FNMA" means the Federal National Mortgage Association.
----
"FNMA Guide" means the FNMA Selling, Servicing and MBS Guides, as amended from
----------
time to time.
"First Mortgage" means the Mortgage that is the first lien on the Mortgaged
--------------
Property.
"HUD" means the United States Department of Housing and Urban Development.
---
3
<PAGE>
"Income" means, with respect to any Mortgage Loan at any time, any principal
------
thereof then payable and all interest, dividends or other distributions payable
thereon less any related servicing fee(s) charged by the Servicer.
"LIBOR" means the London Interbank Offered Rate for one-month, three-month or
-----
six-month United States dollar deposits as set forth on page 3750 of Telerate as
of 11:00 a.m., London time, on the date of determination, as selected by
Seller; provided, however, that Seller may not select the London Interbank
Offered Rate for three-month or six-month dollar deposits if the related
Repurchase Date is shorter than three or six months, respectively.
"Loan-to-Value Ratio" means with respect to any Mortgage Loan as of any date,
-------------------
the fraction, expressed as a percentage, the numerator of which is the
principal balance of such Mortgage Loan at the date of determination and the
denominator of which is the value of the related Mortgaged Property as set forth
in the appraisal of such Mortgaged Property obtained in connection with the
origination of such Mortgage Loan.
"Market Value" means as of any date with respect to any Mortgage Loan, the price
------------
at which such Mortgage Loan could readily be sold as determined by Buyer in its
sole discretion; provided, however, that Buyer shall not take into account, for
purposes of calculating Market Value, any Mortgage Loan (i) which has a related
Repurchase Date of more than 150 days, (ii) which, together with the other
Mortgage Loans subject to then outstanding Transactions, would cause the 30+
Delinquency Percentage to exceed 1.6%, (iii) which, together with the other
Mortgage Loans subject to then outstanding Transactions, would cause the 60+
Delinquency Percentage to exceed 1.2%, (iv) which are more than 89 days
Delinquent or (v) with respect to which there is a breach of a representation,
warranty or covenant made by Seller in this Agreement that materially adversely
affects Buyer's interest in such Mortgage Loan and which breach has not been
cured; provided further, however that the Market Value of any Mortgage Loan
shall not in any event exceed the outstanding principal amount thereof.
"Mortgage" means a mortgage, deed of trust, deed to secure debt or other
--------
instrument, creating a valid and enforceable first or second lien or a first or
second priority ownership interest in an estate in fee simple in residential
real property and the improvements thereon, securing a mortgage note or similar
evidence of indebtedness.
"Mortgage File" means the documents specified as the "Mortgage File" in Section
-------------
7(d), together with any additional documents and information required to be
delivered to Buyer or its designee (including the Custodian) pursuant to this
Agreement.
"Mortgage Loan" means (i) a non-securitized whole loan, namely a conventional
-------------
mortgage loan secured by a first or second lien on a one to four family
residential property or mixed-use property for which a complete Mortgage File
has been delivered to the Custodian or (ii) other type of non-securitized whole
loan as may be agreed upon in writing by the parties hereto from time to time.
"Mortgage Loan Schedule" means a schedule of Mortgage Loans attached to each
----------------------
Trust Receipt, Confirmation and Custodial Delivery.
4
<PAGE>
"Mortgage Note" means a note or other evidence of indebtedness of a Mortgagor
-------------
secured by a Mortgage.
"Mortgaged Property" means the residential real property securing repayment of
------------------
the debt evidenced by a Mortgage Note.
"Mortgagee" means the record holder of a Mortgage Note secured by a Mortgage.
---------
"Mortgagor" means the obligor on a Mortgage Note and the grantor of the related
---------
Mortgage.
"Non-Usage Fee" means, as of each Non-Usage Payment Date, a fee paid by Seller
-------------
to Buyer equal to the product of (a) .125% per annum and (b) the positive amount
by which (X) $25,000,000 exceeds (Y) the average outstanding Repurchase Price
for the immediately preceding three months.
"Non-Usage Payment Date" has the meaning specified in Section 3(g).
----------------------
"Periodic Payment" has the meaning specified in Section 5(b).
----------------
"Person" means an individual, partnership, corporation, joint stock company,
------
trust or unincorporated organization or a governmental agency or political
subdivision thereof.
"Price Differential" means, with respect to any Transaction hereunder as of any
------------------
date, the aggregate amount obtained by daily application of the Pricing Rate for
such Transaction to the Purchase Price for such Transaction on a 360 day per
year basis for the actual number of days during the period commencing on (and
including) the Purchase Date for such Transaction and ending on (but excluding)
the Repurchase Date (reduced by any amount of such Price Differential previously
paid by Seller to Buyer with respect to such Transaction).
"Pricing Rate" means the per annum percentage rate specified in the Confirmation
------------
for determination of the Price Differential which shall not exceed LIBOR plus
the applicable Pricing Spread.
"Pricing Spread" means 0.80%.
--------------
"Prime Rate" means the rate of interest published by The Wall Street Journal,
----------
northeast edition, as the "prime rate".
"Purchase Date" means the date on which Purchased Mortgage Loans are transferred
-------------
by Seller to Buyer or its designee (including the Custodian) as specified in the
Confirmation.
"Purchase Price" means on each Purchase Date, the price at which Purchased
--------------
Mortgage Loans are transferred by Seller to Buyer or its designee (including the
Custodian).
5
<PAGE>
"Purchased Mortgage Loans" means the Mortgage Loans (including any Additional
------------------------
Assets) sold by Seller to Buyer in a Transaction, any Additional Loans and any
Substituted Mortgage Loans.
"Replacement Loans" has the meaning specified in Section 14(b).
-----------------
"Repurchase Date" means the date on which Seller is to repurchase the Purchased
---------------
Mortgage Loans from Buyer, including any date determined by application of the
provisions of Sections 3 or 13, as specified in the Confirmation; provided that
in no event shall such date be more than 150 days after the Purchase Date.
"Repurchase Price" means the price at which Purchased Mortgage Loans are to be
----------------
transferred from Buyer or its designee (including the Custodian) to Seller upon
termination of a Transaction, which will be determined in each case (including
Transactions terminable upon demand) as the sum of the Purchase Price and the
Price Differential as of the date of such determination decreased by all cash,
Income and Periodic Payments actually received by Buyer pursuant to Sections
4(a), 5(a) and 5(b), respectively.
"Securitization" mean the public or private offering of any securities of the
--------------
Seller or its subsidiaries collateralized by, or representing interests in, the
Purchased Mortgage Loans.
"Seller" has the meaning specified in Section 1.
------
"Servicer" has the meaning specified in Section 25.
--------
"Servicing Agreement" has the meaning specified in Section 25.
-------------------
"Servicing Records" has the meaning specified in Section 25.
-----------------
"60+ Delinquency Percentage" means the fraction, expressed as a percentage, the
--------------------------
numerator of which is the aggregate Purchase Price of Purchased Mortgage Loans
subject to then outstanding Transactions which are more than 60 days Delinquent
and the denominator of which is the aggregate Purchase Price of all Purchased
Mortgage Loans subject to then outstanding Transactions.
"Substituted Mortgage Loans" means any Mortgage Loans substituted for Purchased
--------------------------
Mortgage Loans in accordance with Section 9 hereof.
"30+ Delinquency Percentage" means the fraction, expressed as a percentage, the
--------------------------
numerator of which is the aggregate Purchase Price of Purchased Mortgage Loans
subject to then outstanding Transactions which are more than 30 days Delinquent
and the denominator of which is the aggregate Purchase Price of all Purchased
Mortgage Loans subject to then outstanding Transactions.
"Transaction" has the meaning specified in Section 1.
-----------
6
<PAGE>
"Trust Receipt" means a trust receipt issued by Custodian to Buyer confirming
-------------
the Custodian's possession of certain mortgage loan files which are the property
of and held by Custodian for the benefit of the Buyer or the registered holder
of such trust receipt.
3. INITIATION; CONFIRMATION; TERMINATION; MAXIMUM TRANSACTION AMOUNTS
(a) An agreement to enter into a Transaction may be entered into orally or in
writing at the initiation of either Buyer or Seller. In any event, Buyer shall
confirm the terms of each Transaction by issuing a written confirmation to
Seller promptly after the parties enter into such Transaction in the form of
Exhibit I attached hereto (a "Confirmation"). Such Confirmation shall describe
------------
the Purchased Mortgage Loans, identify Buyer and Seller and set forth (i) the
Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the
Transaction is to be terminable on demand, (iv) the Pricing Rate applicable to
the Transaction, (v) the applicable Collateral Amount Percentage with respect to
the calculation of Market Value and (vi) additional terms or conditions not
inconsistent with this Agreement. After receipt of the Confirmation, Seller
shall, subject to the provisions of subsection (c) below, sign the Confirmation
and promptly return it to Buyer. The Purchase Price for any Transaction shall
exceed $500,000.
(b) Any Confirmation by Buyer shall be deemed to have been received by Seller on
the date actually received by Seller.
(c) Each Confirmation, together with this Agreement, shall be conclusive
evidence of the terms of the Transaction(s) covered thereby unless objected to
in writing by Seller no more than two (2) Business Days after the date the
Confirmation was received by Seller or unless a corrected Confirmation is sent
by Buyer. An objection sent by Seller must state specifically that writing which
is an objection, must specify the provision(s) being objected to by Seller, must
set forth such provision(s) in the manner that the Seller believes they should
be stated, and must be received by Buyer no more than two (2) Business Days
after the Confirmation was received by Seller.
(d) In the case of Transactions terminable upon demand, such demand shall be
made by Buyer or Seller by telephone or otherwise, no later than 1:00 p.m. (New
York Time) on the Business Day prior to the day on which such termination will
be effective.
(e) On the Repurchase Date, termination of the Transaction will be effected by
transfer to Seller or its designee of the Purchased Mortgage Loans (and any
Income in respect thereof received by Buyer not previously credited or
transferred to, or applied to the obligations of, Seller pursuant to Section 5)
against the simultaneous transfer of the Repurchase Price to an account of
Buyer. Seller is obligated to obtain the Mortgage Files from Buyer or its
designee at Seller's expense on the Repurchase Date. With respect to any
transfers of Purchased Mortgage Loans on a Repurchase Date in accordance with
the preceding sentence, Buyer shall cause such Purchased Mortgage Loans to be
free of any liens granted by the Buyer thereon.
(f) With respect to all Transactions hereunder, the aggregate Purchase Price for
all Purchased Mortgage Loans at any one time subject to then outstanding
Transactions shall not exceed $25,000,000.
7
<PAGE>
(g) On the last day of each three month period following September 30, 1996
(each a "Non-Usage Payment Date"), Seller shall pay to Buyer in federal funds by
----------------------
wire transfer the Non-Usage Fee then due, if any. In the event that Buyer or any
of its Affiliates participates (or refuses to participate in writing) as the
lead manager or co-manager of a Securitization of some or all of the Purchased
Mortgage Loans during the three month period immediately preceding a Non-Usage
Payment Date, Buyer shall waive the applicable Non-Usage Fee, if any, then due
on such Non-Usage Payment Date.
(h) Notwithstanding anything in this Agreement to the contrary, Buyer shall have
no obligation to enter into any Transaction hereunder if there shall have
occurred any material adverse change, as determined by Buyer in its reasonable
judgment, in the financial condition of Buyer, the financial markets generally
or the secondary market for Mortgage Loans. Buyer shall promptly notify Seller
of any determination by Buyer that any of the foregoing has occurred.
4. COLLATERAL AMOUNT MAINTENANCE
(a) If at any time the aggregate Market Value of all Purchased Mortgage Loans
subject to all Transactions is less than the aggregate Collateral Amount for all
such Transactions (a "Collateral Deficit"), then Buyer may by notice to Seller
------------------
require Seller to transfer to Buyer or its designee (including the Custodian)
Mortgage Loans ("Additional Loans") or cash, so that the cash and aggregate
----------------
Market Value of the Purchased Mortgage Loans, including any such Additional
Loans, will thereupon equal or exceed the aggregate Collateral Amount.
