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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND 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
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(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) (zip code)
Registrant's telephone number, including area code (714) 224-8500
Securities registered pursuant to Section 12(b) of the Act: None
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Class A Common Stock, par value $0.01 NASDAQ National Market System
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
As of February 28, 1998, the aggregate market value of voting stock held by
nonaffiliates of registrant was approximately $195 million.
As of February 28, 1998, the shares outstanding of the issuer's classes of
common stock were as follows:
Class A Common Stock: 11,273,231 shares; Class B Common Stock: 10,956,270
shares.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III, Items 10, 11, 12 and 13 is
incorporated by reference to First Alliance Corporation's proxy statement which
will be filed with the Commission not more than 120 days after December 31,
1997.
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PART I
ITEM 1. BUSINESS.
GENERAL
First Alliance Corporation ("FACO"), together with its subsidiaries (the
"Company"), is a financial services organization principally engaged in mortgage
loan origination, purchases, sales and servicing. Loans originated by the
Company primarily consist of fixed and adjustable rate loans secured by first
mortgages on single family residences. The majority of the Company's loans are
made to owners of single family residences who use the loan proceeds for such
purposes as debt consolidation and financing of home improvements. Typically,
the Company's borrowers are individuals who do not qualify for conventional
loans because of impaired or unsubstantiated credit characteristics and/or
unverifiable income, and whose borrowing needs are not met by conventional
lending institutions. Other borrowers include individuals who may qualify for a
conventional loan but find the Company's loans attractive due to the Company's
personalized service and rapid funding capability. The Company sells loans to
wholesale purchasers or securitizes them in a trust. A significant portion of
the mortgages is securitized with the Company retaining the right to service the
loans. The Company is currently licensed to engage in the mortgage finance
business in 18 states, the District of Columbia and the United Kingdom.
To identify potential customers, the Company utilizes a proprietary marketing
methodology. This methodology focuses on a distinct segment of the home equity
lending market. This segment represents homeowners believed by management, based
on historic customer profiles, to be pre-disposed to using the Company's
products and services, and who satisfy its underwriting guidelines. Using
information obtained from a variety of outside sources for new and existing
markets, the Company develops a list of homeowners ("Homeowners") with
characteristics that make them likely customers. The Company then focuses its
telemarketing and mailing efforts on these identified Homeowners.
Prior to 1994, all of the Company's operations were conducted from retail
branch offices located in California. Since 1994, the business strategy of the
Company has been to expand its retail branch office operations to states other
than California to maximize opportunities that exist in new markets. Currently,
the Company has 33 retail branch offices, 29 of which are in the United States
and four of which are in the United Kingdom, and has identified additional
locations in these markets in which it may open new retail branch offices in the
future.
The Company is primarily a retail originator of loans, with 75% of its loan
volume in 1997 coming from its retail branch operations. Besides a strong
emphasis placed on its marketing and sales efforts, the Company provides a high
degree of personalized service and timely response to loan applications.
Historically, the Company's customers have been willing to pay the Company's
loan origination fees and interest rates which are typically higher than those
charged by conventional lending institutions.
The Company has maintained conservative underwriting guidelines when
originating and purchasing loans. The Company originates loans with higher
levels of credit risk to earn origination fees, however, it generally sells such
loans on a servicing released basis. In addition, the predominant portion of the
Company's loans originations carry relatively low loan to value ratios ("LTVs"),
which mitigates the credit risk associated with such obligations. In conjunction
with the Company's disciplined collection and foreclosure practices, this
approach has allowed the Company to maintain low delinquency and loan losses
relative to others in the industry.
RECENT DEVELOPMENTS
HIGH LTV PROGRAM
In July 1997, the Company began originating high LTV second mortgage loans,
for purposes of debt consolidation and/or home improvement, at LTVs of up to
125%. The Company will sell such high LTV loans on a servicing released basis
soon after funding. The Company believes the origination and sale of high LTV
loans, which would not otherwise satisfy the Company's underwriting guidelines,
will allow the Company to realize revenue from leads already generated by its
marketing efforts.
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CREDIT CARD PROGRAM
The Company has entered into an agreement with Fidelity Federal Bank F.S.B.
("Fidelity"), under which Fidelity will issue real estate secured credit cards
("Credit Cards") that bear the Company's name and that the Company will market
and service. The Company believes the terms of the Credit Cards, including the
tax deductibility of interest paid on outstanding balances for most customers,
will be attractive to potential borrowers.
The Company intends to market the Credit Cards using procedures similar to
those used by the Company in originating its mortgage loan products.
Accordingly, the Company expects that many of the individuals solicited for
mortgage loan products may also be solicited for the Credit Cards, thereby
resulting in relatively lower marketing expenditures for the Credit Cards than
would otherwise be expected.
RETAIL BRANCH EXPANSION
As part of its continuing retail branch network expansion, the Company
opened seven branch offices in seven states and three branch offices in the
United Kingdom during 1997. The Company opened seven branch offices in both
1996 and 1995.
MARKETING AND SALES
MARKETING
The Company's marketing efforts are designed to identify individuals who,
based on the Company's historic customer profiles, display a statistical
likelihood for becoming a consumer of the Company's products and services and,
at the same time, satisfy the Company's underwriting guidelines. The Company
believes its focused marketing approach results in a lower overall marketing
cost per funded loan as compared to a broad indiscriminate marketing approach
aimed at a wide range of homeowners
The Company utilizes a proprietary marketing methodology to subjectively
analyze the Company's historical customer base to identify characteristics
common to its customers. These common characteristics are integrated with
information obtained from a number of outside sources related to the homeowner
pool in new or existing markets. The characteristics of individual homeowners
and their properties in the homeowner pool are compared with characteristics
common to the Company's historical customer base to identify and locate
Homeowners with characteristics that make them likely to become customers for
the Company's products and services and to satisfy its underwriting guidelines.
MAILING CAMPAIGNS AND TELEMARKETING
The Company's mailing and telemarketing campaigns focus on Homeowners in the
communities surrounding its 33 retail branch offices. These campaigns focus on
the multiple benefits of the Company's services and loan products. The Company
distributes over 1.7 million pieces of mail monthly. All of the Company's
mailing campaigns originate from its mail processing center in Irvine,
California. The Company's mailing campaigns result in over 4,000 inbound loan
inquiry calls from Homeowners monthly. The Company continually monitors the
effectiveness of each of its mailing and telemarketing campaigns and continues,
modifies or discontinues a particular campaign based on the results of such
monitoring.
The Company's telemarketing department handles both inbound and outbound
calls from and to Homeowners and existing customers. Substantially all of the
inbound calls are from Homeowners responding to the Company's mailing campaigns.
The Company monitors the effectiveness of each mailing campaign by tracking
which campaign is the source of each inbound call. The outbound telemarketing
department uses computerized predictive dialers to continually solicit the
Homeowners and the Company's current borrowers.
The telemarketing representative's responsibility is to describe the benefits
of the Company's products and services, obtain information about the Homeowner,
the subject property and the purpose of the loan and schedule an appointment to
have a Company appraiser visit and inspect the subject property (an "Appraisal
Appointment").
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Individual telemarketing representatives are rated and compensated based on
the number of Appraisal Appointments set. The Company monitors the performance
of its telemarketing staff on a weekly and monthly basis.
APPRAISAL
The Company's valuation process occurs throughout the loan application
process. In many cases, the first stage valuation occurs immediately after a
telemarketing representative sets an Appraisal Appointment. Staff at the
Company's headquarters gather publicly available information with respect to
recent sales of comparable properties in the same area as the subject property.
The estimated value of the subject property is verified by the comparable sales
data. Only properties that satisfy this stage of the initial underwriting
process will be verified and forwarded to the respective retail branch offices
for Appraisal Appointments.
The property is appraised typically within two days of the initial
telemarketing contact. This appraisal, which provides a valuable marketing
opportunity, is the applicant's first face-to-face contact with the Company's
representatives. The appraiser's responsibilities are to perform a complete
technical appraisal of the subject property and schedule a Sales Appointment.
Senior appraisers at the Company's headquarters perform a desk review of the
property appraisal on the following loan applications: (i) all properties with a
market value above $150,000 or less than $100,000, (ii) all loan applications
with a combined LTV equal to or greater than 55% (62% in California), (iii) all
loan applications prepared by a new retail branch office for the first 90 days
of its existence, (iv) all income properties, and (v) approximately 10% of the
loan applications not otherwise reviewed. For loans originated in the United
Kingdom, the Company contracts with national independent valuation firms to
perform the review appraisal function.
Unlike many of its competitors in the United States, the Company does not use
independent fee-based appraisers. Instead, the company recruits, hires and
trains its own field and desk appraisers. In connection with each securitization
of the Company's loans, independent appraisers have conducted appraisals on a
randomly selected sample of the subject properties that are the collateral for
the securitized loans. The appraisals performed by the Company's appraisers have
been within 1.5% of the aggregate appraisal values of samples of loans from
securitization pools to date as calculated by independent appraisers.
The Company hires certified or licensed appraisers in those states which
require such designations. Individual retail branch office appraisers are rated
and compensated based on the ongoing quality of appraisals performed and the
number of Sales Appointments. The Company monitors the performance of its
appraisers on a weekly and monthly basis.
RETAIL BRANCH OPERATIONS
The retail branch offices are responsible for the next step in the sales
process that, if successful, converts the Sales Appointments set by the
appraisers into underwritten loan files to be submitted to the Company's quality
control department. Each Sales Appointment allows the sales personnel to clearly
determine the applicant's need for financing, tailor a loan program to fit the
applicant's financial needs, perform preliminary underwriting and provide to the
applicant a choice of loan products and a detailed explanation of the various
loan terms.
The loan officer utilizes a loan origination software system developed by the
Company to preliminarily determine an applicant's qualification for the various
products offered by the Company. The loan origination software system
incorporates the Company's underwriting guidelines with respect to collateral,
credit quality, character, and capacity to repay. The retail branch loan officer
or branch manager will run a credit report for each applicant. The Company
utilizes a credit score ("FICO Score") derived from a credit scoring model
developed by an independent third party. Based upon the applicant's FICO Score,
an applicant is preliminarily designated as an "A," "B," "C" or "D" risk. This
designation is reviewed by the Company's centralized quality control and
underwriting department before final approval.
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The typical retail branch office consists of a branch manager, one or two
loan officers, one or two appraisers and one or two loan processors. The Company
generally recruits and hires its loan officers in the location of the branch
office. The Company focuses on candidates with professional sales experience for
loan officer positions. Loan officer and branch manager candidates are required
to successfully complete four weeks of sales and technical underwriting training
to learn the Company's sales presentation and lending procedures prior to their
placement in a retail branch office. Retail branch office sales personnel are
required to attend quarterly regional sales and technical training meetings.
Loan officers and branch managers are rated and compensated based on loans
funded. The Company strives to develop its loan officers and to promote the most
qualified loan officers to branch managers. The Company monitors the performance
of its loan officers and branch managers on a weekly and monthly basis.
LOAN ORIGINATION AND ACQUISITION THROUGH THIRD PARTY ORIGINATORS
The Company has historically augmented its loan production by purchasing
loans from other affiliated, unaffiliated and related party originators. The
Company has entered into mortgage loan purchase agreements with each originator
which require specified minimum levels of experience in origination of
non-conforming mortgage loans and provide representations, warranties and
buy-back provisions which generally are not less restrictive than
representations and warranties required of the Company for the securitization of
its own loan originations.
The Company has entered into agreements with two mortgage banking companies
controlled by related parties under which the Company provides warehouse
financing facilities in exchange for a right of first refusal to purchase loans
originated. In 1997, the Company expanded its purchase of wholesale loans by
concentrating on low LTV loans made to homeowners located in its current or
potential market areas. The Company intends to solicit these homeowners for
additional borrowing needs.
UNDERWRITING
The main underwriting and quality control functions are centralized at the
Company's headquarters. The most significant of the Company's underwriting
functions are performed by senior management. The Company maintains quality
control and underwriting departments. The Company strives to process each loan
application received from its retail branch office network as quickly as
possible in accordance with the Company's loan application approval procedures.
Accordingly, most loan applications receive decisions within three days of
receipt and are funded within 18 days of approval.
After a full review by the quality control department, each initial loan
application file is forwarded to the loan committee for approval. Loans that
clearly conform to the Company's underwriting guidelines are approved at the
first level of review. Other loans that present more complicated underwriting
issues are reviewed by senior underwriting personnel.
The decision of the loan committee to approve, decline or modify a loan is
based upon a number of factors, including the appraised value of the property,
the applicant's credit quality and the Company's perception of the applicant's
ability to repay the loan. With respect to the value of the collateral, loans
secured by first mortgages are generally limited to a maximum 75% combined LTV;
however, the Company will originate loans with a combined LTV of up to 90% for
loans expected to be sold on a whole loan basis. Loans secured by second
mortgages are limited to a maximum 75% combined LTV other than loans originated
under the high LTV program. The Company has established classifications with
respect to the credit profiles of loans and subject properties based on certain
of the applicant's characteristics. Each loan application is placed into one of
the Company's four ratings ("A" through "D," with subratings within those
categories), depending upon the following two primary factors: (i) an
applicant's FICO Score and (ii) combined LTVs. Terms of loans made by the
Company vary depending upon the classification of the application, the debt to
income ratio and other factors. Applications with lower classifications
generally are subject to higher interest rates due to the increased risk
inherent in the loan. The minimums with respect to each of the two primary
factors for the applicable ratings are shown below:
"A/A-" "B/B-" "C/C-" "D"
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Minimum FICO Score..................... 640 560 480 0
Maximum LTV............................ 75% 73% 72% 65%
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In addition to the above criteria, the Company requires higher interest rates
on loans with certain risk factors. These factors include, among others, an
unsubstantiated employment history, a recent foreclosure proceeding, a number of
recent delinquent payments on an existing mortgage, a recent bankruptcy filing,
non-owner occupied properties, rural properties or the presence of a senior
mortgage or zoning restrictions on the subject property.
During the past three years, the Company's mix of loans by risk
classification has not changed significantly. The following table reflects the
risk classifications of the Company's loan originations and purchases in 1997:
TOTAL WEIGHTED
(DOLLARS IN % OF AVERAGE
LOAN CLASSIFICATION THOUSANDS) TOTAL INTEREST RATE
--------------------------------------------------- ----------- -------------
"A" Risk............................... $ 245,602 46% 9.0%
"B" Risk............................... 157,584 30 9.5
"C" Risk............................... 100,565 19 10.0
"D" Risk............................... 24,759 5 11.2
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Total.................................. $ 528,510 100% 9.5
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LOAN ORIGINATIONS AND PURCHASES
The following table presents selected information relating to the origination
and purchase of loans by the Company for the years ended December 31:
1995 1996 1997
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Type of property securing loan:
Single-family.............................. 95% 95% 91%
Multi-family and other..................... 5 5 9
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Total......................................... 100% 100% 100%
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Type of mortgage securing loan:
First lien................................ 95% 99% 99%
Junior lien............................... 5 1 1
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Total......................................... 100% 100% 100%
======== ======== ========
Weighted average interest rate................ 10.3% 9.6% 9.5%
Weighted average initial combined LTV (1) .... 59.3% 62.2% 62.5%
(1) The LTV of a loan secured by a senior mortgage is determined by dividing
the amount of the loan by the appraised value of the mortgaged property
at origination. The combined LTV of a loan secured by any junior mortgage
is determined by taking the sum of the loan secured by such mortgage and
any senior mortgages and dividing by the appraised value of the mortgaged
property at origination.
LOAN SALES
SECURITIZATION
In a securitization, the Company exchanges loans for regular interests and a
residual interest in a trust. The regular interests are immediately sold by the
Company to the public for cash. As the holder of the residual interest, the
Company is entitled to receive certain excess cash flows. These excess cash
flows are the difference between (a) principal and interest paid by borrowers
and (b) the sum of (i) scheduled principal and interest paid to holders of the
regular interests, (ii) trustee fees, (iii) third-party credit enhancement fees,
(iv) servicing fees and (v) loan losses. The Company begins receiving these
excess cash flows after certain overcollateralization requirements, which are
specific to each securitization and are used as a means of credit enhancement,
have been met.
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The Company arranges for credit enhancement to achieve an improved credit
rating on the regular interests issued. This credit enhancement generally takes
the form of an insurance policy, issued by a monoline insurance company,
ensuring the holders of the regular interests of timely payment of scheduled
principal and ultimate payment of scheduled interest at the pass-through rate.
In addition, the securitization trust structure typically includes
overcollateralization as an additional means of credit enhancement. The purpose
of the overcollateralization is to provide a source of payment in the event of
higher than anticipated loan losses. Overcollateralization requirements may
include an initial deposit, the sale of loans at less than par or retention in
the securitization trust of collections from the pool until a specified
overcollateralization amount has been attained. This retention of excess cash
flow creates a faster amortization of the scheduled balance of the regular
interests than the amortization of the principal balance of the mortgage loans
in the securitization pool. Losses resulting from defaults by borrowers on a
payment of principal or interest on the loans in the securitized pool will
reduce the overcollateralization to the extent that funds are available and may
result in a reduction in the value of the residual interests held by the
Company. If payment defaults exceed the amount of overcollateralization and
excess cash flows, the insurance policy will pay any further losses experienced
by holders of the regular interests in the related securitization trust.
Generally, the Company sells loans to a securitization trust at face value,
except when it sells loans at less than par for overcollateralization purposes.
Loans are sold without recourse except for certain representations and
warranties provided by the Company. Under the terms of the pooling and servicing
agreements the Company may be required either to repurchase or to replace loans
that do not conform to such representations and warranties. To date, the Company
has not been required to substitute or repurchase any such loans.
The Company retains the right to service loans it securitizes. In addition to
management servicing fees, the Company also receives prepayment and other
ancillary servicing fees on securitized loans.
WHOLE LOAN SALES
Certain loans originated or purchased by the Company are not chosen for
inclusion in a securitization. These loans may include loans with higher
combined LTVs and/or loans that have higher credit risk. The Company will
originate these loans to earn the origination fees and will then sell such loans
to wholesale purchasers on a servicing released basis to avoid credit risks
related to such loans. The Company anticipates that it will continue to sell
certain loans on a whole loan basis.
INTEREST RATE RISK MANAGEMENT
The Company's profitability is in part determined by the difference, or
"spread," between the effective rate of interest receivable on the loans
originated or purchased by the Company and the pass-through interest rates
payable to regular interests issued in securitizations. After a loan commitment
is made or a loan is purchased and while it is held pending sale or
securitization, the spread can be adversely affected by increases in the
interest rate demanded by purchasers or investors in the Company's
securitizations.
The Company has implemented a hedging program designed to provide a level of
protection against the impact of rapid changes in interest rates on the value of
domestic fixed rate loans from the time the Company commits to fund or purchase
such loans to the date of their securitization or sale. The Company does not
hedge the interest rate risk associated with holding adjustable rate mortgages
pending their securitization or sale due to the decreased significance of such
risk as the pass-through rates for regular interests related to the Company's
adjustable rate mortgage pools are also adjustable.
The Company's hedging program, which was initiated in 1994, has been limited
to selling short or forward sales of United States Treasury securities and
prefunding loan originations in its securitizations. United States Treasury
securities are utilized by the Company due to the liquidity of the market for
such securities and the high degree of correlation between such securities and
the pass-through interest rates for regular interests in the Company's fixed
rate mortgage pools. Prefunding allows the Company to fix the relationship
between the interest rates charged on the loans and the pass-through rates for
the regular interests by permitting the Company to deliver loans to a
securitization trust after the date of its closing.
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The Company may utilize various financial instruments in its hedging
activities. The nature and quantity of hedging transactions are determined by
the Company's management based on various factors, including market conditions
and the expected volume of mortgage loan originations and purchases. To decrease
market risk, only highly liquid instruments are utilized in the Company's
hedging activities. By their nature, however, all such instruments involve
risks, and the maximum potential loss may exceed the value at which such
instruments are carried. As is customary for these types of instruments, the
Company does not require collateral or other security from counterparties to
these instruments. The Company manages its credit exposure to counterparties
through credit approvals, credit limits and other monitoring procedures.
SERVICING
The Company retains the right to service the loans it originates and
purchases (other than loans sold on a whole loan basis). Loan servicing includes
collecting payments from borrowers, remitting payments to investors who have
purchased loans, investor reporting, accounting for principal and interest,
contacting delinquent borrowers, conducting foreclosure proceedings and
disposing of foreclosed properties. The Company's servicing portfolio includes
10,541 loans with an outstanding balance of $799.1 million as of December 31,
1997. The Company receives management servicing fees ranging from 0.5% to 2.0%
per annum for fixed rate loans and 0.5% to 1.0% per annum for adjustable rate
loans, based upon the outstanding principal balance of loans serviced. The
Company currently services only Company originated or purchased loans.
The Company has a sophisticated computer-based loan servicing system that
enables it to provide effective and efficient processing of loans. The system,
which is able to service fixed and adjustable rate loans as well as loans
denominated in dollars or pounds sterling, provides the Company with, among
other things, payment-processing, cashiering, collection and reporting
functions.
The Company believes its disciplined collection practices contribute to the
relatively low delinquency and loss rates on its servicing portfolio. The
following table illustrates the timeline of the Company's collection practices,
assuming (i) the loan is originated in California and (ii) a ten-day grace
period applies by contract or under applicable law:
<TABLE>
<CAPTION>
TIME EVENT
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<S> <C>
1st day of the month.................... Borrower loan payment due.
11th day of the month................... Payment not received is late.
12th day of the month................... Notice of past due payment mailed to borrower.
20th day of the month................... Notice of foreclosure mailed to borrower.
26th day of the month................... Final notice mailed to borrower.
42 days after due date.................. File forwarded to foreclosure department which records notice of
default after 45th day of delinquency.
After notice of default or similar Borrower informed of status and Company's
notice is recorded...................... reinstatement period dates.
During the reinstatement period......... Pre-foreclosure property inspection and valuation performed.
End of the reinstatement period......... Notice of trustee's sale recorded and trustee's
sale date scheduled. Property sold to third party
or acquired on behalf of the Company or a securitization trust.
</TABLE>
The borrower is contacted by telephone prior to recording the notice of
default to inform the borrower of the situation. If the borrower does not bring
the loan current within the reinstatement period, a notice of sale is published
and a trustee's sale date is scheduled. During this period of time, the Company
performs a pre-foreclosure inspection and valuation of the property to determine
whether changes in the value of the property have occurred since the date of
origination. If the loan is not reinstated, the property is either sold to a
third party at the trustee's sale or acquired on behalf of the Company. The
Company forecloses as quickly as state regulations allow. The Company contracts
on a nationwide basis with several independent foreclosure service companies to
facilitate the foreclosure process for properties located outside California.
For loans originated within California, the Company performs all foreclosure
procedures internally. Properties acquired by the Company are managed with the
objective of immediate disposal.
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In other states and the United Kingdom, the Company's collection procedures
described above may occur sooner or later depending upon applicable foreclosure
regulations.
The Company's loan servicing software also allows the Company to track and
maintain impound accounts and hazard and flood insurance information. Periodic
expiration reports list all policies scheduled to expire within 30 days. When
policies lapse, a letter is issued advising the borrower of the lapse and that
the Company will obtain force placed insurance at the borrower's expense.
Additionally, the Company maintains a blanket insurance policy that provides
fire insurance coverage for the Company in the event that the Company fails to
obtain force placed insurance in a timely manner upon expiration of the
homeowner's policy.
Regulation and practices regarding the foreclosure of properties and the
rights of the borrower in default vary greatly from jurisdiction to
jurisdiction. Loans originated by the Company are secured by mortgages, deeds of
trust, trust deeds, security deeds or deeds to secure debt, depending upon the
prevailing practice in the state in which the property securing the loan is
located. Depending on local law, foreclosure is effected by judicial action
and/or non-judicial sale, and is subject to various notice and filing
requirements. If foreclosure if effected by judicial action, the foreclosure
proceedings may take several months.
In general, the borrower, or any person having a junior encumbrance on the
real estate, may cure a monetary default by paying the entire amount in arrears
plus other costs and expenses incurred in enforcing the obligation during a
statutorily prescribed reinstatement period.
There are a number of restrictions that may limit the Company's ability to
foreclose on a property. A lender may not foreclose on the property securing a
junior mortgage loan unless it forecloses subject to each senior mortgage.
Moreover, if a borrower has filed for bankruptcy protection, a lender may be
stayed from exercising its foreclosure rights. Also, certain states provide a
homestead exemption that may restrict the ability of a lender to foreclose on
residential property. In such states, the Company requires the borrower to waive
his or her right of homestead as a requirement of the loan. Such waivers of
homestead rights may not be enforceable in certain states.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the amount of the lender's lien. Such a lack
of bidding is due to several factors, including the possible deterioration of
the property during foreclosure proceedings and the requirement that the
purchaser pay for the property in cash or by cashier's check. Thus, the
foreclosing lender often purchases the property from the trustee and
subsequently re-markets the property. Depending upon market conditions, the
proceeds of the subsequent resale by the Company may not be adequate to cover
the investment in the loan.
CURRENT MARKETS AND EXPANSION PLANS
CURRENT MARKETS
The Company originates loans through 29 retail branch offices in 17 states
and four retail branch offices in the United Kingdom. The Company believes that
originating loans through an extensive retail branch office network represents
the most profitable loan origination strategy due to the significant level of
loan origination fees earned by the Company.
Although the Company is licensed to originate loans in 18 states, the
District of Columbia and the United Kingdom, its business has historically been
concentrated in California. While this concentration has declined, California
remains a significant part of the Company's business and contributed 21% of the
Company's total loan originations and purchases for 1997. Expansion outside
California began in late 1994. The number of retail branch offices within
California has declined from a historical high of eleven in 1992 to seven as of
December 31, 1997.