(b) If at any time the aggregate Market Value of all Purchased Mortgage Loans
subject to all Transactions exceeds the aggregate Collateral Amount for all such
Transactions (a "Collateral Excess"), then Seller may by notice to Buyer require
-----------------
Buyer in such Transactions, to transfer or cause to be transferred to Seller or
its designee Purchased Mortgage Loans or cash so that the cash and aggregate
Market Value of the Purchased Mortgage Loans, after deduction of any such
Mortgage Loans or cash so transferred, will thereupon not exceed the aggregate
Collateral Amount.
(c) Notice required pursuant to subsections (a) or (b) above may be given by any
means of telecopier or telegraphic transmission. A notice for the payment or
delivery in respect of a Collateral Deficit or Collateral Excess, as the case
may be, received before 10:00 a.m. on a Business Day, local time of the party
receiving the notice, must be met not later than 5:00 p.m. on the Business Day
on which the notice was given, local time of the party receiving the notice. Any
notice given on a Business Day after 10:00 a.m., local time of the party
receiving the notice, shall be met not later than 2:00 p.m. (New York time) on
the following Business Day. The failure of Buyer or Seller, on any one or more
occasions, to exercise its rights under subsections (a) or (b) of this Section,
respectively, shall not change or alter the terms and conditions to which this
Agreement is subject or limit the right of the Buyer or Seller to do so at a
later date. Buyer and Seller agree that a failure or delay to exercise its
rights under subsections (a) or (b) of this Section shall not limit either
party's rights under this Agreement or otherwise existing by law or in any way
create additional rights for the other party.
(d) In the event the Seller fails to comply with the provisions of this Section
4, Buyer shall not enter into any additional Transactions hereunder after the
date of such failure.
8
<PAGE>
5. INCOME PAYMENTS
(a) Where a particular Transaction's term extends over an Income payment date on
the Purchased Mortgage Loans subject to that Transaction such Income shall be
the property of Buyer. Notwithstanding the foregoing, so long as no Event of
Default shall have occurred and be continuing, Seller shall be entitled to all
Income with respect to Purchased Mortgage Loans subject to Transactions. Upon
the occurrence and continuance of an Event of Default, all Income with respect
to Purchased Mortgage Loans subject to Transactions shall be held in a
segregated account established by the Custodian for the benefit of Buyer and
distributed under the Custodial Agreement.
(b) Notwithstanding that Buyer and Seller intend that the Transactions hereunder
be sales to Buyer of the Purchased Mortgage Loans, Seller shall pay by wire
transfer to Buyer the accreted value of the Price Differential (less any amount
of such Price Differential previously paid by Seller to Buyer) (each such
payment, a "Periodic Payment") on the first Business Day of each month. The
----------------
Price Differential shall accrue, be calculated and be compounded on a daily
basis for each Purchased Mortgage Loan.
(c) Buyer shall offset against the Repurchase Price of each such Transaction all
Income and Periodic Payments actually received by Buyer pursuant to Sections
5(a) and (b), respectively.
6. SECURITY INTEREST
(a) Buyer and the Seller intend that the Transactions hereunder be sales to
Buyer of the Purchased Mortgage Loans and not loans from Buyer to Seller secured
by the Purchased Mortgage Loans. However, in order to preserve Buyer's rights
under this Agreement in the event that a court or other forum recharacterizes
the Transactions hereunder as loans and as security for the performance by
Seller of all of Seller's obligations to Buyer under this Agreement and the
Transactions entered into pursuant to this Agreement, Seller grants Buyer a
first priority security interest in the Purchased Mortgage Loans, Servicing
Records, insurance relating to the Purchased Mortgage Loans, Income, any and all
custodial accounts and escrow accounts relating to the Purchased Mortgage Loans
and any other contract rights, general intangibles and other assets relating to
the Purchased Mortgage Loans or any interest in the Purchased Mortgage Loans and
the servicing of the Purchased Mortgage Loans (collectively, the "Collateral").
----------
(b) Seller shall pay all fees and expenses associated with perfecting Buyer's
security interest in the Collateral, including, without limitation, the cost of
filing financing statements under the Uniform Commercial Code and recording
assignments of Mortgage, as and when required by Buyer in its sole discretion.
7. PAYMENT, TRANSFER AND CUSTODY
(a) Unless otherwise mutually agreed in writing, all transfers of funds
hereunder shall be in immediately available funds.
(b) On or before each Purchase Date, Seller shall deliver or cause to be
delivered to Buyer or its designee the Custodial Delivery in the form attached
hereto as Exhibit II.
(c) On the Purchase Date for each Transaction, ownership of the Purchased
Mortgage Loans shall be transferred to the Buyer or its designee (including the
Custodian) against the simultaneous transfer of the Purchase price to an account
of Seller specified in the Confirmation. Seller, simultaneously with the
delivery to Buyer or its designee (including the Custodian) of the Purchased
Mortgage Loans relating to each Transaction hereby sells, transfers, conveys
and
9
<PAGE>
assigns to Buyer or its designee (including the Custodian) without recourse, but
subject to the terms of this Agreement, all the right, title and interest of
Seller in and to the Purchased Mortgage Loans together with all right, title
and interest in and to the proceeds of any related insurance policies.
(d) In connection with such sale, transfer, conveyance and assignment, on or
prior to each Purchase Date with respect to each Mortgage Loan (or with respect
to item (vii) below within five Business Days after the Purchase Date), the
Seller shall deliver or cause to be delivered and released to the Custodian the
following original documents (collectively the "Mortgage File"), pertaining to
-------------
each of the Purchased Mortgage Loans identified in the Custodial Delivery
delivered therewith:
(i) the original Mortgage Note bearing all intervening endorsements,
endorsed "Pay to the order of , without recourse" and signed
------------
in the name of the last endorsee (the "Last Endorsee") by an authorized
-------------
officer (in the event that the Mortgage Loan was acquired by the Last
Endorsee in a merger, the signature must be in the following form: "[the
Last Endorsee], successor by merger to [name of predecessor]"; in the
event that the Mortgage Loan was acquired or originated while doing
business under another name, the signature must be in the following
form: "[the Last Endorsee], formerly known as [previous name]");
(ii) the original of any guarantee executed in connection with Mortgage
Note (if any);
(iii) the original Mortgage with evidence of recording thereon or copies
certified by Seller to have been sent for recording;
(iv) the originals of all assumption, modification, consolidation or
extension agreements, with evidence of recording thereon or copies
certified by Seller to have been sent for recording;
(v) the original assignment of Mortgage in blank for each Mortgage
Loan, in form and substance acceptable for recording and signed in the
name of the Last Endorsee (in the event that the Mortgage Loan was
acquired by the Last Endorsee in a merger, the signature must be in the
following form: "[the Last Endorsee], successor by merger to [name of
predecessor]"; in the event that the Mortgage Loan was acquired or
originated while doing business under another name, the signature must
be in the following form: "[the Last Endorsee], formerly known as
[previous name]");
(vi) the originals of all intervening assignments of mortgage with
evidence of recording thereon or copies certified by Seller to have been
sent for recording;
(vii) the original policy of title insurance or a true copy thereof or,
if such policy has not yet been delivered by the insurer, the commitment
or binder to issue the same; and
(viii) the original of any security agreement, chattel mortgage or
equivalent document executed in connection with the Mortgage (if any).
(e) With respect to each Mortgage Loan delivered by Seller to Buyer or its
designee (including the Custodian), Seller shall execute an omnibus power of
attorney substantially in the form of Exhibit III attached hereto irrevocably
appointing Buyer its attorney-in-fact with full power to complete and record the
assignment of Mortgage, complete the endorsement of the Mortgage
10
<PAGE>
Note and take such other steps as may be necessary or desirable to enforce
Buyer's rights against such Mortgage Loans, the related Mortgage Files and the
Servicing Records.
(f) Buyer shall deposit the Mortgage Files representing the Purchased Mortgage
Loans, or direct that the Mortgage Files be deposited directly, with the
Custodian. The Mortgage Files shall be maintained in accordance with the
Custodial Agreement.
(g) Any Mortgage Files not delivered to Buyer or its designee (including the
Custodian) are and shall be held in trust by Seller or its designee for the
benefit of Buyer as the owner thereof. Seller or its designee shall maintain a
copy of the Mortgage File and the originals of the Mortgage File not delivered
to Buyer or its designee. The possession of the Mortgage File by Seller or its
designee is at the will of the Buyer for the sole purpose of servicing the
related Purchased Mortgage Loan, and such retention and possession by the Seller
or its designee is in a custodial capacity only. The books and records
(including, without limitation, any computer records or tapes) of Seller or its
designee shall be marked appropriately to reflect clearly the inclusion of the
related Purchased Mortgage Loan in a Transaction. Seller or its designee
(including the Custodian) shall release its custody of the Mortgage File only
in accordance with written instructions from Buyer, unless such release is
required as incidental to the servicing of the Purchased Mortgage Loans or is in
connection with a repurchase of any Purchased Mortgage Loan by Seller.
8. REHYPOTHECATION OR PLEDGE OF PURCHASED MORTGAGE LOANS
Title to all Purchased Mortgage Loans shall pass to Buyer and Buyer shall have
free and unrestricted use of all Purchased Mortgage Loans. Nothing in this
Agreement shall preclude Buyer from engaging in repurchase transactions with the
Purchased Mortgage Loans or otherwise pledging, repledging, hypothecating, or
rehypothecating the Purchased Mortgage Loans, but no such transaction shall
relieve Buyer of its obligations to transfer Purchased Mortgage Loans to Seller
pursuant to Section 3. Nothing contained in this Agreement shall obligate Buyer
to segregate any Purchased Mortgage Loans delivered to Buyer by Seller.
9. SUBSTITUTION
(a) Subject to Section 9(b), Seller may, upon one (1) Business Days written
notice to Buyer, with a copy to Custodian, substitute other Mortgage Loans for
any Purchased Mortgage Loans. Such substitution shall be made by transfer to
Buyer or its designee (including the Custodian) of the Mortgage File of such
other Mortgage Loans together with a Custodial Delivery and transfer to Seller
or its designee of the Purchased Mortgage Loans requested for release. After
substitution, the substituted Mortgage Loans, shall be deemed to be Purchased
Mortgage Loans subject to the same Transaction as the released Mortgage Loans.
(b) Notwithstanding anything to the contrary in this Agreement, Seller may not
substitute other Mortgage Loans for any Purchased Mortgage Loans (i) if after
taking into account such substitution, a Collateral Deficit would occur or (ii)
such substitution would cause a breach of any provision of this Agreement.
10. REPRESENTATIONS AND WARRANTIES
(a) Each of Buyer and Seller represents and warrants to the other that (i) it
is duly authorized to execute and deliver this Agreement, to enter into the
Transactions contemplated hereunder and to perform its obligations hereunder and
has taken all necessary action to authorize such execution, delivery and
performance; (ii) it will engage in such Transactions as principal; (iii) the
person signing this Agreement on its behalf is duly authorized to do so on its
behalf; (iv) no approval,
11
<PAGE>
consent or authorization of the Transactions contemplated by this Agreement from
any federal, state, or local regulatory authority having jurisdiction over it is
required or, if required, such approval, consent or authorization has been or
will, prior to the Purchase Date, be obtained; (v) the execution, delivery, and
performance of this Agreement and the Transactions hereunder will not violate
any law, regulation, order, judgement, decree, ordinance, charter, by-law, or
rule applicable to it or its property or constitute a default (or an event
which, with notice or lapse of time, or both would constitute a default) under
or result in a breach of any agreement or other instrument by which it is bound
or by which any of its assets are affected; (vi) it has received approval and
authorization to enter into this Agreement and each and every Transaction
actually entered into hereunder pursuant to its internal policies and
procedures; and (vii) neither this Agreement nor any Transaction pursuant hereto
are entered into in contemplation of insolvency or with intent to hinder, delay
or defraud any creditor.
(b) Seller represents and warrants to Buyer that as of the Purchase Date for
the purchase of any Purchased Mortgage Loans by Buyer from Seller and as of the
date of this Agreement and any Transaction hereunder and at all times while this
Agreement and any Transaction hereunder is in full force and effect:
(i) Organization. Seller is duly organized, validly existing and in good
------------
standing under the laws and regulations of the state of California and
is duly licensed, qualified, and in good standing in every state where
Seller transacts business and in any state where any Mortgaged Property
is located if the laws of such state require licensing or qualification
in order to conduct business of the type conducted by Seller therein.
(ii) No Litigation. Except as Buyer has previously been advised in writing,
-------------
there is no action, suit, proceeding or arbitration to which Seller is
a party or investigation, pending or, to the knowledge of Seller,
threatened against Seller, the adverse determination of which is
reasonably likely, either in any one instance or in the aggregate, to
result in a material adverse change in any of the business, operations,
financial condition, properties or assets of Seller, taken as a whole,
or in a material impairment of the right or ability of Seller to carry
on its business substantially as now conducted, or in a material
liability on the part of Seller, or would affect the validity of this
Agreement or any of the Purchased Mortgage Loans or of any action taken
or to be taken in connection with the obligations of Seller contemplated
herein, or would be likely to impair materially the ability of Seller to
perform under the terms of this Agreement;
(iii) No Broker. Seller has not dealt with any broker, investment banker,
---------
agent, or other person, except for Buyer, who may be entitled to any
commission of compensation in connection with the sale of Purchased
Mortgage Loans pursuant to this Agreement;
(iv) Good Title to Collateral. Purchased Mortgage Loans shall be free and
------------------------
clear of any lien, encumbrance or impediment to transfer, and Seller has
good, valid and marketable title and the right to sell and transfer such
Purchased Mortgage Loans to Buyer.
(v) Delivery of Mortgage File. The Mortgage Note, the Mortgage, the
-------------------------
assignment of Mortgage and any other documents required to be delivered
under this Agreement and the Custodial Agreement for the Mortgage Loans
have been delivered to the Custodian. Seller or its designee is in
12
<PAGE>
possession of a complete, true and accurate Mortgage File with respect
to the Mortgage Loans, except for such documents the originals of which
have been delivered to the Custodian.
(vi) Selection Process. The Purchased Mortgage Loans were selected from
-----------------
among the outstanding mortgage loans in Seller's portfolio as to which
the representations and warranties set forth in this Agreement could be
made and such selection was not made in a manner so as to affect
adversely the interests of Buyer.
(vii) Reunderwriting of Mortgage Loans. The Purchased Mortgage Loans that
--------------------------------
were not originated by the Seller have been reunderwritten by the
Seller using its own underwriting standards.
(viii) No Untrue Statements. Neither this Agreement nor any written statement
--------------------
made, or any report or other document issued or delivered or to be
issued or delivered by Seller pursuant to this Agreement or in
connection with the transactions contemplated hereby contains any
untrue statement of material fact or omits to state a material fact
necessary to make the statements contained herein or therein not
misleading;
(ix) Origination and Purchase Practices. The origination and purchase
----------------------------------
practices used by Seller with respect to each Mortgage Loan have been
and are in all respects legal and proper in the mortgage origination
business;
(x) Performance of Agreement. Seller does not believe, nor does it have
------------------------
any reason or cause to believe, that it cannot perform each and every
covenant contained in this Agreement on its part to be performed;
(xi) Seller Not Insolvent. Seller is not, and with the passage of time does
not expect to become, insolvent; and
(xii) No Event of Default. No Event of Default has occurred and is
continuing hereunder.
(c) Seller represents and warrants to the Buyer that each Purchased Mortgage
Loan sold hereunder and each pool of Purchased Mortgage Loans sold in a
Transaction hereunder, as of the related Purchase Date conform to the
representations and warranties set forth in Exhibit V attached hereto and that
each Mortgage Loan delivered hereunder as Additional Loans or Substituted
Mortgage Loans, as of the date of such delivery, conforms to the
representations and warranties set forth in Exhibit V hereto. Seller further
represents and warrants to the Buyer that, as of the first Business Day of each
month, the Collateral Information with respect to each Purchased Mortgage Loan
is complete, true and correct. It is understood and agreed that the
representations and warranties set forth in Exhibit V hereto, if any, shall
survive delivery of the respective Mortgage File to Buyer or its designee
(including the Custodian).
(d) On the Purchase Date for any Transaction, Buyer and Seller shall each be
deemed to have made all the foregoing representations with respect to itself as
of such Purchase Date.
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11. NEGATIVE COVENANTS OF THE SELLER
On and as of the date of this Agreement and each Purchase Date and until this
Agreement is no longer in force with respect to any Transaction, Seller
covenants that it shall not:
(a) take any action which would directly or indirectly impair or adversely
affect Buyer's title to or the value of the Purchased Mortgage Loans;
(b) pledge, assign, convey, grant, bargain, sell, set over, deliver or otherwise
transfer any interest in the Collateral to any person not a party to this
Agreement nor will the Seller create, incur or permit to exist any lien,
encumbrance or security interest in or on the Collateral except as described in
Sections 6 or 25(b) of this Agreement; or
(c) make any adverse changes to Seller's underwriting guidelines without the
prior written consent of Buyer.
12. AFFIRMATIVE COVENANTS OF THE SELLER
For so long as this Agreement is in effect:
(a) Seller covenants that it will promptly notify Buyer of any material adverse
change in its business operations and/or financial condition.
(b) Seller shall provide Buyer with copies of such documentation as Buyer may
reasonably request evidencing the truthfulness of the representations set forth
in Section 10, including but not limited to resolutions evidencing the approval
of this Agreement by Seller's board of directors or loan committee, copies of
the minutes of the meetings of Seller's board of directors or loan committee at
which this Agreement and the Transactions contemplated by this Agreement were
approved.
(c) Seller shall, at Buyer's request, take all action necessary to ensure that
Buyer will have a first priority security interest in the Purchased Mortgage
Loans, including, among other things, filing such Uniform Commercial Code
financing statements as Buyer may reasonably request.
(d) Seller shall notify Buyer no later than one (1) Business Day after an
executive officer of the Seller has actual knowledge thereof, if any event has
occurred that constitutes an Event of Default with respect to Seller or any
event that with the giving of notice or lapse of time, or both, would become an
Event of Default with respect to Seller.
(e) [Reserved].
(f) Seller covenants, upon request of Buyer after the occurrence of a Collateral
Deficit, to enter into hedging transactions with respect to fixed rate Purchased
Mortgage Loans in order to protect adequately, in the reasonable judgment
against interest rate risks.
(g) [Reserved].
(h) Seller covenants to provide Buyer with a copy of any changes to its
underwriting guidelines, prior to the effectiveness of such changes.
(i) Seller covenants to provide Buyer on the first Business Day of each month,
either by direct modem electronic transmission or via a computer diskette, the
Collateral Information, updated as
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appropriate, in computer readable format with respect to all Purchased Mortgage
Loans then subject to Transactions.
(j) Seller covenants to provide Buyer with the following financial and reporting
information:
(i) Within 95 days after the last day of its fiscal year, Seller's
audited consolidated statements of income and statements of cash flow
for such year and balance sheets as of the end of such year in each case
presented fairly in accordance with GAAP, and accompanied, in all cases,
by an unqualified report of one of the "Big Six" independent certified
public accounting firms.
(ii) Within 60 days after the last day of the first three fiscal
quarters in any fiscal year, Seller's consolidated statements of income
and statements of cash flow for such quarter and balance sheets as of
the end of such quarter presented fairly in accordance with GAAP.
(iii) Within 30 days after the last day of each calendar quarter an
officer's certificate from Seller's chief financial officer or
treasurer, addressed to Buyer certifying that, as of the date of such
certificate, (i) Seller is in compliance with all of the terms,
conditions and requirements of this Agreement, and (ii) such officer has
no actual knowledge, except as specifically stated therein, of an Event
of Default hereunder.
(iv) As soon as available, copies of all proxy statements, financial
statements, and reports which Seller sends to its stockholders, and
copies of all regular, periodic and special reports, and all
registration statements under the Securities Act of 1933, as amended,
which it files with the Securities and Exchange Commission or any
government authority which may be substituted therefor, or with any
national securities exchange.
13. EVENTS OF DEFAULT
(a) If any of the following events (each an "Event of Default") occur,
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Seller and Buyer shall have the rights set forth in Section 14, as
applicable:
(i) Seller or Buyer fails to satisfy or perform any material obligation
or covenant under this Agreement; provided, however, that if such
material obligation or covenant relates to a non-monetary obligation or
covenant, such failure shall not constitute an Event of Default
hereunder unless such failure continues for a period of 30 days after
delivery of written notice to the defaulting party;
(ii) an Act of Insolvency occurs with respect to Seller;
(iii) any representation made by Seller shall have been incorrect or
untrue in any material respect when made or repeated or deemed to have
been made or repeated;
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(iv) Seller shall admit its inability to, or its intention not to, perform
any of its obligations hereunder;
(v) any governmental, regulatory, or self-regulatory authority takes any
action to remove, limit, restrict, suspend or terminate the rights,
privileges, or operations of the Seller or any of its Affiliates,
including suspension as an issuer, lender or seller/servicer of mortgage
loans, which suspension has a material adverse effect on the ordinary
business operations of Seller, as a whole, and which continues for more
than 24 hours;
(vi) Seller dissolves, merges or consolidates with another entity (unless (A)
it is the surviving party or (B) the entity into which it mergers has
equity and a market value of at least that of the Seller immediately
prior to such merger and such entity expressly assumes the obligations
of the Seller at the time of such merger), or sells, transfers, or
otherwise disposes of a material portion of its business or assets;
(vii) Buyer, in its good faith judgment, believes that there has been a
material adverse change in the business, operations, corporate structure
or financial condition of Seller or that Seller will not meet any of its
obligations under any Transaction pursuant to this Agreement, this
Agreement or any other agreement between the parties;
(viii) Seller is in default under any other indenture or agreement concerning
the borrowing of money to which it is a party (including, without
limitation, the Subordination Agreement), provided, however, such a
default shall not constitute an Event of Default if the exercise of such
remedies as are available to Seller's counterparty with respect to such
default would not result in a material adverse change in the business
operations or financial condition of the Seller;
(ix) A final judgment by any competent court in the United States of America
for the payment of money in an amount of at least $500,000 is rendered
against the Seller, and the same remains undischarged and unpaid for a
period of sixty (60) days during which execution of such judgment is not
effectively stayed; or
(x) This Agreement shall for any reason cease to create a valid, first
priority security interest in any of the Purchased Mortgage Loans
purported to be covered hereby.
(xi) A Collateral Deficit occurs with respect to Seller and is not eliminated
within the time period specified in Section 4(c).
14. REMEDIES
(a) If an Event of Default occurs with respect to Seller, the following rights
and remedies are available to Buyer:
(i) At the option of Buyer, exercised by written notice to Seller (which
option shall be deemed to have been exercised, even if no notice is
given, immediately upon the occurrence of an Act of Insolvency), the
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Repurchase Date for each Transaction hereunder shall be deemed immediately
to occur.
(ii) If Buyer exercises or is deemed to have exercised the option referred to
in subsection (a)(i) of this Section,
(A) Seller's obligations hereunder to repurchase all Purchased Mortgage
Loans in such Transactions shall thereupon become immediately due and
payable,
(B) to the extent permitted by applicable law, the Repurchase Price with
respect to each such Transaction shall be increased by the aggregate
amount obtained by daily application of, on a 360 day per year basis for
the actual number of days during the period from and including the date of
the exercise or deemed exercise of such option to but excluding the date
of payment of the Repurchase Price as so increased, (x) the greater of the
Prime Rate or the Pricing Rate for each such Transaction to (y) the
Repurchase Price for such Transaction as of the Repurchase Date as
determined pursuant to subsection (a)(i) of this Section (decreased as of
any day by (I) any amounts actually in the possession of Buyer pursuant to
clause (C) of this subsection, (II) any proceeds from the sale of
Purchased Mortgage Loans applied to the Repurchase Price pursuant to
subsection (a)(xi) of this Section, and (III) any amounts applied to the
Repurchase Price pursuant to subsection (a)(iii) of this Section), and
(C) all Income actually received by the Buyer or its designee (including
the Custodian) pursuant to Section 5 shall be applied to the aggregate
unpaid Repurchase Price owed by Seller.