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The following table shows the geographic distribution of the Company's loan
originations and purchases for the years ended December 31:
1995 1996 1997
--------- --------- ---------
United States:
California................................ 43% 38% 21%
New York.................................. 3 13
Illinois.................................. 14 14 11
New Jersey................................ 3 9
Washington................................ 15 11 7
Oregon.................................... 6 6 5
Florida................................... 8 7 4
Colorado.................................. 7 4 4
Others states............................. 7 13 20
United Kingdom............................... 1 6
--------- --------- ---------
Total................................... 100% 100% 100%
========= ========= =========
NATIONAL AND INTERNATIONAL GEOGRAPHIC EXPANSION
The Company intends to continue to expand its existing retail branch office
network. The Company's expansion strategy involves (i) identifying areas with
demographic statistics comparable to existing markets in which the Company has
been successful in originating loans, (ii) understanding each new market's
regulatory requirements and tailoring the Company's loan programs and practices
to comply with such requirements and (iii) identifying and training branch
managers and loan officers for each new retail branch office.
The Company believes that its products and services are best suited for those
housing markets with home values near the nation's averages. After identifying a
potential new market, the Company contracts with regional or national companies
to gather publicly available information with respect to that market and to
integrate such information with the Company's proprietary marketing methodology.
The Company produces a list of Homeowners whom the Company believes, based on
its historic customer profile, are likely to utilize the Company's products and
services and satisfy the Company's underwriting guidelines. The Company then
focuses its marketing efforts on these Homeowners in each new market.
The Company has generally entered into short-term leases for its retail
branch offices. Additionally, the Company generally recruits and hires the
personnel required to staff its retail branch offices from the area near the new
market. Branch managers of new retail branch offices are generally branch
managers of existing retail offices or loan officers promoted from existing
retail branch offices.
COMPETITION
As a consumer finance company, the Company is subject to intense competition.
Traditional competitors in the financial services business include other
mortgage banking companies, mortgage brokers, commercial banks, credit unions,
thrift institutions, credit card issuers and finance companies. Many of these
competitors in the consumer finance business are substantially larger and have
considerably greater financial, technical and marketing resources than the
Company. Competition can take many forms including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount of the loan,
loan origination fees and interest rates. In addition, the current level of
gains realized by the Company and its existing competitors on the sale of loans
could attract additional competitors into this market with the possible effect
of lowering gains on future loan sales owing to increased competition.
The Company believes that it is able to compete on the basis of providing
prompt and responsive service, consistent underwriting and competitive loan
programs to borrowers whose needs are not met by conventional lending
institutions.
9
<PAGE>
REGULATION
The Company's business is subject to extensive regulation at both the federal
and state level. Regulated matters include loan origination, credit activities,
maximum interest rates and finance and other charges, disclosure to customers,
terms of secured transactions, the collection, repossession and claims handling
procedures utilized by the Company, multiple qualification and licensing
requirements for doing business in various jurisdictions and other trade
practices.
TRUTH IN LENDING. The Truth in Lending Act ("TILA") and Regulation Z
promulgated thereunder contain certain disclosure requirements designed to
provide consumers with uniform, understandable information with respect to the
terms and conditions of loans and credit transactions in order to give them the
ability to compare credit terms. TILA also guarantees consumers a three day
right to cancel certain credit transactions including loans of the type
originated by the Company. Management of the Company believes that it is in
compliance with TILA in all material respects. If the Company were found not to
be in compliance with TILA, aggrieved borrowers could have the right to rescind
their loans and to demand, among other things, the return of finance charges and
fees paid to the Company.
In September 1994, the Riegle Act was enacted. Among other things, the Riegle
Act makes certain amendments to TILA (the "TILA Amendments"). The TILA
Amendments generally apply to mortgage loans (other than mortgage loans to
finance the acquisition or initial construction of a dwelling) with (i) total
loan origination fees and other fees upon origination in excess of the greater
of eight percent of the total loan amount or a certain dollar amount (currently
$400) or (ii) an annual percentage rate of more than ten percentage points
higher than comparably maturing U.S. Treasury securities ("Covered Loans"). The
Company estimates that substantially all of the loans currently originated and a
portion of the loans purchased by the Company are Covered Loans.
The TILA Amendments impose additional disclosure requirements on lenders
originating Covered Loans and prohibits lenders from engaging in a pattern or
practice of originating Covered Loans that are underwritten solely on the basis
of the borrower's home equity without regard to the borrower's ability to repay
the loan. Consistent with its underwriting practices with respect to all loans,
the Company applies to all Covered Loans underwriting criteria that take into
consideration the borrower's ability to repay.
The TILA Amendments also prohibit lenders from including prepayment fee
clauses in Covered Loans to borrowers with a monthly debt-to-income ratio in
excess of 50% or Covered Loans used to refinance existing loans originated by
the same lender or an affiliate of such lender. The Company reported $3.5
million, $4.0 million and $3.2 million in prepayment fee revenue in fiscal year
1997, 1996 and 1995, respectively. The Company will continue to collect
prepayment fees on loans originated prior to the October 1995 effectiveness of
the TILA Amendments and on non-Covered Loans as well as on Covered Loans in
permitted circumstances. Compliance with the TILA Amendments may cause the level
of prepayment fee revenue to decline in future years. The TILA Amendments impose
other restrictions on Covered Loans, including restrictions on balloon payments
and negative amortization features, which the Company does not believe will have
a material impact on its operations.
OTHER LENDING LAWS. The Company is also required to comply with the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors
from discriminating against applicants on certain prohibited bases, including
race, color, religion, national origin, sex, age or marital status. Regulation B
promulgated under ECOA restricts creditors from obtaining certain types of
information from loan applicants. Among other things, it also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a result
of information obtained from a consumer credit agency, another statute, the Fair
Credit Reporting Act of 1970, as amended, requires lenders to supply the
applicant with the name and address of the reporting agency. In addition, the
Company is subject to the Fair Housing Act, which broadly prohibits certain
discriminatory practices in connection with the Company's business. The Company
is also subject to the Real Estate Settlement Procedures Act of 1974, as
amended, and regulations thereunder.
10
<PAGE>
In addition, the Company is subject to various other federal and state laws,
rules and regulations governing among other things, the licensing of, and
procedures that must be followed by, mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with such
laws, as well as with the laws described above, may result in civil and criminal
liability. As a mortgage lender, the Company has been, and expects to continue
to be, subject to regulatory enforcement actions and private causes of action
from time to time with respect to its compliance with applicable laws and
regulations. The Company's lending practices have in the past been and currently
are under regulatory review by various state authorities. Although the Company
utilizes systems and procedures to facilitate compliance with these legal
requirements and believes that it is in compliance in all material respects with
applicable laws, rules and regulations, there can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future, or
that existing laws and regulations will not be interpreted in a more restrictive
manner, which could make compliance more difficult or expensive.
INSURANCE REGULATORY LAWS. As a condition to funding its loans, the Company
requires each borrower to obtain and maintain a policy of insurance providing
coverage, at an amount equal to the greater of the replacement cost or loan
amount, for improvements on any real property securing the borrower's loan. If
the borrower fails to provide such coverage prior to closing of the borrower's
loan or if the borrower's coverage is subsequently canceled or not renewed at
any time during the loan period and the borrower fails to obtain new coverage,
the Company will provide coverage on the borrower's behalf under policies
insuring the Company's interest in the collateral. Such practice is commonly
referred to as "forced placement" of insurance. The Company receives a fee in
connection with its placement of such insurance in California, which activity is
not required to be licensed.
Insurance which is force placed is subject to regulation under TILA, the
National Flood Insurance Act, and state insurance regulatory and lender
statutes. Such laws and regulations generally impose disclosure and notice
requirements which must be satisfied prior to forced placement of coverage,
limitations on the amount of coverage that a lender may obtain to protect its
interest in the collateral, and restrictions on fees and charges that the
Company may assess in connection with such insurance.
In addition, in California only, the Company has provided insurance agency
services with respect to credit life insurance and credit disability insurance.
The Company's sale of these insurance products in California is subject to
statutes and regulations applicable to insurance producers.
Failure to comply with any of the foregoing federal and state laws and
regulations could result in the imposition of civil penalties on the Company,
class action lawsuits and administrative enforcement actions.
UNITED KINGDOM REGULATIONS. The Company's mortgage business in the United
Kingdom is subject to regulations promulgated under the United Kingdom Consumer
Credit Act of 1974 (the "CCA") with respect to loans made to individuals or
partnerships with principal balances of 15,000 British Pound Sterling (UKP) or
less. Loans with principal balances in excess of 15,000 UKP are not currently
regulated within the United Kingdom. The CCA and regulations promulgated
thereunder, among other things, impose licensing obligations on the Company's
United Kingdom subsidiaries, set down certain requirements relating to the form,
content, legibility, execution and delivery of loan documents, restrict
communication with the borrower prior to completion of a transaction, require
information and notice of enforcement to be given to the borrower, require
rebates to the borrower on early settlement and create a cause of action for
"extortionate credit bargains." A license is required to service loans in the
United Kingdom irrespective of the size of the loan. Failure to comply with the
requirements of these rules and regulations can result in the revocation or
suspension of the license to do business and render the mortgage unenforceable
in the absence of a court order. The Company's operations in the United Kingdom
involve loans with principal balances in excess of 15,000 UKP and are
therefore largely unregulated.
In July 1997 (revised in November 1997) the United Kingdom's Director General
of Fair Trading issued guidelines ("Guidelines") for lenders and brokers engaged
in "non-status" lending activity. These consist of both general principles and
specific guidelines relating to advertising, clarity of disclosure of loan
terms, contract documentation, dealings with borrowers, selling methods,
underwriting and various contract terms which should be provided and those which
are considered unfair. Lenders' attention is drawn to their responsibility for
brokers' and intermediaries' actions and for ensuring that such parties comply
with relevant statutory requirements and the Guidelines and do not engage in
unfair business practices. The Guidelines apply to lending activity whether
regulated under the CCA or not, and thus require dealings in relation to
unregulated lending to be more in line with those in respect of regulated
lending. Failure to comply with these Guidelines could lead to regulatory
action, including the revocation or refusal by the Office of Fair Trading of CCA
licenses, and/or impair the enforceability of certain mortgage terms.
11
<PAGE>
The Unfair Terms in Consumer Contracts Regulations 1994 (the "Regulations")
apply generally to contractual dealings with consumers. The Regulations make
unfair terms void and unenforceable against the consumer. Unfair terms are those
which have not been negotiated and which, contrary to good faith, cause a
significant imbalance in the parties' contractual rights and obligations to the
consumer's detriment.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
clean up activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future.
In the course of its business, the Company, generally on behalf of the REMIC
trusts, has acquired and may acquire in the future properties securing loans
that are in default. Although the Company primarily lends to owners of
residential properties, there is a risk that the Company could be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such properties after acquisition by the Company, and may be held liable to a
governmental entity or to third parties for property damage, personal injury and
investigation and cleanup costs incurred by such parties in connection with the
contamination. In addition, the owner or former owners of a contaminated site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property.
EMPLOYEES
As of February 28, 1998, the Company had a total of 480 employees. The
Company has 144 employees working at its corporate headquarters. None of the
Company employees is covered by a collective bargaining agreement. The Company
considers its relations with its employees to be good.
ITEM 2. PROPERTIES.
The Company's corporate headquarters are located at 17305 Von Karman Avenue,
Irvine, California 92614-6203, where the Company leases from a partnership
beneficially owned by Brian and Sarah Chisick approximately 40,000 square feet
of office. The lease expires on January 31, 2003, and the Company has an option
to renew the lease for five years. The Company also leases office space for its
31 retail branch offices in 16 states and the United Kingdom. The average size
of these retail branch offices is approximately 1,700 square feet, with an
annual average base rent of approximately $32,000. In 1997 the Company purchased
an office building in Irvine, California, with approximately 40,000 square feet
of office space, for use as a telemarketing center and a mail processing center.
The Company believes its facilities are both suitable and adequate for the
current business activities conducted at its corporate headquarters and at its
existing retail branch offices.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various routine legal proceedings arising out of
the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect
on the consolidated financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during
the quarter ended December 31, 1997.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
In July 1996, the Company's Class A Common Stock began trading under the
symbol FACO on the NASDAQ National Market. The following table sets forth the
range of high and low closing sale prices of the Company's Class A Common Stock
for the periods indicated:
High Low
--------- ---------
1996
Third Quarter (from July 31, 1996).................... 16 5/6 12 7/12
Fourth Quarter........................................ 20 1/3 14 2/3
1997
First Quarter......................................... 20 1/6 15
Second Quarter........................................ 19 1/2 12 1/6
Third Quarter......................................... 21 11/12 18 1/6
Fourth Quarter........................................ 23 43/64 15 1/2
No cash dividends were declared during the period covered by the above table.
On October 31, 1997, the Company paid a stock dividend of 1 share for every 2
shares of Class A and Class B Common Stock held by holders of record on October
15, 1997. The above sales prices of Class A Common Stock have been retroactively
adjusted to reflect this stock dividend as a stock split. The Company does not
anticipate declaring cash dividends in the near future.
On February 28, 1998, the Company had approximately five stockholders of
record of its Class A Common Stock. The Company believes its Class A Common
Stock is beneficially held by more than 2,100 stockholders. As of February 28,
1998, there were four stockholders of record for the Company's Class B Common
Stock. There is no established public trading market for the Class B Common
Stock.
13
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
FIRST ALLIANCE CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
<CAPTION>
1993 1994 (1) 1995 1996 (2) 1997
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Gain (loss) on sale of loans........................... $ 2,056 $ (1,547) $ 8,982 $ 10,965 $ 22,644
Origination fees and other............................. 20,433 29,449 26,484 37,206 44,034
Servicing and other fees revenue....................... 8,989 9,106 8,614 8,854 7,544
Interest revenue....................................... 4,452 8,650 14,624 13,562 21,397
Total revenue.......................................... 35,950 45,802 58,880 70,871 95,649
Interest expense....................................... 2,106 3,744 4,167 2,655 3,164
Non-interest expense (3)............................... 22,881 26,824 23,693 29,977 39,840
Income before income tax provision..................... 10,963 15,234 31,020 38,239 52,645
Net income............................................. 10,741 14,871 30,542 32,139 32,772
Basic net income per share............................. 0.67 0.93 1.91 1.72 1.50
Diluted net income per share........................... 0.67 0.93 1.91 1.72 1.49
Pro forma net income (4)............................... 6,468 8,988 18,302 22,561 32,772
Pro forma diluted net income per share (4) ............ 0.29 0.41 0.83 1.02 1.49
Income before income tax provision as a % of revenue... 30.5% 33.3% 52.7% 54.0% 55.0%
Dividends declared (5) ................................ $ 5,853 $ 17,341 $ 12,205 $ 60,080
STATEMENT OF FINANCIAL CONDITION DATA:
Cash and cash equivalents ............................. $ 4,387 $ 5,298 $ 4,019 $ 27,414 $ 14,032
Loans held for sale ................................... 74,196 18,676 24,744 11,023 54,872
Residual interests..................................... 6,879 11,645 19,705 29,253 50,238
Total assets........................................... 99,855 48,266 66,911 87,457 158,147
Total borrowings....................................... 68,773 14,839 19,356 131 57,767
Stockholders' equity .................................. 26,454 23,984 42,321 77,978 91,277
OTHER DATA:
Loan originations and purchases:
Retail originations.................................. $ 195,907 $ 221,839 $ 216,566 $ 291,807 398,359
Wholesale purchases.................................. 84,034 91,826 24,078 32,681 130,151
---------- ---------- ---------- ---------- ----------
Total ............................................. $ 279,941 $ 313,665 $ 240,644 $ 324,488 $ 528,510
========== ========== ========== ========== ==========
Average retail origination loan size................... $ 54 $ 66 $ 69 $ 83 $ 88
Number of retail branches.............................. 11 13 17 23 33
Weighted average interest rate on loan
originations and purchases........................... 9.5% 8.7% 10.3% 9.6% 9.5%
Weighted average initial combined
loan-to-value ratio.................................. 55.2% 56.2% 59.3% 62.2% 62.5%
Loan sales:
Securitizations....................................... $ 141,795 $ 350,331 $ 167,974 $ 267,661 $ 339,005
Whole loan sales...................................... 70,554 22,857 65,251 71,864 144,633
---------- ---------- ---------- ---------- ----------
Total ............................................. $ 212,349 $ 373,188 $ 233,225 $ 339,525 $ 483,638
========== ========== ========== ========== ==========
Servicing portfolio ................................... $ 385,570 $ 555,685 $ 613,791 $ 641,191 $ 99,085
Total delinquencies as a % of the
servicing portfolio................................ 4.0% 4.3% 5.8% 5.5% 4.1%
Real estate owned as a % of the servicing
portfolio.......................................... 0.9% 0.6% 1.3% 0.6% 0.2%
Losses on real estate owned as a % of the
average servicing portfolio during the period...... 0.02% 0.01% 0.03% 0.35% 0.24%
</TABLE>
(1) The Company typically securitizes or sells most of its loan originations and
purchases within each year. At the end of 1993, the Company had $74 million
of loans held for sale resulting in increased assets and increased
borrowings on the warehouse financing facilities. These loans were sold in
1994 resulting in an increase in the ratio of loan sales to loan
originations and purchases in 1994 as compared to other years.
(2) During 1996, the Company completed the IPO whereby 6,037,500 shares of Class
A Common Stock were issued and the Company changed its tax status from that
of an S corporation to that of a C corporation. The Company received $63
million of net proceeds from the IPO, of which $45 million was used to pay
the S distribution notes.
(3) During 1994 and 1993, the Company incurred legal expenses and settlement
costs of $7 million and $2 million, respectively, related to litigation
initiated in December 1989.
(4) Pro forma amounts reflect adjustments for federal and state income taxes as
if the Company had been taxed as a C corporation rather than an S
corporation. The Company ceased to be an S corporation concurrent with the
IPO in July 1996. Pro forma diluted net income per share assumes that the
total number of shares outstanding upon completion of the IPO were
outstanding in all prior periods.
(5) Included in dividends in 1996 is $45 million of S distribution dividends
made in the form of the S distribution notes. Historical dividends include
dividends used by the stockholders to pay income taxes on the Company's S
corporation earnings and are not indicative of the Company's present
dividend policy.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
GENERAL
The Company is a financial services organization principally engaged in
mortgage loan origination, purchases, sales and servicing. Loans originated by
the Company primarily consist of fixed and adjustable rate loans secured by
first mortgages on single family residences. The Company originates loans
through its retail branch network which is currently comprised of 29 offices in
the United States (seven of which are located in California, two of which are
located in each of Florida, Illinois, Maryland, New Jersey, New York, and Ohio
and one of which is located in each of Arizona, Colorado, Georgia,
Massachusetts, Minnesota, Oregon, Pennsylvania, Utah, Virginia and Washington)
and four offices in the United Kingdom. In addition, the Company purchases loans
from qualified mortgage originators. The Company sells loans to wholesale
purchasers or securitizes them in trusts. A significant portion of the Company's
loan production is securitized with the Company retaining the right to service
the loans.
In October 1997 the Board of Directors authorized a three-for-two split of
its common stock to be effected in the form of a stock dividend. The stock
dividend was distributed on October 31, 1997. All share and per share
information have been restated to reflect the stock dividend.
During the third quarter of 1996, FACO completed an initial public offering
(the "IPO") whereby 6,037,500 shares of its Class A Common Stock were sold to
the public. Concurrently, 16,125,000 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. The consolidated financial condition
and results of operations of the Company for periods prior to the date of the
reorganization substantially consist of those of FAMCO.
Prior to 1992, the Company sold its loans to private investors on a servicing
retained basis. Since that time, the Company has sold the majority of its loans
in the secondary market primarily through securitization and, to a lesser
extent, through whole loan sales in which the Company does not retain the right
to service the loans. The Company's underwriting guidelines require threshold
credit criteria and combined LTV limits for loans sold through securitizations.
Accordingly, the Company sells on a servicing released basis those loans which
do not meet its risk criteria for securitization. The Company retains the right
to service loans which it has securitized.
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 income has allowed the Company to generate positive
operating cash flow. There can be no assurance, however, that the Company's
operating cash flow will continue to be positive in the future.
CERTAIN ACCOUNTING CONSIDERATIONS
As a fundamental part of its business and financing strategy, the Company
securitizes the majority of its loans in trusts whereby the loans are exchanged
for regular and residual interests in the trusts. A significant portion of the
Company's income is associated with securitization activity.
Gains on servicing released whole loan sales equal the difference between the
net proceeds to the Company from such sales and the loans' acquisition cost (for
purchased loans) or net carrying value (for originated loans). The net carrying
value of originated loans is equal to their principal balance less net deferred
origination fees.
Gains on servicing retained sales of loans through securitization represent
the difference between the net proceeds to the Company in the securitization and
the allocated cost of loans securitized. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 125, 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 residual interests and the mortgage servicing rights
retained by the Company based upon their relative fair values. At origination,
the Company classifies the residual interests as trading securities, which are
carried at fair value. The difference between the fair value of residual
interests and their allocated cost is recorded as gain on securitization and is
included in loan origination and sale revenue.
15
<PAGE>
In a securitization, the Company exchanges loans for regular interests and a
residual interest in a trust. The regular interests are immediately sold by the
Company to the public for cash. As the holder of the residual interest, the
Company is entitled to receive certain excess cash flows. These excess cash
flows are the difference between (a) principal and interest paid by borrowers
and (b) the sum of (i) scheduled principal and interest paid to holders of the
regular interests, (ii) trustee fees, (iii) third-party credit enhancement fees,
(iv) servicing fees and (v) loan losses. The Company begins receiving these
excess cash flows after certain overcollateralization requirements, which are
specific to each securitization and are used as a means of credit enhancement,
have been met.
The Company carries residual interests at fair value. As such, the carrying
value of these securities is impacted by changes in market interest rates and
prepayment and loss experiences of these and similar securities. The Company
determines the fair value of the residual interests utilizing prepayment, credit
loss and other assumptions appropriate for each particular securitization
consistent with those an unrelated third party would utilize to value such
securities. To the Company's knowledge, there is no active market for the sale
of these residual interests. The range of values attributable to the factors
used in determining fair value is broad. Accordingly, the Company's estimate of
fair value is inherently subjective. Prepayments are expressed through a market
convention known as an annual constant prepayment rate ("CPR"). In its past
securitizations, the Company has experienced a life-to-date CPR on securitized
loans ranging from 11% to 53%. Non-conforming mortgage loans, such as the
Company's loans, historically prepay at a faster rate than conforming mortgage
loans. At origination, the Company utilizes prepayment assumptions ranging from
25% to 40%, an estimated annual loss assumption of 0.5% and a weighted average
discount rate of 15% to value residual interests. Based upon the historical
performance of its loans, the Company expects its securitized pools to have
average lives of three to five years. As of December 31, 1997, the Company's
investments in residual interests totaled $50.2 million.
To determine the fair value of mortgage servicing rights, the Company
computes the present value of projected net cash flows expected to be received
over the life of the loans. Such projections incorporate assumptions, including
servicing costs, prepayment rates and discount rates, consistent with those an
unrelated third party would utilize to value such mortgage servicing rights.
These assumptions are similar to those used by the Company to value residual
interests. The Company periodically evaluates capitalized mortgage servicing
rights for impairment, which is measured as the excess of unamortized cost over
fair value. This review is performed on a disaggregated basis by loan type. The
Company has generally found that non-conforming borrowers are payment sensitive
rather than interest rate sensitive. Therefore, the Company does not consider
interest rates a predominant risk characteristic for purposes of evaluating
impairment. As of December 31, 1997, mortgage servicing rights totaled $9.2
million.
The three primary components of the Company's revenue are loan origination
and sale, loan servicing and other fees and interest income.
Loan origination and sale revenue consists of gain on sale of loans and the
recognition of net deferred origination fees. A significant portion of loan
origination and sale revenue is the recognition upon sale of net deferred
origination fees, which equaled $44.0 million, or 66% of loan origination and
sale revenue during 1997.
Loan servicing and other fees represent management servicing fees and other
ancillary fees, including prepayment penalties, received from servicing loans.
Mortgage servicing rights are amortized against loan servicing and other fee
revenue over the period of estimated net future servicing fee income.
Interest income is comprised of two primary components: (i) interest on loans
held for sale during the warehousing period and (ii) the effective yield on
residual interests. The Company recognizes interest income from residual
interests on a level yield basis over the expected lives of the securitized
loans. At the end of each quarter, the Company computes an effective yield based
on the Company's then-current estimate of each residual interest's future cash
flows. This effective yield is used to accrue interest income in the subsequent
quarter.
16
<PAGE>
LOAN ORIGINATION AND PURCHASES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Loan originations and purchases:
Retail originations........................................$ 216,566 $ 291,807 $ 398,359
Wholesale purchases........................................ 24,078 32,681 130,151
----------- ----------- -----------
Total originations and purchases......................$ 240,644 $ 324,488 $ 528,510
=========== =========== ===========
Number of retail branches as of the end of the period:
United States:
California .............................................. 7 7 7
Other States............................................. 10 15 22
United Kingdom............................................. 1 4
----------- ----------- -----------
Total ................................................ 17 23 33
=========== =========== ===========
Weighted average initial interest rate........................ 10.3% 9.6% 9.5%
Weighted average initial combined loan-to-value ratio......... 59.3% 62.2% 62.5%
Weighted average loan origination and processing fees
as a percent of retail originations........................ 15.1% 14.2% 14.8%
Average retail origination loan size..........................$ 69 $ 83 $ 88
</TABLE>
Total originations and purchases increased 63% in 1997 and 35% in 1996.
Retail originations increased 37% in 1997 and 35% in 1996 primarily as a result
of new retail branch offices opened in 1997, 1996 and 1995. Wholesale purchases
increased 298% in 1997 as increased premiums available in the secondary market
allowed the Company to increase its purchases and sales of wholesale loans.
Additionally, the Company initiated a strategy in June 1997 to purchase low LTV
loans secured by property located near the Company's retail offices for the
purpose of marketing to these homeowners for additional borrowing needs.
Purchases of low LTV loans totaled $61.5 million in 1997.
LOAN SALES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Securitizations............................................$ 167,974 $ 267,661 $ 339,005
Whole loan sales ......................................... 65,251 71,864 144,633
----------- ----------- -----------
Total ..................................................$ 233,225 $ 339,525 $ 483,638
=========== =========== ===========
</TABLE>
Loan sales, including securitizations of loans, increased 42% in 1997 and 46%
in 1996. These increases in loan sales were the result of the sale of the
increased volume of loan originations and purchases.