(iii) After one Business Day's notice to Seller (which notice need not be given
if an Act of Insolvency shall have occurred, and which may be the notice
given under subsection (a)(i) of this Section), Buyer may (A) immediately
sell, without notice or demand of any kind, at a public or private sale
and at such price or prices Buyer may reasonably deem satisfactory any or
all Purchased Mortgage Loans subject to a Transaction hereunder or (B) in
its sole discretion elect, in lieu of selling all or a portion of such
Purchased Mortgage Loans, to give Seller credit for such Purchased
Mortgage Loans in an amount equal to the Market Value of the Purchased
Mortgage Loans against the aggregate unpaid Repurchase Price and any other
amounts owing by Seller hereunder. The proceeds of any disposition of
Purchased Mortgage Loans shall be applied first to the costs and expenses
incurred by Buyer in connection with Seller's default; second to
consequential damages, including reasonable legal expenses, the costs of
cover and/or related hedging transactions; third to the Repurchase Price;
fourth to any other outstanding obligation of Seller to Buyer or its
Affiliates; and fifth, if any amounts remain, to the Seller.
(iv) The parties recognize that it may not be possible to purchase or sell all
of the Purchased Mortgage Loans on a particular Business Day, or in a
transaction with the same purchaser, or in the same manner because the
market for such Purchased Mortgage Loans may not be liquid. In view of the
nature of the Purchased Mortgage Loans, the parties agree that liquidation
of a Transaction or the underlying Purchased Mortgage Loans does not
require a public purchase or sale and that a good faith private purchase
or sale shall be deemed to have been made in a commercially reasonable
manner. Accordingly, Buyer may elect, in its sole discretion,
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the time and manner of liquidating any Purchased Mortgage Loan and
nothing contained herein shall (A) obligate Buyer to liquidate any
Purchased Mortgage Loan on the occurrence of an Event of Default or to
liquidate all Purchased Mortgage Loans in the same manner or on the same
Business Day or (B) constitute a waiver of any right or remedy of Buyer.
However, in recognition of the parties' agreement that the Transactions
hereunder have been entered into in consideration of and in reliance
upon the fact that all Transactions hereunder constitute a single
business and contractual relationship and that each Transaction has been
entered into in consideration of the other Transactions, the parties
further agree that Buyer shall use its best efforts to liquidate all
Transactions hereunder upon the occurrence of an Event of Default as
quickly as is prudently possible in the reasonable judgment of Buyer.
(v) Buyer shall, without regard to the adequacy of the security for the
Seller's obligations under this Agreement, be entitled to the
appointment of a receiver by any court having jurisdiction, without
notice, to take possession of and protect, collect, manage, liquidate,
and sell the Collateral or any portion thereof, and collect the payments
due with respect to the Collateral or any portion thereof. Seller shall
pay all costs and expenses incurred by Buyer in connection with the
appointment and activities of such receiver.
(vi) Seller agrees that Buyer may obtain an injunction or an order of specific
performance to compel Seller to fulfill its obligations as set forth in
Section 25, if Seller fails or refuses to perform its obligations as set
forth therein.
(vii) Seller shall be liable to Buyer for the amount of all expenses,
reasonably incurred by Buyer in connection with or as a consequence of an
Event of Default, including, without limitation, reasonable legal fees
and expenses and reasonable costs incurred in connection with hedging or
covering transactions.
(viii) Buyer shall have all the rights and remedies provided herein, provided by
applicable federal, state, foreign, and local laws (including, without
limitation, the rights and remedies of a secured party under the Uniform
Commercial Code of the State of New York, to the extent that the Uniform
Commercial Code is applicable, and the right to offset any mutual debt
and claim), in equity, and under any other agreement between Buyer and
Seller.
(ix) Buyer may exercise one or more of the remedies available to Buyer
immediately upon the occurrence of an Event of Default and, except to the
extent provided in subsections (a)(i) and (iii) of this Section, at any
time thereafter without notice to Seller. All rights and remedies arising
under this Agreement as amended from time-to-time hereunder are
cumulative and not exclusive of any other rights or remedies which Buyer
may have.
(x) In addition to its rights hereunder, Buyer shall have the right to
proceed against any assets of Seller which may be in the possession of
Buyer or its designee (including the Custodian) including the right to
liquidate such
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assets and to set off the proceeds against monies owed by Seller to Buyer
pursuant to this Agreement. Buyer may set off cash, the proceeds of the
liquidation of the Purchased Mortgage Loans, any Collateral or its
proceeds, and all other sums or obligations owed by Seller to Buyer
against all of Seller's obligations to Buyer, whether under this
Agreement, under a Transaction, or under any other agreement between the
parties, or otherwise, whether or not such obligations are then due,
without prejudice to Buyer's right to recover any deficiency. Any cash,
proceeds, or property in excess of any amounts due, or which Buyer
reasonably believes may become due, to it from Seller shall be returned
to Seller after satisfaction of all obligations of Seller to Buyer.
(xi) Buyer may enforce its rights and remedies hereunder without prior
judicial process or hearing, and Seller hereby expressly waives any
defenses Seller might otherwise have to require Buyer to enforce its
rights by judicial process. Seller also waives any defense Seller might
otherwise have arising from the use of nonjudicial process, enforcement
and sale of all or any portion of the Collateral, or from any other
election of remedies. Seller recognizes that nonjudicial remedies are
consistent with the usages of the trade, are responsive to commercial
necessity and are the result of a bargain at arm's length.
(xii) Buyer and Seller hereby agree that sales of the Purchased Mortgage Loans
shall be deemed to include and permit the sales of Purchased Mortgaged
Loans pursuant to a securities offering.
(xiii) Notwithstanding the foregoing remedies, if the Event of Default (other
than an Event of Default under Section 13(a)(xi) arises from a breach of
any representation or warranty set forth in Sections 10(b) (iii), (v) or
(ix) or in Exhibit V attached hereto with respect to a Purchased Mortgage
Loan, then Seller may elect, subject to Buyer's written consent (which
consent shall not be unreasonably withheld or delayed), to cure such
default by repurchasing such Mortgage Loan or substituting for such
Mortgage Loan within ten (10) Business Days of such Event of Default,
provided, however, that Seller shall not have the right to make the
foregoing election if such breach causes a default with respect to
Mortgage Loans that in the aggregate represent ten percent (10%) or more
of the aggregate Purchase Price of all Purchased Mortgage Loans subject
to then outstanding Transactions. The repurchase price for any such
repurchase shall be the outstanding Repurchase Price of such Mortgage
Loan, as the case may be. Any such substitution shall be performed in
accordance with Section 9 of this Agreement.
Notwithstanding the foregoing, if an Event of Default shall occur hereunder as
a result of a default under an indenture or instrument described in subsection
(viii) of Section 13 (a) hereof, and such default under such indenture or
instrument is subsequently remedied or cured by Seller, then the Event of
Default hereunder shall by reason thereof, after notice of such cure or remedy
is given to Buyer by Seller, by deemed likewise to have been thereupon remedied
or cured without further action upon the part of Seller or Buyer; provided,
however, that Buyer shall not be responsible for the effects upon Seller of, nor
otherwise liable to Seller for, any actions taken by Buyer in connection with
its exercise of remedies under this Section 14 prior to its receipt of said
notice of such cure or
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remedy, including, without limitation, the sale of the Purchased Mortgage
Loans by Buyer to a third party.
(b) If an Event of Default occurs with respect to Buyer, the following rights
and remedies are available to Seller:
(i) Upon tender by Seller of payment of the aggregate Repurchase Price
for all such Transactions, Buyer's right, title and interest in all
Purchased Mortgage Loans subject to such Transactions shall be
deemed transferred to Seller, and Buyer shall deliver or cause to be
transferred all such Purchased Mortgage Loans to Seller or its
designee at Buyer's expense.
(ii) If Seller exercises the option referred to in subsection (b)(i) of
this Section and Buyer fails to deliver or cause to be delivered the
Purchased Mortgage Loans to Seller or its designee, after one
Business Day's notice to Buyer, Seller may (A) purchase Mortgage
Loans ("Replacement Loans") that are as similar as is reasonably
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practicable in characteristics, outstanding principal amounts (as a
pool) and interest rate to any Purchased Mortgage Loans that are not
delivered by Buyer to Seller or its designee as required hereunder
or (B) in its sole discretion elect, in lieu of purchasing
Replacement Loans, to be deemed to have purchased Replacement Loans
at a price therefor on such date, equal to the Market Value of the
Purchased Mortgage Loans.
(iii) Buyer shall be liable to the Seller (A) with respect to Purchased
Mortgage Loans (other than Additional Loans), for any excess of the
price paid (or deemed paid) by Seller for Replacement Loans therefor
over the Repurchase Price for such Purchased Mortgage Loans and (B)
with respect to Additional Loans, for the price paid (or deemed
paid) by Seller for the Replacement Loans therefor. In addition,
Buyer shall be liable to Seller for interest on such remaining
liability with respect to each such purchase (or deemed purchase) of
Replacement Loans calculated on a 360-day year basis for the actual
number of days during the period from and including the date of such
purchase (or deemed purchase) until paid in full by Buyer. Such
interest shall be at the greater of the Pricing Rate or the Prime
Rate.
(iv) Buyer shall be liable to Seller for the amount of all expenses
reasonably incurred by Seller in connection with or as a consequence
of an Event of Default, including, without limitation, reasonable
legal expenses.
(v) Seller shall have all the rights and remedies provided herein,
provided by applicable federal, state, foreign, and local laws, in
equity, and under any other agreement between Buyer and Seller,
including, without limitation, the right to offset any debt or
claim.
(vi) Seller may exercise one or more of the remedies available to Seller
immediately upon the occurrence of an Event of Default and at any
time thereafter without notice to Buyer. All rights and remedies
arising under this Agreement as amended from time-to-time hereunder
are cumulative and not exclusive of any other rights or remedies
which Seller may have.
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15. ADDITIONAL CONDITION
Seller shall, on the date of the initial Transaction hereunder and, upon the
request of Buyer, on the date of any subsequent Transaction, cause to be
delivered to Buyer, with reliance thereon permitted as to any Person that
purchases the Purchased Mortgage Loan from Buyer in a repurchase transaction, a
favorable opinion or opinions of counsel no more often than quarterly with
respect to the matters set forth in Exhibit IV attached hereto.
16. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered hereinto and will enter
into each Transaction hereunder in consideration of and in reliance upon the
fact that, all Transactions hereunder constitute a single business and
contractual relationship and that each has been entered into in consideration of
the other Transactions. Accordingly, each of Buyer and Seller agrees (i) to
perform all of its obligations in respect of each Transaction hereunder, and
that a default in the performance of any such obligations shall constitute a
default by it in respect of all Transactions hereunder, (ii) that each of them
shall be entitled to set off claims and apply property held by them in respect
of any Transaction against obligations owing to them in respect of any other
Transactions hereunder and (iii) that payments, deliveries, and other transfers
made by either of them in respect of any Transaction shall be deemed to have
been made in consideration of payments, deliveries, and other transfers in
respect of any other Transactions hereunder, and the obligations to make any
such payments, deliveries, and other transfers may be applied against each other
and netted.
17. NOTICES AND OTHER COMMUNICATIONS
Unless another address is specified in writing by the respective party to whom
any written notice or other communication is to be given hereunder, all such
notices or communications shall be in writing or confirmed in writing and
delivered at the respective addresses set forth in the Confirmation. Notices
hereunder may be given by facsimile transmission.
18. ENTIRE AGREEMENT; SEVERABILITY
This Agreement together with the applicable Confirmation constitutes the entire
understanding between Buyer and Seller with respect to the subject matter it
covers and shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions involving
Purchased Mortgage Loans. By acceptance of this Agreement, Buyer and Seller
acknowledge that they have not made, and are not relying upon, any statements,
representations, promises or undertakings not contained in this Agreement. Each
provision and agreement herein shall be treated as separate and independent from
any other provision or agreement herein and shall be enforceable notwithstanding
the unenforceability of any such other provision or agreement.
19. NON-ASSIGNABILITY
The rights and obligations of the parties under this Agreement and under any
Transaction shall not be assigned by Seller without the prior written consent of
Buyer. Subject to the foregoing, this Agreement and any Transactions shall be
binding upon and shall inure to the benefit of the parties and their respective
successors and assigns. Nothing in this Agreement express or implied, shall give
to any person, other than the parties to this Agreement and their successors
hereunder, any benefit or any legal or equitable right, power, remedy or claim
under this Agreement.