17
<PAGE>
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 years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Loan origination and sale:
Gain (loss) on sale of loans............................ 15.3% 15.5% 23.7%
Net loan origination and other fees..................... 45.0 52.5 46.0
Loan servicing and other fees............................. 14.6 12.5 7.9
Interest and other........................................ 25.1 19.5 22.4
----------- ----------- -----------
Total revenue........................................... 100.0 100.0 100.0
----------- ----------- -----------
EXPENSE:
Compensation and benefits................................. 17.7 21.9 20.2
Advertising .............................................. 7.4 5.9 6.4
Professional services and other fees...................... 3.4 2.7 3.3
Facilities and insurance.................................. 3.6 3.5 3.5
Supplies.................................................. 2.1 2.2 2.5
Depreciation and amortization............................. 1.5 1.2 1.0
Interest.................................................. 7.1 3.7 3.3
Legal .................................................... 2.5 1.3 2.1
Travel and training....................................... 1.4 1.6 1.8
Other .................................................... 0.6 2.0 0.9
----------- ----------- -----------
Total expense........................................... 47.3 46.0 45.0
----------- ----------- -----------
Income before income tax provision........................... 52.7 54.0 55.0
Income tax provision (1)...................................... 0.8 8.7 20.7
----------- ----------- -----------
Net income ................................................... 51.9% 45.3% 34.3%
=========== =========== ===========
</TABLE>
(1) During 1996, the Company completed the IPO and the Company changed its
tax status from that of an S corporation to that of a C corporation.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997
REVENUE
The following table sets forth the components of the Company's revenue for
the years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
(Dollars in thousands)
Loan origination and sale:
Gain on sale of loans (1).................................$ 8,982 $ 10,965 $ 22,644
Net loan origination and other fees....................... 26,484 37,206 44,034
Loan servicing and other fees................................. 8,614 8,854 7,544
Interest and other............................................ 14,800 13,846 21,427
----------- ----------- -----------
Total revenue.............................................$ 58,880 $ 70,871 $ 95,649
=========== =========== ===========
</TABLE>
(1) Excluding net loan origination and other fees.
Total revenues increased 35% or $24.8 million and 20% or $12.0 million in
1997 and 1996, respectively, as compared to the corresponding prior periods
primarily due to higher loan origination and sale revenue and, in 1997, higher
interest income from residual interests and loans held for sale.
18
<PAGE>
Loan origination and sale revenue increased 38% in 1997 to $66.7 million from
$48.2 million in 1996, which increased 36% from $35.5 million in 1995.
Gain on sale of loans increased $11.7 million in 1997 as compared to 1996 due
to a 42% increase in the volume of loans sold, an increase in the weighted
average gain on loan sales and $3.1 million recognized in 1997 as an increase in
the fair value of residual interests. The weighted average gain on sale of loans
as a percentage of loan principal balances increased to 4.7% in 1997 from 3.2%
in 1996. The weighted average gain on sale of loans securitized increased to
4.3% in 1997 from 3.5% in 1996. This increase is primarily due to an increase in
the weighted average initial interest rate spread, an increase in the proportion
of adjustable rate mortgages securitized and a decrease in the discount rate
used in computing the fair value of the residual interests and mortgage
servicing rights. The weighted average initial interest rate spread (the
difference between the initial weighted average loan interest rates for the
loans included in the securitization and the initial weighted average
pass-through rate paid to the holders of the regular interests in the
securitization) in residual interests originated increased to 3.1% in 1997 from
2.9% in 1996. As a percentage of total loans securitized, adjustable rate loans,
which historically have generated larger interest rate spreads than fixed rate
loans, increased to 60% in 1997 from 53% in 1996. A discount rate of 15% was
used to value residual interests and mortgage servicing rights in 1997 as
compared to a rate of 18% used in 1996. In addition, the weighted average gain
on whole loan sales increased to 3.3% of loans sold in 1997 as compared to 2.0%
in 1996. The Company's whole loan sales consist of bulk sales, for which the
Company receives a premium over the principal balance of the loan, and flow
sales, which represent individual loan sales for which the Company generally
recognizes no gain or loss. The increase in the weighted average gain on whole
loan sales is primarily the result of increases in the percentage of whole loan
sales sold through bulk sales.
The 22% increase in gain on sale of loans in 1996 as compared to 1995 was due
to the increased volume of loans sold offset by lower premiums realized on loan
sales. The weighted average gain on sales of loans as a percentage of loan
principal balances decreased to 3.2% in 1996 from 3.9% in 1995. This decrease
was primarily due to decreased weighted average initial gross spreads in
residual interests originated in securitizations which decreased to 2.9% in 1996
from 3.8% in 1995. Gross spreads decreased due to increasing interest rates
during the first half of 1996 as compared to decreasing interest rates during
the first nine months of 1995. These decreased gross spreads were offset by the
results of the Company's hedging activities which had realized gains of $0.4
million in 1996 as compared to realized losses of $0.3 million in 1995. 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 18% and 40% in 1997 and 1996,
respectively, as compared to the corresponding prior periods as a result of the
increased volume of sales of retail originations.
Loan servicing and other fees as a percentage of the average servicing
portfolio were 1.1%, 1.4% and 1.5% in 1997, 1996 and 1995, respectively. As a
percentage of the average servicing portfolio, management fees decreased 0.1%,
prepayment penalties decreased 0.1% and the amortization of mortgage servicing
rights increased 0.1% in 1997 as compared to 1996. The Company earns higher
management fees on loans serviced for private investors and for certain
securitizations originated prior to 1996. As the proportion of loans serviced
for private investors and securitizations originated prior to 1996 have
decreased as a percentage of the total servicing portfolio, the Company's
weighted average management fees have decreased. The decrease in prepayment
penalties is primarily the result of a decrease, due to certain state and
federal restrictions, in the percentage of loans on which the Company collects
prepayment penalties. The increase in the amortization of mortgage servicing
rights is due to the adoption in January of 1995 of 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 increased $7.6 million, or 55%, in 1997 as compared to 1996.
The increase in interest income was due to a $3.6 million increase in interest
income from loans held for sale, a $2.6 million increase in interest income from
residual interest, and a $1.4 million increase in interest income from
short-term investments. The increases in interest income from loans held for
sale and residual interests were primarily due to increases in the average
balances of loans held for sale and residual interests during 1997 as compared
to 1996. The increases in interest income from short-term investments were
primarily attributable in increases in the balance of available cash as a result
of the IPO and cash generated from operations.
Interest income decreased $1.0 million, or 6%, in 1996 as compared to 1995.
Interest income from loans held for sale and loans receivable held for
investment decreased $3.8 million due primarily to a decrease in the average
balance of loans outstanding. This was the result of a decrease in the average
holding period of loans held for sale as the Company completed securitizations
in each quarter of 1996, as compared to two securitizations in 1995, and the
paydown of loans receivable held for investment. Interest income from residual
interests increased $2.5 million due primarily to an increase in the average
balance of residual interests.
19
<PAGE>
EXPENSE
The following table sets forth the components of the Company's expenses for
the years ended December 31:
1995 1996 1997
---------- ---------- ----------
(Dollars in thousands)
Compensation and benefits..................$ 10,416 $ 15,488 $ 19,341
Advertising................................ 4,345 4,191 6,099
Professional services and other fees....... 1,999 1,946 3,196
Facilities and insurance................... 2,148 2,511 3,362
Supplies................................... 1,214 1,575 2,416
Depreciation and amortization.............. 907 838 924
Interest................................... 4,167 2,655 3,164
Legal...................................... 1,491 917 2,009
Travel and training........................ 797 1,163 1,710
Other ..................................... 376 1,348 783
---------- ---------- ----------
Total expense...........................$ 27,860 $ 32,632 $ 43,004
========== ========== ==========
Total expenses increased 32%, or $10.4 million, and 17% or $4.8 million in
1997 and 1996, respectively, as compared to the corresponding prior year periods
primarily due to increases in expenses related to the Company's continuing
retail branch expansion.
The increase in compensation and benefits in 1997 and 1996 of $3.9 million
and $5.1 million, respectively, were due primarily to increases in personnel to
support the Company's retail branch expansion. In addition, in 1996, the Company
reduced the use of outside telemarketing services and increased the number of
employees in its internal telemarketing operations.
Advertising expense increased 46%, or $1.9 million, in 1997 as compared to
1996 primarily due to increase in marketing activities resulting from the
Company's retail branch expansion. The decrease in advertising expense in 1996
as compared to 1995 is due primarily to the reduction in the use of outside
telemarketing services and the increase in the number of employees in the
Company's internal telemarketing operations.
Professional services and other fees increased $1.2 million, in 1997 as
compared to 1996 primarily due to increases in recruiting costs and information
systems consulting costs associated with the Company's ongoing retail branch
expansion and increases in costs associated with management of properties in
foreclosure. The increase in the costs associated with the management of
properties in foreclosure is due to the increase in the proportion of properties
in foreclosure located outside of California for which the Company utilizes
foreclosure service companies located in the same state as the property.
Combined, facilities and insurance, supplies, and travel and training
increased 43% and 26% in 1997 and 1996, respectively, as compared to the
corresponding prior periods primarily due to increases in expenses related to
the Company's continuing retail branch expansion. The number of retail branch
offices increased from 17 at December 31, 1995 to 23 at December 31, 1996 to 33
at December 31, 1997.
Interest expense increased $0.5 million in 1997 as compared to 1996 due
primarily to an increase in interest expense on the warehouse financing facility
of $1.2 million. The increase in interest expense on the warehouse financing
facility is the result of a 53% increase in the average balance outstanding on
the warehouse line when compared to the prior year. In addition, during 1996,
the Company paid interest on S distribution notes of $0.6 million. No such notes
were outstanding during 1997.
Interest expense decreased $1.5 million in 1996 as compared to 1995 due
primarily to a decrease in interest expense on the warehouse financing
facilities of $1.8 million offset by an increase of $0.4 million in interest
expense paid to stockholders related to stockholder notes payable and S
distribution notes. Due to the increased frequency of securitizations in 1996 as
compared to 1995, the average outstanding balance of the warehouse financing
facilities decreased 42% resulting in a decrease in the related interest
expense. The increase in interest expense associated with stockholder notes
payable and S distribution notes was due primarily to an increase in the average
balance outstanding during 1996 which was due to the distribution of the S
distribution notes in 1996.
20
<PAGE>
Legal expense increased $1.1 million in 1997 as compared to 1996 primarily
due to legal costs incurred in resolving outstanding corporate litigation
matters. Legal expense decreased $0.6 million in 1996 as compared to 1995
primarily due to a $0.8 million decrease in legal settlement costs.
Other expenses in 1996 were $0.6 million and $1.0 million higher than the
corresponding amounts in 1997 and 1995, respectively. These differences were
primarily due to increase in losses realized on the sale of real estate owned
("REO") in 1996. The increase in REO losses in 1996 reflect the Company's
decision to aggressively reduce the balance of its REO portfolio which decreased
from $1.5 million at December 31, 1995 to zero at December 31, 1997.
INCOME TAXES
From May 1, 1988 until the close of the IPO, 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 during that period reflected
modest corporate level state income 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 stockholders for Federal and
state income tax purposes.
The Company's S corporation status was terminated in July 1996 and the
Company became subject to full corporate Federal income and certain state income
taxes. In conjunction with the termination of the Company's S corporation
status, the Company recorded $3.1 million of net deferred tax assets related to
temporary differences between financial reporting and tax basis of assets and
liabilities measured by applying enacted tax rates and law to taxable years in
which such temporary differences are expected to be recovered or settled. Since
the IPO, the Company's effective income tax rate has approximated the Federal
and composite state income tax rates (net of Federal benefit). If the Company
had been fully subject to Federal and state income taxes, net income on a pro
forma basis would have been $22.6 million and $18.3 million in 1996 and 1995,
respectively.
To date, all of the Company's securitizations have been in the form of real
estate mortgage investment conduit trusts. In 1998, the Company intends to
securitize its loans in owners' trusts. Under an owners' trust, the
securitization of loans will be treated as a borrowing for state and Federal tax
purposes rather than as a sale. To the extent that the gain on sale recorded on
a securitization is greater the net interest income realized in the current
period from the loans included in the related securitization, state and Federal
taxes will be deferred. These deferred taxes will be payable in future periods
as net interest income is realized for tax purposes. The company believes that
the use of owners' trusts in its securitizations may significantly increase
operating cash flow in 1998.
21
<PAGE>
SERVICING
The following tables provide data on loan delinquency, REO and net losses for
the Company's servicing portfolio:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------
1995 1996 1997
---------------------- ---------------------- ----------------------
% 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............. $ 613,791 $ 641,191 $ 799,085
========== ========== ==========
30-59 days delinquent........... $ 8,339 1.4% $ 9,359 1.5% $ 7,994 1.0%
60-89 days delinquent........... 6,538 1.0 6,704 1.0 7,654 0.9
90 days or more delinquent...... 21,002 3.4 19,081 3.0 17,378 2.2
---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies.......... $ 35,879 5.8% $ 35,144 5.5% $ 33,026 4.1%
========== ========== ========== ========== ========== ===========
REO (1)......................... $ 7,854 1.3% $ 3,951 0.6% $ 1,688 0.2%
=========== ========== ========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Average servicing portfolio (2) ......................... $ 583,943 $ 615,393 $ 705,928
Net losses (3)........................................... 169 2,160 1,705
Percentage of average servicing portfolio............... 0.03% 0.35% 0.24%
</TABLE>
(1) Includes REO of the Company as well as REO of the securitization 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 represent losses realized with respect to disposition of REO.