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20. TERMINABILITY
This Agreement shall terminate upon the earlier of (i) written notice from
Seller to Buyer to such effect and (ii) eighteen months from the date of this
Agreement, except that, in either case, this Agreement shall, notwithstanding
clauses (i) or (ii) above, remain applicable to any Transaction then
outstanding. Notwithstanding any such termination or the occurrence of an Event
of Default, all of the representations and warranties hereunder (including those
made in Exhibit V) shall continue and survive.
21. GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
22. CONSENT TO JURISDICTION AND ARBITRATION
The parties irrevocably agree to submit to the personal jurisdiction of the
United States District Court for the Southern District of New York, the parties
irrevocably waiving any objection thereto. If, for any reason, federal
jurisdiction is not available, and only if federal jurisdiction is not
available, the parties irrevocably agree to submit to the personal jurisdiction
of the Supreme Court of the State of New York, the parties irrevocably waiving
any objection thereto. Notwithstanding the foregoing two sentences, at either
party's sole option exercisable at any time not later than thirty (30) days
after an action or proceeding has been commenced, the parties agree that the
matter may be submitted to binding arbitration in accordance with the commercial
rules of the American Arbitration Association then in effect in the State of New
York and judgment upon any award rendered by the arbitrator may be entered in
any court having jurisdiction thereof within the City, County and State of New
York; provided, however, that the arbitrator shall not amend, supplement, or
reform in any regard this Agreement or the terms of any Confirmation, the rights
or obligations of any party hereunder or thereunder, or the enforceability of
any of the terms hereof or thereof. Any arbitration shall be conducted before a
single arbitrator who shall be reasonably familiar with repurchase transactions
and the secondary mortgage market in the City, County, and State of New York.
23. NO WAIVERS, ETC.
No express or implied waiver of any Event of Default by either party shall
constitute a waiver of any other Event of Default and no exercise of any remedy
hereunder by any party shall constitute a waiver of its right to exercise any
other remedy hereunder. No modification or waiver of any provision of this
Agreement and no consent by any party to a departure herefrom shall be effective
unless and until such shall be in writing and duly executed by both of the
parties hereto. Any such waiver or modification shall be effective only in the
specific instance and for the specific purpose for which it was given.
24. INTENT
The parties understand and intend that this Agreement and each Transaction
hereunder constitute a "repurchase agreement" and a "securities contract" as
those terms are defined under the relevant provisions of Title 11 of the United
States Code, as amended.
25. SERVICING
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(a) Notwithstanding the purchase and sale of the Purchased Mortgage Loans
hereby, Seller shall continue to service the Purchased Mortgage Loans for the
benefit of Buyer and, if Buyer shall exercise its rights to pledge or
hypothecate the Purchased Mortgage Loan prior to the related Repurchase Date
pursuant to Section 8, Buyer's assigns; provided, however, that the obligations
of Seller to service the Purchased Mortgage Loans shall cease upon the payment
by Seller to Buyer of the Repurchase Price therefor. Seller shall service the
Purchased Mortgage Loans in accordance with the servicing standards maintained
by other prudent mortgage lenders with respect to mortgage loans similar to the
Mortgage Loans.
(b) Seller agrees that Buyer is the owner of all servicing records, including
but not limited to any and all servicing agreements, files, documents, records,
data bases, computer tapes, copies of computer tapes, proof of insurance
coverage, insurance policies, appraisals, other closing documentation, payment
history records, and any other records relating to or evidencing the servicing
of Purchased Mortgage Loans (the "Servicing Records"). Seller grants Buyer a
-----------------
security interest in all servicing fees and rights relating to the Purchased
Mortgage Loans and all Servicing Records to secure the obligation of the Seller
or its designee to service in conformity with this Section and any other
obligation of Seller to Buyer. Seller covenants to safeguard such Servicing
Records and to deliver them promptly to Buyer or its designee (including the
Custodian) at Buyer's request.
(c) Upon the occurrence and continuance of an Event of Default, Buyer may, in
its sole discretion, (i) sell its right to the Purchased Mortgage Loans on a
servicing released basis or (ii) terminate the Seller as servicer of the
Purchased Mortgage Loans with or without cause, in each case without payment of
any termination fee.
(d) Seller shall not employ sub-servicers to service the Purchased Mortgage
Loans without the prior written approval of Buyer.
(e) Seller shall cause any sub-servicer hereunder to execute a letter agreement
with Buyer acknowledging Buyer's security interest and agreeing that, upon
notice from Buyer (or the Custodian on its behalf) that an Event of Default has
occurred and in continuing hereunder, it shall deposit all Income with respect
to the Purchased Mortgage Loans in the amount specified in the third sentence of
Section 5(a).
26. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that in the case of
Transactions in which one of the parties is an "insured depository institution"
as that term is defined in Section 1831(a) of Title 12 of the United States
Code, as amended, funds held by the financial institution pursuant to a
Transaction hereunder are not a deposit and therefore are not insured by the
Federal Deposit Insurance Corporation, the Savings Association Insurance Fund or
the Bank Insurance Fund, as applicable.
27. NETTING
If Buyer and Seller are "financial institutions" as now or hereinafter defined
in Section 4402 of Title 12 of the United States Code ("Section 4402") and any
------------
rules or regulations promulgated thereunder:
(a) All amounts to be paid or advanced by one party to or on behalf of the other
under this Agreement or any Transaction hereunder shall be deemed to be "payment
obligations" and all amounts to be received by or on behalf of one party from
the other under this Agreement or any Transaction hereunder shall be deemed to
be "payment entitlements" within the meaning of
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Section 4402, and this Agreement shall be deemed to be a "netting contract" as
defined in Section 4402.
(b) The payment obligations and the payment entitlements of the parties hereto
pursuant to this Agreement and any Transaction hereunder shall be netted as
follows. In the event that either party (the "Defaulting Party") shall fail to
----------------
honor any payment obligation under this Agreement or any Transaction hereunder,
the other party (the "Nondefaulting Party") shall be entitled to reduce the
-------------------
amount of any payment to be made by the Nondefaulting Party to the Defaulting
Party by the amount of the payment obligation that the Defaulting Party failed
to honor.
28. MISCELLANEOUS
(a) Time is of the essence under this agreement and all Transactions and all
references to a time shall mean New York time in effect on the date of the
action unless otherwise expressly stated in this Agreement.
(b) Buyer shall be authorized to accept orders and take any other action
affecting any accounts of the Seller in response to instructions given in
writing or orally by telephone or otherwise by any person with apparent
authority to act on behalf of the Seller, and the Seller shall indemnify Buyer,
defend, and hold Buyer harmless from and against any and all liabilities,
losses, damages, costs, and expenses of any nature arising out of or in
connection with any action taken by Buyer in response to such instructions
received or reasonably believed to have been received from the Seller.
(c) If there is any conflict between the terms of this Agreement or any
Transaction entered into hereunder and the Custodial Agreement, this Agreement
shall prevail.
(d) If there is any conflict between the terms of a Confirmation or a corrected
Confirmation issued by the Buyer and signed or initiated by the Seller and this
Agreement, the Confirmation shall prevail.
(e) This Agreement may be executed in counterparts, each of which so executed
shall be deemed to be an original, but all of such counterparts shall together
constitute but one and the same instrument.
(f) Seller agrees to reimburse Buyer for all reasonable costs and expenses of
Buyer in connection with this Agreement including, without limitation, the fees,
expenses and disbursement of counsel to Buyer, which fees, expenses and
disbursements shall not exceed $10,000.
(g) The headings in this Agreement are for convenience of reference only and
shall not affect the interpretation or construction of this Agreement.
[Signature page follows.]
24
<PAGE>
EXHIBITS
--------
<TABLE>
<S> <C>
EXHIBIT I Confirmation
EXHIBIT II Form of Custodial Delivery
EXHIBIT III Form of Power of Attorney
EXHIBIT IV Opinion of Counsel to Seller
EXHIBIT V Representations and Warranties
Regarding Mortgage Loans
</TABLE>
26
<PAGE>
EXHIBIT I
Form of Confirmation Letter
(date)
First Alliance Mortgage Company
17305 Von Karman Avenue
Irvine, California 92714-6203
Attention:__________________
Confirmation No.:___________
Ladies/Gentlemen:
This letter confirms our oral agreement to purchase from you the Mortgage Loans
listed in Appendix I hereto, pursuant to the Master Repurchase Agreement
Governing the Purchases and Sales of Mortgage Loans between us, dated as of
September 5, 1996 (the "Agreement"), as follows:
Purchase Date:
Mortgage Loans to be Purchased: See Appendix I hereto.
[Appendix I to Confirmation Letter will list Mortgage Loans]
Aggregate Principal Amount of Purchased Mortgage Loans:
Purchase Price:
Pricing Rate:
Repurchase Date:
Repurchase Price:
Collateral Amount Percentage with respect to Market Value:
Account to which Purchase Price will be deposited
(ABA, A/C#, institution):
27
<PAGE>
Names and addresses for communications:
Buyer:
Lehman Commercial Paper Inc.
200 Vesey Street
9th Floor
New York, New York 10285-0900
Attention: Central Funding Department
Seller:
First Alliance Mortgage Company
17305 Von Karman Avenue
Irvine, California 92714-6203
Attention:__________________
LEHMAN COMMERCIAL PAPER INC.
By:__________________________
Name:________________________
Title:_______________________
Agreed and Acknowledged:
First Alliance Mortgage Company
Seller
By:________________________
Name:______________________
Title:_____________________
28
<PAGE>
EXHIBIT II
Form of Custodial Delivery
On this __ day of __________, 199_, First Alliance Mortgage Company ("Seller"),
as the Seller under that certain Master Repurchase Agreement Governing Purchases
and Sales of Mortgage Loans, dated as of September 5, 1996 (the "Repurchase
Agreement") between the Seller and Lehman Commercial Paper Inc. ("Buyer"), does
hereby deliver to Bankers Trust Company of California, N.A. ("Custodian"), as
custodian under that certain Custodial Agreement, dated as of September 5, 1996,
among Buyer, Seller and Custodian the Mortgage Files with respect to the
Mortgage Loans to be purchased by Buyer pursuant to the Repurchase Agreement,
which Mortgage Loans are listed on the Mortgage Loan Schedule attached hereto
and which Mortgage Loans shall be subject to the terms of the Custodial
Agreement on the date hereof.
With respect to the Mortgage Files delivered hereby, for the purposes of issuing
the Trust Receipt, the Custodian shall review the Mortgage Files to ascertain
delivery of the documents listed in Annex A attached to the Custodial Agreement.
[The Mortgage Loans delivered hereby constitute Additional Loans [delivered
pursuant to Section 7 of the Custodial Agreement].][The Mortgage Loans delivered
hereby constitute Substituted Collateral [pursuant to Section 6 of the Custodial
Agreement] and are intended to be substituted for the Purchased Mortgage Loans
listed on the [schedule attached hereto][Request for Release of Documents and
receipt delivered herewith]. The Purchased Mortgage Loans to be released shall
be delivered to ________.]
Capitalized terms used herein and not otherwise defined shall have the meanings
set forth in the Custodial Agreement.
29
<PAGE>
IN WITNESS WHEREOF, the Seller has caused its name to be signed hereto by its
officer thereunto duly authorized as of the day and year first above written.
FIRST ALLIANCE MORTGAGE COMPANY
Seller
By: ___________________________________
Title: ________________________________
Name: _________________________________
30
<PAGE>
EXHIBIT III
Form of Power of Attorney
"Notice: The powers granted by this document are broad and sweeping. They are
defined in New York General Obligations Law, Article 5, Title 15, sections
5-1502A through 51503, which expressly permits the use of any other different
form of power of attorney desired by the parties concerned.
"Know All Men by These Presents, which are intended to constitute a GENERAL
POWER OF ATTORNEY pursuant to Article 5, Title 15 of the New York General
Obligations Law: That First Alliance Mortgage Company ("Seller"), does hereby
appoint Lehman Commercial Paper Inc. ("Buyer"), its attorney-in-fact to act in
Seller's name, place and stead in any way which Seller could do with respect to
recording the Mortgages purchased by Buyer pursuant to a Master Repurchase
Agreement Governing Purchases and Sales of Mortgage Loans dated as of September
5, 1996 between Seller and Buyer and to take such other steps as may be
necessary or desirable to enforce Buyer's rights against such Mortgage Loans,
the related Mortgage Files and the Servicing Records to the extent that Seller
is permitted by law to act through an agent.