The increase in loan losses in 1996 was principally due to disposition of
properties acquired through foreclosures of wholesale loans purchased in 1993
and 1994 from certain originators from which the Company no longer purchases
loans.
LIQUIDITY AND CAPITAL RESOURCES
During the third quarter of 1996, the Company completed the IPO whereby
6,037,500 shares of Class A Common Stock were sold resulting in gross proceeds
of $68.4 million. After deducting underwriting discounts and costs of the IPO,
the net proceeds of $63.1 million were used to pay $45.0 million of S
distribution notes, to pay down $12.9 million of the Company's warehouse
financing facilities 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, borrowings under
its warehouse financing facilities, 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 its warehouse financing facilities, capital expenditures, operating
and administrative expenses and payment of income taxes.
22
<PAGE>
The Company generated pro forma operating cash flow of $13.7 million, $9.3
million and $7.0 million in 1997, 1996 and 1995, respectively. Pro forma amounts
reflect adjustments for state and federal income taxes as if the Company had
been taxed as a C corporation for periods prior to the IPO. The following table
shows the computation of operating cash flow and provides a reconciliation of
operating cash flow to net cash provided by (used in) operating activities as it
is included in the consolidated statement of cash flows for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Pro forma net income.............................................. $ 18,302 $ 22,561 $ 32,772
Non-cash adjustments to reconcile pro forma net income to
pro forma net operating cash flow:
Capitalized residual interests and mortgage servicing rights... (9,908) (12,515) (23,220)
Net accretion of residual interests in securities.............. (2,048) (850) (3,837)
Amortization of mortgage servicing rights...................... 638 1,813 2,857
Deferred income taxes.......................................... 73 (3,028) 3,774
Depreciation and amortization.................................. 907 838 923
Other.......................................................... (976) 445 421
---------- ---------- -----------
Operating cash flow............................................... $ 6,988 $ 9,264 $ 13,690
========== ========== ===========
Reconciliation to consolidated statements of cash flows
Operating cash flow............................................ $ 6,988 $ 9,264 $ 13,690
(Increase) decrease in loans held for sale..................... (6,068) 12,112 (44,416)
Changes in other assets and liabilities........................ (7,180) 7,788 (2,811)
Adjustment for pro forma income tax provision.................. 12,240 9,578
---------- ---------- -----------
Net cash provided by (used in) operating activities............... $ 5,980 $ 38,742 $ (33,537)
========== ========== ============
</TABLE>
The loan origination and processing fees charged to the borrower are included
in the principal balance of the loan originated. The Company funds such loans
out of available cash or through its warehouse financing facilities. For loans
financed through available cash, the Company receives its loan origination and
processing fees in cash upon sale of the loan. For loans financed through the
warehouse financing facilities, the Company generally receives substantially all
of the loan origination and processing fees in cash at the time of the warehouse
financing facility borrowing. The Company's warehouse financing facilities
provide, in the aggregate, up to $250 million in the United States and up to
50 UKP million in the United Kingdom in repurchase agreements or secured
revolving lines of credit which are used to finance loan originations and
purchases.
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 warehouse financing facilities consist of four separate
agreements: a $125 million facility, a $100 million facility, a $25 million
facility and a 50 million UKP facility. The Company's $125 million warehouse
financing facility, which is secured by loans originated or purchased by the
Company and currently bears interest at a rate of 0.80% over the 30 day US
dollar denominated London Interbank Offered Rate ("LIBOR"), expires in June
1998. The Company's $100 million master repurchase agreement, which is secured
by loans originated or purchased by the Company and currently bears interest at
a rate of 0.25% over 30 day US dollar denominated LIBOR, expires in October
1998. The Company's $25 million master repurchase agreement, which is secured by
loans originated or purchased by the Company and currently bears interest at a
rate of 0.80% over 30 or 90 day US dollar denominated LIBOR, expires in March
1998. The Company's 50 million UKP credit facility, which is secured by loans
originated or purchased by the Company in the United Kingdom and currently bears
interest at a rate of 0.925% over 30 day sterling denominated LIBOR, expires in
August 1998. Management expects, although there can be no assurance, that the
Company will be able to maintain these warehouse financing facilities (or obtain
comparable replacement or additional financing) in the future.
23
<PAGE>
In February 1997, the Company entered into master repurchase agreements to
provide warehouse financing facilities to two mortgage banking companies
("Borrowers") that are controlled by related parties. These facilities are
secured by loans originated by the Borrowers and by personal guarantees provided
by stockholders of the Borrowers, bear interest at 10% per annum, have a
combined borrowing limit of $17 million and expire in October 1998. As of
December 31, 1997, an aggregate of $12.3 million was outstanding on these lines.
In April 1997, the Board of Directors of the Company authorized the
repurchase of up to 1.5 million shares of Class A Common Stock in open market
transactions. In connection with this program, the Company repurchased 1.2
million shares of its Class A Common Stock for $20.5 million during 1997. In
January 1998, the Board of Directors authorized the repurchase of an additional
2 million shares of the Company's Class A Common Stock.
As of December 31, 1997, the Company had commitments to fund loans of $20.4
million. Historically, approximately 55% of such commitments have ultimately
been funded. Capital expenditures totaled $6.7 million, $2.3 million and $1.3
million in 1997, 1996 and 1995, respectively. In 1997, the Company purchased an
office building for $3.4 million to house the Company's telemarketing
operations.
Prior to the IPO, the Company paid dividends, including amounts to be used by
the stockholders for the payment of personal income tax on the earnings of the S
corporation. In this regard, the Company paid dividends of $15.1 million and
$12.2 million in 1996 and 1995, respectively. In addition, in 1996, the Company
distributed S distribution notes to the stockholders of the Company totaling
$45.0 million. Proceeds from the IPO were used to pay the S distribution notes
in 1996. Since the completion of the IPO in July 1996 the Company has been taxed
as a C corporation and no cash dividends have been declared.
The Company believes that cash flows from operations, net proceeds from
securitizations and whole loan sales and the availability of funds under the
warehouse financing facilities will be sufficient to fund operating needs and
capital expenditures for the ensuing 12 months.
YEAR 2000 ISSUE
The Company has performed a preliminary review of its computer systems and
hardware to identify processes which may be affected by Year 2000 problems.
During 1998 and 1999, the Company plans to complete this review, make changes
where needed and test its computer systems and hardware to ensure the Company's
systems are Year 2000 compliant. During 1998 and 1999, the Company will also
complete a Year 2000 review of its relationships with suppliers and financial
institutions and obtain assurance, where necessary, that these entities are Year
2000 compliant. Because the majority of the Company's computer systems and
hardware have been purchased or developed recently and were designed to be Year
2000 compliant, the Company does not expect to incur significant costs in
addressing the Year 2000 issue.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings Per Shares" which is effective for annual and interim
periods ending after December 15, 1997. It supersedes the presentation of
primary earnings per share with a presentation of basic earnings per share which
does not consider the effect of common stock equivalents. The computation of
diluted earnings per share, which gives effect to all dilutive potential common
shares that were outstanding during the period, is consistent with the
computation of fully diluted earnings per share per Accounting Principles Board
opinion No. 15. The adoption of this standard did not have a material effect on
the Company's earnings per share.
In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income" which
is effective for annual and interim periods beginning after December 15, 1997.
This statement requires that all items that are required to be recognized under
accounting standards as comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
24
<PAGE>
In June 1997, FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which is effective for annual and interim
periods beginning after December 15, 1997. This statement establishes standards
for the method that public entities report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about product and services, geographical areas and major customers. The adoption
of this standard is not expected to have a material effect on the Company's
financial reporting.
In February 1998, FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits" which is effective for annual and
interim periods beginning after December 15, 1997. This statement standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures that are no longer as
useful as they were under previous statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Consolidated Financial Statements beginning on Page F-1 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is set forth under the caption
"Management" in the Company's definitive Proxy Statement (the "Proxy
Statement"), which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is set forth under the caption
"Executive Compensation" in the Proxy Statement, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities and Exchange Act of 1934 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is set forth under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement, which will be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities and Exchange Act of 1934 and is incorporated herein by
reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K
(a) 1. Financial Statements:
Consolidated Statements of Financial Condition:
December 31, 1997 and 1996 F-1
Consolidated Statements of Income: For each of the
three years in the period ended December 31, 1997 F-2
Consolidated Statements of Stockholders' Equity: For
each of the three years in the period ended
December 31, 1997. F-3
Consolidated Statements of Cash Flows: For each of the
three years in the period ended December 31, 1997 F-4
Notes to Consolidated Financial Statements: For each
of the three years in the period ended December 31, 1997 F-6
Independent Auditors' Report F-20
2. Financial Statement Schedules:
None Required.
3. Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--- ----------------------
3.1 Certificate of Incorporation of the Company (Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1,
Commission File No. 333-3633)
3.2 Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, Commission File No.
333-3633)
4.1 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1, Commission File No.
333-3633)
4.1.1 Form of Incentive Stock Option Agreement for use with 1996 Stock
Incentive Plan (Incorporated by reference to Exhibit 4.1.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, Commission File No. 0-28706)
4.1.2 Form of Non-qualified Stock Option Agreement for use with 1996 Stock
Incentive Plan (Incorporated by reference to Exhibit 4.1.2 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, Commission File No. 0-28706)
10.1 Warehouse Financing Facility dated October 29, 1993 (Incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-1, Commission File No. 333-3633)
10.2 Form of Pooling and Servicing Agreement (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1,
Commission File No. 333-3633)
10.3 Corporate Headquarters Lease (Incorporated by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1, Commission File
No. 333-3633)
10.4 S Distribution Notes (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Commission File No.
333-3633)
10.5 Mason Employment Agreement (Incorporated by reference to Exhibit 10.5
to the Company's Registration Statement on Form S-1, Commission File
No. 333-3633)
10.5.1 Mason Loan (Incorporated by reference to Exhibit 10.5.1 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, Commission File No. 0-28706)
10.6 Form of Directors' and Officers' Indemnity Agreement (Incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-1, Commission File No. 333-3633)
10.7 Master Repurchase Agreement dated as of October 31, 1997 between
Nationscapital Mortgage Corporation and the Company *
10.8 Master Repurchase Agreement dated as of October 31, 1997 between Coast
Security Mortgage Inc. and the Company *
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--- ----------------------
10.9 Chisick Employment Agreement (Incorporated by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-1, Commission
File No. 333-3633)
10.10 Reimbursement Agreement (Incorporated by reference to Exhibit 10.11 to
the Company's Registration Statement on Form S-1, Commission File No.
333-3633)
10.11 Warehouse Financing Facility dated September 5, 1996 (Incorporated by
reference to Exhibit 10.12 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1996, Commission File No.
0-28706)
10.12 Interim Warehouse and Security Agreement dated as of February 15, 1997
between Nationscapital Mortgage Corporation and the Company
(Incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1997, Commission
File No. 0-28706)
10.13 Interim Warehouse and Security Agreement dated as of February 15, 1997
between Coast Security Mortgage Inc. and the Company (Incorporated by
reference to Exhibit 10.13 to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1997, Commission File No. 0-28706)
10.14 Smith Loan (Incorporated by reference to Exhibit 10.14 to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1997,
Commission File No. 0-28706)
10.15 Building Purchase and Sale Agreement between Amresco Residential
Mortgage Corporation and the Company (Incorporated by reference to
Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997, Commission File No. 0-28706)
10.16 25,000,000 UKP Warehouse Credit Facility Agreement dated August 18,
1997 between Prudential Securities Credit Corporation and the Company
(Incorporated by reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1997, Commission
File No. 0-28706)
10.17 Master Repurchase Agreement dated as of October 27, 1997 between First
Union National Bank and the Company *
21 Subsidiaries of the Registrant *
27 Financial Data Schedule *
- ----------------
* Filed herewith.
(a) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1998
FIRST ALLIANCE CORPORATION
By: /S/ BRIAN CHISICK
-------------------------------------
Brian Chisick
President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ BRIAN CHISICK President and Chief Executive Officer, Director March 27, 1998
- ------------------------ PRINCIPAL EXECUTIVE OFFICER
Brian Chisick
/S/ MARK MASON Executive Vice President and Chief Financial Officer, March 27, 1998
- ------------------------ Director, PRINCIPAL ACCOUNTING OFFICER
Mark Mason
/S/ JEFFREY W. SMITH Executive Vice President and Chief Operating Officer, March 27, 1998
- ----------------------- Director
Jeffrey W. Smith
/S/ SARAH CHISICK Vice President, Director March 27, 1998
- -----------------------
Sarah Chisick
/S/ MERRILL BUTLER Director March 27, 1998
- -----------------------
Merrill Butler
/S/ GEORGE GIBBS, JR. Director March 27, 1998
- -----------------------
George Gibbs, Jr.