TO INDUCE ANY THIRD PARTY TO ACT HEREUNDER, SELLER HEREBY AGREES THAT ANY THIRD
PARTY RECEIVING A DULY EXECUTED COPY OR FACSIMILE OF THIS INSTRUMENT MAY ACT
HEREUNDER, AND THAT REVOCATION OR TERMINATION HEREOF SHALL BE INEFFECTIVE AS TO
SUCH THIRD PARTY UNLESS AND UNTIL ACTUAL NOTICE OR KNOWLEDGE OF SUCH REVOCATION
OR TERMINATION SHALL HAVE BEEN RECEIVED BY SUCH THIRD PARTY, AND SELLER ON ITS
OWN BEHALF AND ON BEHALF OF SELLER'S LEGAL REPRESENTATIVES AND ASSIGNS, HEREBY
AGREES TO INDEMNIFY AND HOLD HARMLESS ANY SUCH THIRD PARTY FROM AND AGAINST ANY
AND ALL CLAIMS THAT MAY ARISE AGAINST SUCH THIRD PARTY BY REASON OF SUCH THIRD
PARTY HAVING RELIED ON THE PROVISIONS OF THIS INSTRUMENT.
31
<PAGE>
IN WITNESS WHEREOF Seller has caused this Power of Attorney to be executed and
the Seller's seal to be affixed this 5th day of September, 1996.
FIRST ALLIANCE MORTGAGE COMPANY
(Seal)
By: ___________________________________
Name: _________________________________
Title: ________________________________
32
<PAGE>
EXHIBIT IV
OPINION OF SELLER'S COUNSEL
33
<PAGE>
[Date]
Bankers Trust Company of California, N.A.
3 Park Plaza
Irvine, CA 92714
Lehman Commercial Paper Inc.
3 World Financial Center
New York, NY 10285
Ladies and Gentlemen:
I have acted as counsel for First Alliance Mortgage Company ("Seller") in
connection with the transactions contemplated by the Master Repurchase Agreement
Governing Purchases and Sales of Mortgage Loans between Seller and Lehman
Commercial Paper Inc. ("Buyer"), and the Custodial Agreement among Seller, Buyer
and Bankers Trust Company of California, N.A., as custodian ("Custodian"), both
dated as of September 5, 1996 (collectively, the "Agreements"). Capitalized
terms used herein and not defined shall have the meanings assigned to them in
the Agreements.
In rendering my opinion as provided in this letter, I have relied on information
gathered by my staff. I have also examined and relied upon originals or copies,
certified or otherwise identified to my satisfaction, of such documents,
corporate records, certificates of public officials and other instruments and
have conducted such other investigations of fact and law as I have deemed
necessary or advisable for purposes of rendering this opinion. In addition, I
have relied, as to various matters of fact relevant to the opinions expressed
herein, upon representations and warranties of Seller, Buyer and Custodian
contained in the Agreements.
Based upon the foregoing, I am of the opinion that:
1. The Seller is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, and is
duly qualified to do business and is in good standing in each jurisdiction
in which the character of the properties owned or leased by it therein or in
which the transaction of its business makes such qualification necessary,
except as would not have a material adverse effect on the Seller.
2. The Seller has the corporate power and authority to enter into each of the
Agreements, to borrow under the Agreements and to grant liens under the
Agreements, and has taken all necessary corporate action to authorize such
borrowing and such granting of liens upon the terms and conditions of the
Agreements and to authorize the execution, delivery and performance of the
Agreements. No consent of any other Person (including, without limitation,
stockholders of the Seller), and no consent, license, permit, approval or
authorization of, or registration or declaration with, any governmental
authority, bureau or agency is required in connection with the execution and
delivery or enforceability of each of the Agreements.
34
<PAGE>
Bankers Trust Company of California, N.A.
Lehman Commercial Paper Inc.
[Date]
Page 2
3. Each of the Agreements has been duly authorized, executed and delivered by
the Seller and, upon due authorization, execution and delivery by the other
parties thereto, will constitute a valid, legal and binding agreement of the
Seller, enforceable against it in accordance with the terms thereof.
4. The execution, delivery and performance by Seller of each of the Agreements
have been duly authorized by all necessary corporate action and do not
conflict with, constitute an event of default under or contravene (i)
Seller's certificate of incorporation or bylaws, (ii) to my knowledge, any
Mortgage, indenture or other material contract or undertaking to which the
Seller is a party or which is binding upon it or its assets, or (iii) any
existing law or governmental regulation applicable to Seller, nor will such
execution, delivery or performance result in the creation or imposition of
any lien, charge or encumbrance on any of its assets pursuant to the
provisions of any of the foregoing, except as provided in the Agreements.
5. Except as Buyer has previously been advised in writing, there is no material
litigation or administrative proceedings of or before any government body
presently pending or, to my knowledge, threatened against the Seller or its
respective assets.
6. The delivery by the Seller to the Custodian of the promissory notes
("Mortgage Notes") evidencing the Mortgage Loans as and in the manner
contemplated by the Agreements, create a perfect first priority security
interest in the Mortgage Notes securing the obligations of the Seller to the
Buyer under the Agreements.
With your permission I have assumed the following: (a) the authenticity of
original documents and the genuineness of all signatures (other than Seller's);
(b) the conformity to the originals of all documents submitted to me as copies;
(c) the truth, accuracy, and completeness of the information, representations
and warranties contained in the records, documents, instruments and certificates
I have reviewed; (d) that the documents referred to herein were duly authorized,
executed and delivered on behalf of the respective parties thereto (other than
by Seller) and are legal, valid and binding obligations of such parties; (e) the
absence of any extrinsic evidence to the provisions of the written agreements
between the parties that the parties intended a meaning contrary to that
expressed by those provisions; (f) the compliance by Seller and the Buyer with
any applicable requirements to file returns and pay taxes under the California
Franchise Tax Law; and (g) the availability of an exemption under the California
usury laws.
I express no opinion as to: (a) matters of law in jurisdictions other than the
State of California and the United States, except to the extent necessary to
render the opinion as to corporate authority in paragraphs (1), (2) and (3)
above; or (b) the enforceability of a choice of law provision in the documents
described herein. For purposes of the opinions expressed in paragraphs (3) and
(6) above I have also assumed the conformity of New York law to the laws of
California.
My opinion that any document is valid, binding, or enforceable in accordance
with its terms is qualified as to:
A. limitations imposed by bankruptcy, insolvency, reorganization, arrangement,
fraudulent conveyance, moratorium, or other laws relating to or affecting the
enforcement of creditors' rights generally;
35
<PAGE>
B. rights to indemnification and contribution which may be limited by
applicab1e law and equitable principles;
C. the unenforceability under certain circumstances of provisions imposing
penalties, forfeiture, late payment charges or an increase in interest rate
upon delinquency in payment or the occurrence of any event of default; and
D. general principles of equity including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, and the possible
unavailability of specific performance or injunctive relief regardless of
whether such enforceability is considered in a proceeding in equity or at
law.
My opinion in paragraph (4) above is also subject to the following: (i) I
express no opinion relating to the effect of the Agreement or the Note under any
financial test or ratio contained in any of the instruments or agreements
referred to in paragraph (4), and (ii) when reviewing instruments and agreements
that are governed by the laws of any jurisdiction other than California and
Delaware, I have not undertaken any independent investigation of the laws of
such other jurisdiction. As you know, I am not licensed to practice law in the
State of Delaware, and my opinion as to Delaware corporate law is based solely
on a review of a standard compilation of the Delaware General Corporation Law.
This opinion is solely for your benefit and may not be relied upon, used,
circulated, quoted or referred to, nor may copies hereof delivered to, any other
person without my prior written approval. I disclaim any obligation to update
this opinion letter for events occurring or coming to my attention after the
date hereof.
Very truly yours,
36
<PAGE>
EXHIBIT V
Representations and Warranties
Regarding Purchased Mortgage Loans
The Seller represents and warrants to the Buyer that, with respect to each
Purchased Mortgage Loan sold in a Transaction hereunder, as of the related
Purchase Date:
(a) Purchased Mortgage Loans as Described. The information set forth in the
-------------------------------------
Mortgage Loan Schedule is complete, true and correct;
(b) No Outstanding Charges. There are no defaults in complying with the terms
----------------------
of the Mortgage relating to such Purchased Mortgage Loan, and all taxes,
governmental assessments, insurance premiums, water, sewer and municipal
charges, leasehold payments or ground rents which previously became due and
owing have been paid, or, if any escrows have been established, an escrow of
funds has been established in an amount sufficient to pay for every such
item which remains unpaid and which has been assessed but is not yet due and
payable. Seller has not advanced funds, or induced, solicited or knowingly
received any advance of funds by a party other than the Mortgagor, directly
or indirectly, for the payment of any amount required under the Purchased
Mortgage Loan, except for the interest accruing from the date of the
Mortgage Note or date of disbursement of the Purchased Mortgage Loan
proceeds, whichever is greater, to the day which precedes by one month the
due date of the first installment of principal and interest;
(c) Original Terms Unmodified. The terms of the Mortgage Note and Mortgage
-------------------------
relating to the Purchased Mortgage Loan have not been impaired, waived,
altered or modified in any respect, except by a written instrument which has
been recorded, if necessary to protect the interests of Buyer and which has
been delivered to Buyer or its designee (including the Custodian). The
substance of any such waiver, alteration or modification has been approved
by the issuer, if any, of any related primary mortgage insurance policy
issued by a generally accepted insurance carrier (a "PMI Policy") and the
title insurer, to the extent required by the policy, and its terms are
reflected on the Mortgage Loan Schedule. No Mortgagor has been released, in
whole or in part, except in connection with an assumption agreement approved
by the issuer, if any, of any related PMI Policy and the title insurer, to
the extent required by the policy, and which assumption agreement is
included in the Mortgage File delivered to Buyer or its designee (including
the Custodian) and the terms of which are reflected in the Mortgage Loan
Schedule;
37
<PAGE>
(d) No Defenses. The Purchased Mortgage Loan is not subject to any right of
-----------
rescission, set-off, counterclaim or defense, including without limitation
the defense of usury, nor will the operation of any of the terms of the
Mortgage Note or the Mortgage, or the exercise of any right thereunder,
render either the Mortgage Note or the Mortgage unenforceable, in whole or
in part, or subject to any right of rescission, set-off, counterclaim or
defense, including without limitation the defense of usury, and no such
right of rescission, set-off, counterclaim or defense has been asserted with
respect thereto;
(e) Insurance Policies in Effect. The fire and casualty insurance policy
----------------------------
covering the Mortgaged Property (1) affords (and will afford) sufficient
insurance against fire and such other risks as are usually insured against
in the broad form of extended coverage insurance from time to time
available, as well as insurance against flood hazards if the Mortgaged
Property is an area identified by the Federal Emergency Management Agency as
having special flood hazards; (2) is a standard policy of insurance for the
locale where the Mortgaged Property is located, is in full force and effect,
and the amount of the insurance is in the amount of the full insurable value
of the Mortgaged Property on a replacement cost basis or the unpaid balance
of the Purchased Mortgage Loans, whichever is less; (3) names (and will
name) the present owner of the Mortgaged Property as the insured; and (4)
contains a standard mortgagee loss payable clause in favor of Seller. All
individual insurance policies with respect to the Purchased Mortgage Loan
are the valid and binding obligation of the insurer and contain a standard
mortgage clause naming Seller, its successors and assigns, as Mortgagee. All
premiums thereon have been paid. The Mortgage obligates the Mortgagor
thereunder to maintain all such insurance policies at the Mortgagor's cost
and expense, and upon the Mortgagor's failure to do so, authorizes the
holder of the Mortgage to obtain and maintain such insurance at the
Mortgagor's cost and expense and to seek reimbursement therefor from the
Mortgagor;
(f) Compliance with Applicable Laws. Any and all requirements of any federal,
-------------------------------
state or local law including, without limitation, usury, truth-in-lending,
real estate settlement procedures, consumer credit protection, equal credit
opportunity or disclosure laws applicable to the origination and servicing
of the Purchased Mortgage Loan have been complied with, and Seller shall
maintain in its possession, available for Buyer's inspection, and shall
deliver to Buyer upon demand, evidence of compliance with all such
requirements;
(g) No Satisfaction of Mortgage. The Mortgage has not been satisfied, canceled,
---------------------------
subordinated or rescinded, in whole or in part, and the Mortgaged Property
has not been released from the lien of the Mortgage, in whole or in part,
nor has any instrument been executed that would effect any such release,
cancellation, subordination or rescission;
(h) Location and Type of Mortgaged Property. The Mortgaged Property is located
---------------------------------------
in the state identified in the Mortgage Loan Schedule and consists of a
parcel of real property with a detached single family residence erected
thereon, or a two- to four-family dwelling, or an individual condominium
unit in a condominium project, or an individual unit in a planned unit
development and no residence or dwelling is a mobile home or a manufactured
dwelling. No portion of the Mortgaged Property is used for commercial
purposes;
38
<PAGE>
(i) Valid First or Second Lien. The Mortgage relating to the Purchased Mortgage
--------------------------
Loan is a valid, subsisting and enforceable first or second lien on the
Mortgaged Property, including all buildings on the Mortgaged Property and
all installations and mechanical, electrical, plumbing, heating and air
conditioning systems located in or annexed to such buildings, and all
additions, alterations and replacements made at any time with respect to
the foregoing. The lien of such Mortgage is subject only to:
(1) the lien of current real property taxes and special assessments not
yet due and payable;
(2) covenants, conditions and restrictions, rights of way, easements and
other matters of the public record as of the date of recording acceptable
to mortgage lending institutions generally and specifically referred to
in the lender's title insurance policy delivered to the originator of the
Mortgage Loan and (i) referred to or to otherwise considered in the
appraisal made for the originator of the Purchased Mortgage Loan or (ii)
which do not adversely affect the appraised value of the Mortgaged
Property set forth in such appraisal;
(3) in the case of a Mortgaged Property that is a condominium or an
individual unit in a planned unit development, liens for common charges
permitted by statute;
(4) in the case where the Purchased Mortgage Loan is secured by a second
mortgage lien on the Mortgaged Property (and represented on the Mortgage
Loan Schedule as such), the lien of the First Mortgage; and
(5) other matters to which like properties are commonly subject which do
not materially interfere with the benefits of the security intended to be
provided by the mortgage or the use, enjoyment, value or marketability of
the related Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document related to
and delivered in connection with the Purchased Mortgage Loan establishes
and creates a valid, subsisting and enforceable first or second lien and
first or second priority security interest on the property described
therein and Seller has full right to pledge and assign the same to Buyer or
its designee (including the Custodian).