/S/ ALBERT L. LORD Director March 27, 1998
- -----------------------
Albert L. Lord
</TABLE>
26
<PAGE>
FIRST ALLIANCE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
As of December 31, 1996 and 1997 F-1
Consolidated Statements of Income
For each of the three years in the period ended December 31, 1997 F-2
Consolidated Statements of Stockholders' Equity
For each of the three years in the period ended December 31, 1997 F-3
Consolidated Statements of Cash Flows
For each of the three years in the period ended December 31, 1997 F-4
Notes to Consolidated Financial Statements
For each of the three years in the period ended December 31, 1997 F-6
Independent Auditors' Report F-20
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<CAPTION>
December 31,
-------------------------
1996 1997
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents................................................... $ 27,414 $ 14,032
Receivable from trusts...................................................... 2,671 3,085
Loans held for sale......................................................... 11,023 54,872
Warehouse financing receivable.............................................. - 12,324
Loans receivable held for investment........................................ 2,432 2,082
Residual interests in securities - at fair value............................ 29,253 50,238
Mortgage servicing rights................................................... 6,025 9,240
Property, net............................................................... 3,410 8,587
Deferred taxes.............................................................. 3,101 -
Prepaid expenses and other assets........................................... 2,128 3,687
------------ ------------
Total assets............................................................. $ 87,457 $ 158,147
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse financing facilities.............................................. $ - $ 57,742
Accounts payable and accrued liabilities.................................... 3,952 4,769
Income taxes payable........................................................ 5,396 3,664
Deferred taxes.............................................................. - 670
Notes payable............................................................... 131 25
------------ ------------
Total liabilities........................................................ 9,479 66,870
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock $.01 par value: 1,000,000 shares authorized; no shares
outstanding..............................................................
Class A Common Stock, $.01 par value; 25,000,000 shares authorized; shares
issued and outstanding: 11,265,375 at December 31, 1997, 6,037,500 at December
31,1996.................................................................. 60 112
Class B Common Stock, $.01 par value; 15,000,000 shares authorized; shares
issued and outstanding: 10,956,270 at December 31, 1997, 16,125,000 at December
31, 1996................................................................. 161 110
Additional paid in capital.................................................. 64,570 65,321
Retained earnings........................................................... 14,338 47,110
Treasury stock - at cost: 1,169,300 shares at December 31, 1997............. (20,544)
Deferred stock compensation................................................. (1,113) (765)
Foreign currency translation................................................ (38) (67)
------------ ------------
Total stockholders' equity............................................... 77,978 91,277
------------ ------------
Total liabilities and stockholders' equity............................... $ 87,457 $ 158,147
============ ============
</TABLE>
See notes to consolidated financial statements
F-1
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
<CAPTION>
Years Ended December 31,
--------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
Loan origination and sale................................... $ 35,466 $ 48,171 $ 66,678
Loan servicing and other fees............................... 8,614 8,854 7,544
Interest and other.......................................... 14,800 13,846 21,427
------------ ------------ ------------
Total revenue............................................. 58,880 70,871 95,649
------------ ------------ ------------
EXPENSE:
Compensation and benefits................................... 10,416 15,488 19,341
Advertising................................................. 4,345 4,191 6,099
Professional services and other fees........................ 1,999 1,946 3,196
Facilities and insurance.................................... 2,148 2,511 3,362
Supplies.................................................... 1,214 1,575 2,416
Depreciation and amortization............................... 907 838 924
Interest.................................................... 4,167 2,655 3,164
Legal....................................................... 1,491 917 2,009
Travel and training......................................... 797 1,163 1,710
Other ...................................................... 376 1,348 783
------------ ------------ ------------
Total expense............................................ 27,860 32,632 43,004
------------ ------------ ------------
INCOME BEFORE INCOME TAX PROVISION............................. 31,020 38,239 52,645
INCOME TAX PROVISION........................................... 478 6,100 19,873
------------ ------------ ------------
NET INCOME..................................................... $ 30,542 $ 32,139 $ 32,772
============ ============ ============
NET INCOME PER SHARE:
Basic....................................................... $ 1.91 $ 1.72 $ 1.50
============ ============ ============
Diluted..................................................... $ 1.91 $ 1.72 $ 1.49
============ ============ ============
Weighted average number of common shares outstanding:
Basic....................................................... 15,963,750 18,638,423 21,851,732
Diluted..................................................... 15,963,750 18,672,872 22,030,438
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<CAPTION>
Foreign
Additional Deferred Currency Total
Class A Common Class B Common Paid in Retained Treasury Stock Stock Translation Stockholders'
Stock Stock
Shares Amount Shares Amount Capital Earnings Shares Amount Compensation Adjustment Equity
--------- ------- --------- ------- --------- ---------- -------- -------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January
1, 1995........ 15,963,750 $ 42 23,942 $ 23,984
Dividends........ (12,205) (12,205)
Net income....... 30,542 30,542
--------- ------- --------- ------- --------- ---------- -------- -------- -------------- ----------- -------------
Balance December
31, 1995...... 15,963,750 42 42,279 42,321
Dividends....... (15,085) (15,085)
Distribution of
S distribution
notes......... (44,995) (44,995)
Net income...... 32,139 32,139
Issuance of
restricted
stock......... 161,250 119 $ 1,481 $ (1,600)
Initial public
offering of
stock.........6,037,500 $ 60 63,089 63,149
Amortization of
deferred stock
compensation.. 487 487
Foreign currency
translation
adjustment.... $ (38) (38)
--------- ------- --------- ------- --------- ---------- -------- -------- -------------- ----------- -------------
Balance December
31, 1996......6,037,500 60 16,125,000 161 64,570 14,338 (1,113) (38) 77,978
Net income...... 32,772 32,772
Issuance of
stock..... 59,145 1 670 671
Tax benefit
from exercise
of stock
options....... 81 81
Purchase of
treasury
stock......... 1,169,300 $(20,544) (20,544)
Conversion of
Class B Stock
to Class A
Stock.........5,168,730 51 (5,168,730) (51)
Amortization of
deferred stock
compensation 348 348
Foreign currency
translation
adjustment.... (29) (29)
--------- ------- --------- ------- --------- ---------- -------- -------- -------------- ----------- -------------
Balance December
31, 1997.....11,265,375 $ 112 10,956,270 $ 110 $ 65,321 $ 47,110 1,169,300 $(20,544)$ (765) $ (67) $ 91,277
========== ======= ========= ======= ========= ========== ======== ======== ============== =========== =============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<CAPTION>
Years Ended December 31,
--------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 30,542 $ 32,139 $ 32,772
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Capitalized residual interests and mortgage servicing rights (9,908) (12,515) (23,220)
Deferred income taxes...................................... 73 (3,028) 3,774
Net accretion of residual interests in securities.......... (2,048) (850) (3,837)
Amortization of mortgage servicing rights.................. 638 1,813 2,857
Depreciation and amortization.............................. 907 838 923
Deferred stock compensation................................ - 487 348
Accretion of discounts on loan receivable.................. (1,022) (268) (143)
Foreign currency transaction (gain) loss .................. - (188) 146
Loss on sales of property.................................. 46 414 70
Changes in assets and liabilities:
Receivable from trusts..................................... (758) 1,993 (414)
Loans held for sale........................................ (6,068) 12,112 (44,416)
Prepaid expenses and other assets.......................... (2,253) 1,681 (1,562)
Accounts payable and accrued liabilities................... (4,169) (1,282) 816
Income taxes payable....................................... - 5,396 (1,651)
------------ ------------ ------------
Net cash provided by (used in) operating activities..... 5,980 38,742 (33,537)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances on warehouse financing receivable..................... - - (12,324)
Capital expenditures........................................... (1,333) (2,286) (6,653)
Collections on loans receivable held for investment............ 2,880 1,518 954
Proceeds from sales of property................................ 552 1,748 645
Loans receivable held for investment issued.................... (1,579)
------------ ------------ ------------
Net cash provided by (used in) investing activities...... 520 980 (17,378)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on warehouse financing facilities.. 4,843 (18,233) 57,641
Purchase of treasury stock..................................... - - (20,544)
Proceeds from issuance of stock (net of issuance costs)........ - 63,149 671
Payments on notes payable...................................... (417) (1,163) (188)
Payments on S distribution notes............................... - (44,995) -
Cash dividends................................................. (12,205) (15,085) -
Proceeds from issuance of notes payable to stockholders........ 4,500 1,000 -
Payments on notes payable to stockholders...................... (4,500) (1,000) -
------------ ------------ ------------
Net cash (used in) provided by financing activities...... (7,779) (16,327) 37,580
------------ ------------ ------------
Effect of exchange rate changes on cash........................ - - (47)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........... (1,279) 23,395 (13,382)
CASH AND CASH EQUIVALENTS, beginning of period................. 5,298 4,019 27,414
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period ...................... $ 4,019 $ 27,414 $ 14,032
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(Dollars in Thousands)
<CAPTION>
Years Ended December 31,
--------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL INFORMATION:
Interest paid.................................................. $ 4,114 $ 2,735 $ 2,694
============ ============ ============
Income taxes paid.............................................. $ 486 $ 3,686 $ 17,764
============ ============ ============
SUPPLEMENTAL INFORMATION ON NONCASH INVESTING
AND FINANCING ACTIVITIES:
Transfer of loans held for sale to loans receivable held for
investment $ 1,421 $ 594
============ ============
Distribution of S distribution notes........................... $ 44,995
============
Grant of restricted stock...................................... $ 1,600
============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of First Alliance Corporation ("FACO") and its subsidiaries
(collectively the "Company"). The Company is a financial services organization
principally engaged in mortgage loan origination, purchases, sales and
servicing. The majority of the Company's loans are made to owners of single
family residences who use the loan proceeds for such purposes as debt
consolidation and financing of home improvements. The Company sells loans to
investors and wholesale purchasers or securitizes them in trusts. A significant
portion of the loans are securitized with the Company retaining the right to
service the loans. The Company is currently licensed as a consumer finance
lender in eighteen states, the District of Columbia and the United Kingdom. The
Company's business may be affected by many factors including real estate and
other asset values, the level of and fluctuations in interest rates, changes in
the securitization market and competition.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles. All significant intercompany accounts
and transactions have been eliminated in consolidation.
In July and August 1996, FACO completed an initial public offering (the
"Offering") whereby 6,037,500 shares of its Class A Common Stock were sold to
the public resulting in gross proceeds of $68.4 million. Concurrently,
16,125,000 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. 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.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
RECEIVABLE FROM TRUSTS - In the normal course of servicing loans previously
securitized, the Company advances payments and other costs to the securitization
trusts. In such cases, funds advanced are reflected in the consolidated
statements of financial condition as receivable from trusts. Advances are
recovered through subsequent collections from the trusts or borrowers.
LOANS - Loans held for sale are loans the Company plans to sell or securitize
which are carried at the lower of aggregate cost or market value. Loan
origination and processing fees and related direct origination costs are
deferred until the related loan is sold. Loans receivable held for investment
are loans the Company has purchased or originated and has the intent and ability
to hold to maturity. Loan origination and processing fees and related direct
origination costs associated with loans receivable held for investment are
deferred and offset against the related loans, and the net fee or cost is
amortized into interest income over the contractual lives of the related loans.
Loans transferred from loans held for sale to loans receivable held for
investment are transferred at the lower of cost or market value. When a loan
becomes over 90 days contractually delinquent, it is placed on non-accrual
status and unpaid interest income is reversed. While a loan is on non-accrual
status, interest is recognized only as cash is received.
ALLOWANCES FOR ESTIMATED LOSSES ON LOANS AND REAL ESTATE OWNED - The
allowances for estimated losses on loans and real estate owned (REO) represent
the Company's estimate of identified and unidentified losses. These estimates,
while based upon historical loss experience and other relevant data, are
ultimately subjective and inherently uncertain. The Company has established
valuation allowances for estimated losses on specific loans and REO. When these
estimated losses are determined to be permanent, such as when a loan is
foreclosed and the related property is transferred to REO, specific valuation
allowances are charged off and are then reflected as writedowns.
F-6
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
RESIDUAL INTERESTS IN SECURITIES - The Company securitizes a majority of
loans held for sale in a trust. The trust is a multi-class security which
derives its cash flow from a pool of mortgages. The regular interests of the
securitization trusts are sold and the residual interests are retained by the
Company. The documents governing the Company's securitizations require the
Company to establish initial overcollateralization or build
overcollateralization levels through retention of distributions by the
securitization trust otherwise payable to the Company as the residual interest
holder. This overcollateralization causes the aggregate principal amount of the
loans in the related pool and/or cash reserves to exceed the aggregate principal
balance of the outstanding regular interests. Such excess amounts serve as
credit enhancement for the regular interests of the related securitization
trust. To the extent that borrowers default on the payment of principal or
interest on the loans, losses will reduce the overcollateralization to the
extent that funds are available. If payment defaults exceed the amount of
overcollateralization, as applicable, the insurance policy maintained by the
related securitization trust will pay any further losses experienced by holders
of the regular interests in the related securitization trust. The Company does
not have any recourse obligations for credit losses in the securitization trust.