(j) Validity of Mortgage Documents. The Mortgage Note and the Mortgage relating
------------------------------
to the Purchased Mortgage Loan are genuine, and each is the legal, valid
and binding obligation of the maker thereof enforceable in accordance with
its terms, except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, receivership, moratorium or other similar laws
relating to or affecting the rights of creditor's generally, and by general
39
<PAGE>
equity principles (regardless of whether such enforcement is considered in a
proceeding in equity or at law). All parties to the Mortgage Note and the
Mortgage had legal capacity to enter into the Purchased Mortgage Loan and to
execute and deliver such Mortgage Note and Mortgage, and such Mortgage Note
and Mortgage have been duly and properly executed by such parties. Either
(i) the Mortgagor is a natural person who is a party to such Mortgage Note
and Mortgage in an individual capacity, and not in the capacity of a trustee
or otherwise or (ii) the Mortgagor is a trust, and such trust and the
related Mortgage conform to the requirements of the FNMA Guide.
(k) Full Disbursement of Proceeds. The proceeds of the Purchased Mortgage Loan
-----------------------------
have been fully disbursed and there is no requirement for future advances
thereunder, and any and all requirements as to completion of any on-site or
off-site improvement and as to disbursements of any escrow funds therefor
have been complied with. All costs, fees and expenses incurred in making or
closing the Purchased Mortgage Loan and the recording of the related
Mortgage were paid, and the related Mortgagor is not entitled to any refund
of any amounts paid or due under the related Mortgage Note or Mortgage;
(l) Ownership. Seller is the sole owner of record and holder of the Purchased
---------
Mortgage Loan. The Purchased Mortgage Loan is not assigned or pledged except
as provided in this Agreement, and Seller has good, indefeasible and
marketable title thereto, and has full right to pledge and assign the
Purchased Mortgage Loan to Buyer or its designee (including the Custodian)
free and clear of any encumbrance, equity, participation interest, lien,
pledge, charge, claim or security interest, and has full right and authority
subject to no interest or participation of, or agreement with, any other
party, to sell and assign each Purchased Mortgage Loan pursuant to this
Agreement;
(m) Doing Business. All parties which have had any interest in the Purchased
--------------
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are
(or, during the period in which they held and disposed of such interest,
were) (1) in compliance with any and all applicable licensing requirements
of the laws of the state wherein the Mortgaged Property is located, and (2)
organized under the laws of such state, or (3) qualified to do business in
such state, or (4) federal savings and loan associations or national banks
having principal offices in such state, or (5) not doing business in such
state;
(n) LTV. No Purchased Mortgage Loan has a Loan-to-Value Ratio of more than 85%.
---
No more than 2% of the Purchased Mortgage Loans (measured by aggregate
principal amount subject Transactions) have a Loan-to-Value Ratio in excess
of 80%.
(o) Title Insurance. The Purchased Mortgage Loan is covered by either (i) an
---------------
attorney's opinion of title and abstract of title or (ii) an ALTA mortgage
title insurance policy or such other policy in form acceptable to FNMA or
FHLMC, issued by and constituting the valid and binding obligation of a
title insurer generally acceptable to prudent mortgage lenders that
regularly originate or purchase mortgage loans comparable to the Purchased
Mortgage Loans for sale to prudent investors in the secondary market that
invest in mortgage loans such as the Purchased Mortgage Loans and qualified
to do business in the jurisdiction where the related Mortgaged Property is
located, insuring Seller, its successors and assigns, as to the first
priority lien of the related Mortgage in the case of a First Mortgage Loan
secured by a First Mortgage and the second priority lien of the Mortgage in
the case of a Purchased Mortgage Loan secured by a
40
<PAGE>
second lien on the related Mortgaged Property, in the original principal
amount of the Purchased Mortgage Loan. Seller is the sole named insured of
such mortgage title insurance policy, the assignment to Buyer or the
Custodian as assignee of Buyer of Seller's interest in such mortgage title
insurance policy does not require the consent of or notification to the
insurer or the same has been obtained, and such mortgage title insurance
policy is in full force and effect and will be in full force and effect and
inure to the benefit of Buyer upon the consummation of the transactions
contemplated by this Agreement. No claims have been made under such
mortgage title insurance policy and no prior holder of the related
Mortgage, including Seller, has done, by act or omission, anything that
would impair the coverage of such mortgage title insurance policy;
(p) No Defaults. There is no default, breach, violation or event of
-----------
acceleration existing under the Mortgage or the Mortgage Note relating to
the Purchased Mortgage Loan and no event which, with the passage of time or
with notice and the expiration of any grace or cure period, other than the
failure to make, prior to expiration of the applicable grace period, the
monthly payment due immediately prior to the related Purchase Date if such
Purchase Date occurs prior to the expiration of such grace period, would
constitute a default, breach, violation or event of acceleration, and
neither Seller nor its predecessors have waived any default, breach,
violation or event of acceleration;
(q) No Mechanics' Liens. There are no mechanics' or similar liens or claims
-------------------
which have been filed for work, labor or material (and no rights are
outstanding that under the law could give rise to such liens) affecting the
Mortgaged Property which are or may be liens prior to, or equal or
coordinate with, the lien of the Mortgage except those that are stated in
the related title policy and for which related losses are affirmatively
insured against by such title policy;
(r) Location of Improvements; No Encroachments. All improvements which were
------------------------------------------
considered in determining the appraised value of the Mortgaged Property lay
wholly within the boundaries and building restriction lines of the
Mortgaged Property and no improvements on adjoining properties encroach
upon the Mortgaged Property except those that are stated in the title
policy and for which related losses are affirmatively insured against by
such title policy. No improvement located on or being part of the mortgaged
property is in violation of any applicable zoning law or regulation;
(s) Origination. The Purchased Mortgage Loan was originated or purchased by
-----------
Seller. The documents, instruments and agreements submitted for loan
underwriting were not falsified and contain no untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the information and statements therein not misleading. No
fraud was committed in connection with the origination of the Purchased
Mortgage Loan.
(t) Customary Provisions. The Mortgage relating to the Purchased Mortgage Loan
--------------------
contains customary and enforceable provisions such as to render the rights
and remedies of the holder thereof adequate for the realization against the
related Mortgaged Property of the benefits of the security provided
thereby, including, (i) in the case of a Mortgage designated as a deed of
trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. There
is no homestead or other exemption available to the related Mortgagor which
would
41
<PAGE>
interfere with the right to sell the Mortgaged Property at a trustee's sale
or the right to foreclose the Mortgage;
(u) Occupancy of the Mortgaged Property. As of the related Purchase Date the
-----------------------------------
Mortgaged Property relating to the Purchased Mortgage Loan is capable of
being lawfully occupied under applicable law. All inspections, licenses
and certificates required by law or regulation to be made or issued with
respect to all occupied portions of the Mortgaged Property and, with respect
to the use and occupancy of the same, including but not limited to
certificates of occupancy and fire underwriting certificates, have been
made or obtained from the appropriate authorities. Either the Mortgagor
represented at the time of origination of the Purchased Mortgage Loan that
the Mortgagor would occupy the Mortgaged Property as the Mortgagor's primary
residence or second home or the Mortgaged Property is capable of being
occupied pursuant to terms that approximate current standard market rental
terms and rates;
(v) No Additional Collateral. The Mortgage Note relating to the Purchased
------------------------
Mortgage Loan is not and has not been secured by any collateral except the
lien of the corresponding Mortgage and the security interest of any
applicable security agreement or chattel mortgage referred to in (i) above;
(w) Deeds of Trust. In the event the Mortgage relating to the Purchased Mortgage
--------------
Loan constitutes a deed of trust, a trustee, duly qualified under applicable
law to serve as such, has been properly designated and currently so serves
and is named in the Mortgage, and no fees or expenses are or will become
payable by Buyer to the trustee under the deed of trust, except in
connection with a trustee's sale after default by the Mortgagor;
(x) Acceptable Investment. Seller has no knowledge of any circumstances or
---------------------
conditions with respect to the Mortgage, the Mortgaged Property, the
Mortgagor or the Mortgagor's credit standing that can reasonably be expected
to cause private institutional investors to regard the Purchased Mortgage
Loan as an unacceptable investment, cause the Purchased Mortgage Loan to
become Delinquent, or adversely affect the value or marketability of the
Purchase Mortgage Loan;
(y) Purchase of Mortgage Documents. The Mortgage File and any other documents
------------------------------
required by Buyer to be delivered for the Purchased Mortgage Loan by Seller
under this Agreement have been delivered to the Custodian. Seller is in
possession of a complete, true and accurate Mortgage File except for such
documents the originals of which have been delivered to the Buyer or its
designee (including the Custodian). Each of the documents and instruments
included in the Mortgage File is duly executed and in due and proper form
and each such document or instrument is in a form generally acceptable to
prudent institutional mortgage lenders that regularly originate and purchase
mortgage loans;
(z) [Reserved].
--------
42
<PAGE>
(aa) Transfer of Purchased Mortgage Loans. The assignment of Mortgage relating
------------------------------------
to the Purchased Mortgage Loan is in recordable form and is acceptable for
recording under the laws of the jurisdiction in which the related
Mortgaged Property is located;
(bb) Due on Sale. The Mortgage relating to the Purchased Mortgage Loan contains
-----------
an enforceable provision for the acceleration of the payment of the unpaid
principal balance of the Purchased Mortgage Loan in the event that the
related Mortgaged Property is sold or transferred without the prior
written consent of the Mortgagee thereunder;
(cc) No Buydown Provisions; No Graduated Payments or Contingent Interests. The
--------------------------------------------------------------------
Purchased Mortgage Loan does not contain provisions pursuant to which
monthly payments are paid or partially paid with funds deposited in any
separate account established by Seller, the Mortgagor or anyone on behalf
of the mortgagor, or paid by any source other than the Mortgagor nor does
it contain any other similar provisions currently in effect which may
constitute a "buydown" provision. The Purchased Mortgage Loan is not a
graduated payment mortgage loan and the Purchased Mortgage Loan does not
have a shared appreciation or other contingent interest feature;
(dd) Consolidation of Future Advances. Any future advances made prior to the
--------------------------------
Purchase Date have been consolidated with the outstanding principal amount
secured by the Mortgage relating to the Purchased Mortgage Loan, and the
secured principal amount, as consolidated, bears a single interest rate
and single repayment term. The lien of such Mortgage securing the
consolidated principal amount is expressly insured as having first or
second lien priority by a title insurance policy or an endorsement to the
policy insuring the mortgagee's consolidated interest or by other title
evidence in form acceptable to FNMA or FHLMC. The consolidated principal
amount does not exceed the original principal amount of the Purchased
Mortgage Loan;
(ee) Mortgaged Property Undamaged. There is no proceeding pending or threatened
----------------------------
for the total or partial condemnation of the Mortgaged Property relating
to the Purchased Mortgage Loan. Such Mortgaged Property is undamaged by
waste, fire, earthquake or earth movement, windstorm, flood, tornado or
other casualty so as to affect adversely the value of the Mortgaged
Property as security for the Purchased Mortgage Loan or the use for which
the premises were intended;
(ff) Collection Practices; Escrow Deposits; Interest Rate Adjustments. The
----------------------------------------------------------------
origination and collection practices used with respect to the Purchased
Mortgage Loan have been in all respects in accordance with industry custom
and practice, and have been in all respects legal and proper. With respect
to any escrow deposits and escrow payments that have been established, all
such payments are in the possession of Seller and there exist no
deficiencies in connection therewith for which customary arrangements for
repayment thereof have not been made. All escrow payments have been
collected in full compliance with state and federal law. If an escrow of
funds has been established, it is not prohibited by applicable law and has
been established in an amount sufficient to pay for every item that
remains unpaid and has been assessed but is not yet due and payable. No
escrow deposits or escrow payments or other charges or payments due Seller
have been capitalized under the Mortgage or the Mortgage Note relating to
the Purchased Mortgage Loan. All mortgage interest rate adjustments have
been made in strict compliance with
43
<PAGE>
state and federal law and the terms of the related Mortgage Note. Any
interest required to be paid pursuant to state and local law has been
properly paid and credited;
(gg) Conversion to Fixed Interest Rate. With respect to the aggregate
---------------------------------
outstanding principal balance of the Purchased Mortgage Loans on the
related Purchase Date, no more than 10% of the Mortgage Notes contain a
provision allowing the Mortgagor to convert the Mortgage Note from an
adjustable interest rate Mortgage Note to a fixed interest rate Mortgage
Note for the remaining term thereof all in accordance with the terms of a
rider to the related Mortgage Note;
(hh) Appraisal. The Mortgage File contains an appraisal of the related Mortgage
---------
Property signed prior to the approval of the Purchased Mortgage Loan
application by a qualified appraiser, duly appointed by the originator of
the Purchased Mortgage Loan, who had no interest, direct or indirect in the
mortgaged property or in any loan made on the security thereof, other than
as an employee of the lender, and whose compensation is not affected by the
approval or disapproval of the Purchased Mortgage Loan;
(ii) Soldiers' and Sailors' Relief Act. The Mortgagor relating to the Purchased
---------------------------------
Mortgage Loan has not notified Seller, and Seller has no knowledge of any
relief requested or allowed to the Mortgagor under the Soldiers' and
Sailors' Civil Relief Act of 1940;
(jj) Environmental Matters. To the best of Seller's knowledge based on customary
---------------------
residential mortgage industry practices, the Mortgaged Property is free
from any and all toxic or hazardous substances other than those in quantity
and type associated with normal household uses and there exists no
violation of any local, state or federal environmental law, rule or
regulation with respect thereto;
(kk) Delinquencies. The Purchased Mortgage Loan (i) together with the other
-------------
Purchased Mortgage Loans subject to Transactions, would not cause the 30+
Delinquency Percentage to exceed 1.6%, (ii) together with the other
Purchased Mortgage Loans with the other Purchased Mortgage Loans subject to
Transactions would not cause the 60+ Delinquency Percentage to exceed 1.2%
and (iii) is not more than 89 days Delinquent;
(ll) Balloon Mortgage Loans. Except with respect to any Balloon Mortgage Loan,
----------------------
each Mortgage Loan is payable in monthly installments of principal and
interest which would be sufficient, in the absence of late payments, to
fully amortize such loan within the term thereof, beginning no later than
60 days after disbursement of the proceeds of the Mortgage Loan and bears a
fixed or adjustable interest rate for the term of the Mortgage Loan. Each
Balloon Mortgage Loan has an original term of not less than fifteen (15)
years and which provides for monthly payments based on a thirty (30) year
amortization schedule and a final Monthly Payment substantially greater
than the preceding Monthly Payments;
(mm) No Construction Loans. No Purchased Mortgage Loan is a construction loan;
---------------------
44
<PAGE>
(nn) Selection by Seller. No Purchased Mortgage Loan was selected for inclusion
-------------------
under this Agreement on any basis which was intended to have a material
adverse effect on Buyer;
(oo) Second Mortgages. With respect to each Purchased Mortgage Loan secured by a
----------------
second lien on the related Mortgaged Property;
(1) if the Loan-to-Value Ratio is higher than 70%, either the related
first lien does not provide for a balloon payment or the maturity
date of each Purchased Mortgage Loan, with respect to which a first
lien on the related Mortgaged Property provides for a
balloon payment, is prior to the maturity date of the mortgage loan
relating to such first lien;
(2) the related first lien on any Mortgaged Property with respect to
which the related Purchased Mortgage Loan secured by a second lien
does not provide for negative amortization;
(3) either no consent for the Purchased Mortgage Loan secured by a
second lien on the related Mortgaged Property is required by the
holder of the related first lien or such consent has been obtained
and is contained in the Mortgage File; and
(4) the related first lien is not held by an individual;
(pp) CERCLA. To the actual knowledge of an executive officer of the Seller, no
------
Mortgaged Property was, as of the Purchase Date or, with respect to
Additional Loans or Substitute Mortgage Loans, as of the related date of
addition or substitution, located within a one-mile radius of any site
listed in the National Priorities List as defined under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
or on any similar state list of hazardous waste sites which are known to
contain any hazardous substance or hazardous waste;
(qq) No Bankruptcy of Mortgagor. None of the Purchased Mortgage Loans are
--------------------------
subject to a bankruptcy plan;
(rr) Qualified Mortgage. Each Mortgage Loan constitutes a "qualified mortgage"
------------------
within the meaning of Section 860G(a)(3) of the Code;
(ss) Balloon Loan Concentration. If the Purchased Mortgage Loan is a Balloon
--------------------------
Loan, it, together with the other Purchased Mortgage Loans which are
Balloon Loans subject to Transactions, constitutes less than 45% of the
aggregate outstanding Repurchase Price of all Purchased Mortgage Loans
subject to Transactions;
(tt) No Short Maturity Balloon Loans. The Purchased Mortgage Loan is not a
-------------------------------
Balloon Loan with a maturity date occurring within five years from its
related Purchase Date;
45
<PAGE>
(uu) Owner Occupied. In the event the Purchased Mortgage Loan relates to a
--------------
Mortgaged Property which is non-owner occupied, it, together with the other
Purchased Mortgage Loans subject to Transactions relating to Mortgaged
Properties which are non-owner occupied, does not exceed 10% of the
aggregate outstanding Repurchase Price of all Purchased Mortgage Loans
subject to Transactions; and
(vv) Payment Terms. With respect to adjustable rate Mortgage Loans, the mortgage
-------------
interest rate is adjusted annually or semi-annually on each interest rate
adjustment date to equal the index plus the gross margin, rounded up or
down to the nearest 1/8%, subject to the mortgage interest rate cap. With
respect to fixed rate Mortgage Loans, the mortgage note is payable each
month in equal monthly installments of principal and interest. With respect
to adjustable rate Mortgage Loans, installments of interest are subject to
change due to the adjustments to the mortgage interest rate on each
interest rate adjustment date, with interest calculated and payable in
arrears, sufficient to amortize the Mortgage Loan fully by the stated
maturity date, over an original term of not more than thirty years
from commencement of amortization.
It is understood and agreed that the representations and warranties
set forth in this Schedule V shall survive delivery of the respective Mortgage
Files to the Custodian on behalf Buyer.
46
<PAGE>
EXHIBIT 11.1 COMPUTATION OF NET INCOME PER SHARE
FIRST ALLIANCE CORPORATION
COMPUTATION OF NET INCOME PER SHARE
FOR THE QUARTERS AND NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
DATA AS TO EARNINGS - Net Income......................................... $ 8,633 $ 1,370 $ 25,542 $ 12,250
=========== =========== =========== ==========
DATA AS TO NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES - PRIMARY NET INCOME PER SHARE
Weighted average number of shares outstanding
Class A and Class B Common Stock....................................... 13,601,359 10,750,000 11,707,391 10,750,000
Reduction of outstanding shares assuming average balance of deferred
stock compensation plus tax benefits credited to capital on assumed
exercise used as proceeds invested in treasury stock (at average
market prices during each period)...................................... (79,922) (99,593) (92,292) (99,593)
Common equivalent shares assuming issuance of shares represented by
outstanding stock options:
Additional shares assumed to be issued................................. 385,298 129,371
Reduction of such additional shares assuming proceeds plus tax benefits
credited to capital on assumed exercise invested in treasury stock
(at average market prices during each period).......................... (343,844) (124,053)
Weighted average number of common and common equivalent ----------- ---------- ----------- -----------
shares outstanding..................................................... 13,562,891 10,650,407 11,620,417 10,650,407
=========== ========== =========== ===========
PRIMARY NET INCOME PER SHARE............................................ $ 0.64 $ 0.13 $ 2.20 $ 1.15
=========== ========== =========== ===========
DATA AS TO NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES - FULLY DILUTED NET INCOME PER SHARE:
Weighted average number of shares outstanding
Class A and Class B Common Stock...................................... 13,601,359 10,750,000 11,707,391 10,750,000
Reduction of outstanding shares assuming ending balance of deferred
stock compensation plus tax benefits credited to capital on assumed
exercise used as proceeds invested in treasury stock (at market
prices at the end of each period)..................................... (62,584) (99,593) (62,584) (99,593)
Common equivalent shares assuming issuance of shares represented by
outstanding stock options:
Additional shares assumed to be issued................................ 385,298 129,731
Reduction of such additional shares assuming proceeds plus tax
benefits credited to capital on assumed exercise invested in
treasury stock (at market prices at the end of each period).......... (329,729) (110,712)
----------- ---------- ---------- ----------
Weighted average number of common and common equivalent
shares outstanding.................................................... 13,594,344 10,650,407 11,663,466 10,650,407)
=========== =========== =========== ===========
FULLY DILUTED NET INCOME PER SHARE..................................... $ 0.64 $ 0.13 $ 2.19 $ 1.15
=========== =========== =========== ===========
</TABLE>
Reference is made to ITEM 1. FINANCIAL STATEMENTS: Notes to Consolidated
Financial Statements - Note 1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 26,709,000
<SECURITIES> 25,508,000
<RECEIVABLES> 17,126,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,086,000
<DEPRECIATION> 2,102,000
<TOTAL-ASSETS> 83,446,000
<CURRENT-LIABILITIES> 9,132,000
<BONDS> 0
0
0
<COMMON> 64,791,000
<OTHER-SE> 6,577,000
<TOTAL-LIABILITY-AND-EQUITY> 83,446,000
<SALES> 13,008,000
<TOTAL-REVENUES> 18,922,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,439,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 592,000
<INCOME-PRETAX> 9,891,000
<INCOME-TAX> 1,258,000
<INCOME-CONTINUING> 8,633,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,633,000
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
</TABLE>