The Company classifies residual interests as trading securities which are
carried at fair value with any unrealized gains or losses recorded in the
results of operations in the period of the change in fair value. Valuations at
origination and at each reporting period are based on discounted cash flow
analyses. The cash flows are estimated as the excess of the weighted average
coupon on each pool of underlying mortgages over the sum of the pass-through
interest rates on the regular interests of the related securitization trust,
servicing fees, trustee fees, insurance fees, and an estimate of annual future
loan losses. These cash flows are projected over the life of the loans using
prepayment, default, loss, and interest rate assumptions that market
participants would use for similar financial instruments and are discounted
using an interest rate that a purchaser unrelated to the seller of such a
financial instrument would demand. The valuation includes consideration of
characteristics of the loans including loan type and size, interest rate,
origination date, term and geographic location. The Company also uses other
available information such as externally prepared reports on prepayment rates,
collateral value, economic forecasts and historical default and prepayment rates
of the portfolio under review. The Company utilized estimated annual losses of
0.5% and weighted average discount rates of 15% for 1997 and 18% for 1996 and
1995, to value residual interests. Prepayment assumptions used to value residual
interests at origination utilized constant prepayment rates, ranging from 25% to
40%, based on the experience of the Company's overall servicing portfolio during
the previous twelve months. Prepayment assumptions used to value residual
interests at each reporting period subsequent to origination utilized constant
prepayment rates, ranging from 25% to 75%, equal to the higher of (i) the
constant prepayment rate experience of the related securitization during the
previous twelve months or (ii) the constant prepayment rate experience of the
Company's overall servicing portfolio during the previous twelve months. To the
Company's knowledge, there is no active market for the sale of these residual
interests. The range of possible values attributable to the factors used in
determining fair value is broad. Accordingly, the Company's estimate of fair
value is subjective. During 1997, the Company recorded aggregate unrealized
gains in the value of its residual interests of $3.1 million. These unrealized
gains are included in loan origination and sale revenue.
MORTGAGE SERVICING RIGHTS - Upon the sale or securitization of servicing
retained loans, the Company capitalizes the costs associated with the right to
service mortgage loans based on their relative fair values. The Company
determines the fair value of the servicing rights based on the present value of
estimated net future cash flows related to servicing income. Assumptions used to
value mortgage servicing rights are consistent with those used to value residual
interests. The cost allocated to the mortgage servicing rights is amortized in
proportion to and over the period of estimated net future servicing fee income.
F-7
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
The Company capitalized $6,073,000, $3,817,000 and $3,896,000 of mortgage
servicing rights for the years ended December 31, 1997, 1996 and 1995,
respectively. During the same periods, related amortization of such mortgage
servicing rights was $2,708,000, $1,631,000 and $208,000, respectively. The
Company periodically evaluates capitalized mortgage servicing rights for
impairment, which represents the excess of unamortized cost over fair value.
This review is performed on a disaggregated basis based on loan type. The
Company generally makes loans to credit impaired borrowers whose borrowing needs
may not be met by traditional financial institutions due to credit exceptions.
The Company has found that credit impaired borrowers are payment sensitive
rather than interest rate sensitive. Therefore, the Company does not consider
interest rates a predominant risk characteristic for purposes of evaluating
impairment. Impairment, if it occurs, is recognized in a valuation allowance for
each pool in the period of impairment. At December 31, 1997, the estimated fair
value of mortgage servicing rights was $10.2 million and no valuation allowance
existed.
PROPERTY - Property is stated at cost and depreciated over the estimated
useful lives of the assets using straight line or accelerated methods. Leasehold
improvements are amortized on the straight-line method over the lesser of the
useful lives of the assets or the terms of the related leases. Useful lives
generally range from three to seven years.
REAL ESTATE OWNED - Real estate acquired in settlement of loans generally
results when property collateralizing a loan is foreclosed upon or otherwise
acquired by the Company in satisfaction of the loan. Real estate acquired
through foreclosure is carried at either the lower of fair value less costs to
dispose or the recorded investment in the loan. Fair value is based on the net
amount that the Company could reasonably expect to receive for the asset in a
current sale between a willing buyer and a willing seller, that is, other than
in a forced or liquidation sale.
Adjustments to the carrying value of REO are made through valuation
allowances and chargeoffs recognized through a charge to earnings.
REVENUE RECOGNITION - The Company derives its revenue principally from gains
on sales of loans, fees for the origination of loans, loan servicing fees and
interest income. The Company sells its loans through securitization and whole
loan sales. Revenue from loans pooled and securitized or sold in the secondary
market is recognized when such loan pools are sold. The Company retains the
right to service all loans it securitizes. The Company receives a management fee
for servicing loans based on a fixed percentage of the declining principal
balance of securitized loan pools and other ancillary and prepayment fees
associated with the servicing of such loans. The Company has historically
retained a residual interest in the securitization trusts.
Gains on servicing retained sales of loans through securitization represent
the difference between the net proceeds to the Company in the securitization and
the allocated cost of loans securitized. 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 residual interests and the mortgage servicing rights
retained by the Company based upon their relative fair values. The net carrying
value of originated loans is equal to their principal balance less net deferred
origination fees. At origination, the Company classifies the residual interests
as trading securities, which are carried at fair value. The difference between
the fair value of residual interests and their allocated cost is recorded as
gain on securitization and is included in loan origination and sale revenue. In
1997, the difference between the allocated cost and the fair value of originated
residual interests was $2,309,000. Gains on servicing released whole loan sales
equal the difference between the net proceeds to the Company from such sales and
the loans' acquisition costs or net carrying values.
Loan servicing and other fees are recorded as earned.
F-8
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Interest income is recorded as earned. Interest income represents the
interest earned on loans held for sale during the period prior to their
securitization or sale, loans receivable held for investment, residual interests
and cash equivalents. At the end of each quarter, in accordance with Emerging
Issues Task Force Issue No. 89-4, the Company computes an effective yield based
on the carrying amount of each residual interest and its then-current estimate
of future cash flows. This yield is then used to accrue interest income on the
residual interest in the subsequent quarter. As of December 31, 1997, the
weighted average effective yield of the Company's residual interests was 29%.
INCOME TAXES - Deferred tax assets and liabilities are determined based on
temporary differences between financial reporting and tax basis of assets and
liabilities and are measured by applying enacted tax rates and laws to taxable
years in which such temporary differences are expected to be recovered or
settled. The affect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
STOCK SPLIT - In October 1997 the Board of Directors authorized a
three-for-two stock split to be effected in the form of a stock dividend. The
stock dividend was distributed on October 31, 1997, to holders of record on
October 15, 1997. All balances and transactions in common stock and additional
paid in capital and all share and per share data, including shares issued and
outstanding, shares repurchased and net income per share, have been restated to
reflect the stock dividend. All outstanding options under the Company's stock
incentive plan have been adjusted for the effect of the stock dividend.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
FOREIGN CURRENCY TRANSLATION - The financial statements of the Company's
United Kingdom subsidiary were prepared in pounds sterling, its functional
currency, and translated into dollars at the current exchange rate at the end of
the period for the statements of financial condition and at a weighted average
rate for the period for the statements of income. Translation adjustments are
reflected as foreign currency translation adjustments in stockholders' equity
and accordingly have no effect on income. Foreign currency transaction gains and
losses for the Company's United Kingdom subsidiary are included in income.
RECENT ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share" which is effective for annual and interim
periods ending after December 15, 1997, and requires retroactive application to
all periods presented. It supersedes the presentation of primary earnings per
share with a presentation of basic earnings per share which does not consider
the effect of common stock equivalents. The computation of diluted earnings per
share, which gives effect to all dilutive potential common shares that were
outstanding during the period, is consistent with the computation of fully
diluted earnings per share per Accounting Principles Board Opinion No. 15. The
adoption of this standard did not have a material effect on the Company's net
income per share in 1997, 1996 and 1995.
In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income" which
is effective for annual and interim periods beginning after December 15, 1997.
This statement requires that all items that are required to be recognized under
accounting standards as comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
F-9
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
In June 1997, FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which is effective for annual and interim
periods beginning after December 15, 1997. This statement establishes standards
for the method that public entities report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about product and services, geographical areas and major customers. The adoption
of this standard is not expected to have a material effect on the Company's
financial reporting.
In February 1998, FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits" which is effective for annual and
interim periods beginning after December 15, 1997. This statement standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures that are no longer as
useful as they were under previous statements.
RECLASSIFICATIONS - Certain reclassifications have been made to conform the
1996 and 1995 consolidated financial statements to the 1997 presentation.
NOTE 2. LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment are secured principally by single family
residences. The loans bear interest at fixed rates ranging up to 16.5% per annum
and are due in monthly installments of principal and interest through September
2027.
NOTE 3. PROPERTY
Property consists of the following at December 31:
1996 1997
------------ ------------
(Dollars in thousands)
Office equipment................................$ 4,218 6,835
Land............................................ - 2,100
Building........................................ 141 1,425
Computer software............................... 647 841
Vehicles........................................ 396 314
Leasehold improvements.......................... 78 287
Real estate owned............................... 312
------------ ------------
Property, gross................................. 5,792 11,802
Less accumulated depreciation and
amortization.................................. ( 2,382) (3,215)
------------ ------------
Property, net...................................$ 3,410 8,587
============ ============
NOTE 4. SERVICING PORTFOLIO
Trust and other custodial funds, relating to loans serviced for others,
totaled $25.3 million and $14.5 million at December 31, 1997 and 1996,
respectively. Such funds, which are maintained in separate bank accounts, are
excluded from the Company's assets and liabilities.
Total loans serviced amounted to $799.1 million and $641.2 million at
December 31, 1997 and 1996, respectively.
F-10
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
NOTE 5. WAREHOUSE FINANCING FACILITIES AND WAREHOUSE FINANCING RECEIVABLE
The Company has four separate financing facilities. The first facility is a
line of credit which allows the Company to borrow and repay during a 90 day
revolving period up to $125 million. The second facility is a master repurchase
agreement which allows the Company to borrow and repay during the term up to
$100 million. The third facility is also a master repurchase agreement which
allows the Company to borrow and repay during the term up to $25 million. The
fourth facility is a line of credit which allows the Company to borrow and repay
during the term up to 25 million UKP. The first three facilities bear
interest at a variable rate based upon the United States dollar denominated
London Interbank Offered Rate (LIBOR). The fourth facility bears interest at a
variable rate based upon sterling denominated LIBOR. Interest is payable monthly
on all four facilities. The facilities expire or are renewable by the lender at
the following dates: the first facility, June 1998; the second facility, October
1998; the third facility, March 1998; and the fourth facility, August 1998.
Outstanding borrowings under these facilities are collateralized by loans held
for sale. Upon the sale or securitization of such loans, borrowings are repaid.
These facilities contain certain affirmative and negative covenants with which
the Company was in compliance at December 31, 1997. In February 1998, the
borrowing limit of the fourth facility was increased to 50 million UKP.
The following table presents data on the lines of credit for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average interest rate for the period.............. 7.10% 6.30% 6.67%
Weighted average interest rate at the end of the period.... 6.56% 6.30% 7.20%
Average amount outstanding for the period..................$ 52,610 $ 30,507 $ 46,596
Maximum amount outstanding at any month-end................$ 108,217 $ 65,262 $ 124,702
</TABLE>
In 1997, the Company entered into agreements to provide warehouse financing
facilities to two mortgage banking companies ("Borrowers") that are controlled
by related parties. These facilities are secured by loans originated by the
Borrowers and by personal guarantees provided by stockholders of the Borrowers,
bear interest at 10% per annum, have a combined borrowing limit of $17 million
and expire in October 1998. As of December 31, 1997, an aggregate of $12.3
million was outstanding on these lines.
NOTE 6. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution plan, which was established in
1994, available to all employees who have been with the Company for six months
and have reached the age of 21. Employees may generally contribute up to 15% of
their salary each year and the Company, at its discretion, may match up to 25%
of the first 7% contributed by the employee. The Company's contribution expense
was $175,000, $120,000 and $97,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
F-11
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
NOTE 7. INCOME TAXES
Through the date of the Offering in 1996 and in 1995 the Company elected to
be treated for Federal income and certain state tax purposes as an S corporation
whereby its taxable income was included in the individual returns of the
stockholders. As an S corporation, the Company was subject to certain state
taxes, primarily in California. Upon consummation of the Offering, the Company
became a C corporation subject to Federal and state income taxes. The income tax
provision for 1996 represents S corporation taxes prior to the Offering, C
corporation taxes subsequent to the Offering and net deferred tax assets
recognized upon the conversion from an S corporation to a C corporation. Taxes
for 1995 represent certain state taxes. The reconciliation of income tax from
continuing operations computed at the Federal statutory tax rate to the
Company's effective income tax rate is as follows for the years ended December
31:
1996 1997
------------ ------------
Tax at Federal statutory rate................... 35.0 % 35.0 %
State income taxes, net of Federal benefit...... 3.9 4.0
Benefit for S corporation period taxation....... (14.5) -
Effect of conversion to C corporation........... (8.4) -
Other........................................... - (1.2)
------------ ------------
Effective rate.................................. 16.0 % 37.8 %
============ ============
The components of the provision for income taxes are as follows for the years
ended December 31:
1995 1996 1997
------------ ------------ ------------
(Dollars in thousands)
Current:
Federal........................ $ - $ 7,204 $ 14,299
State.......................... 405 1,924 1,805
------------ ------------ ------------
Total current..................... 405 9,128 16,104
------------- ------------ ------------
Deferred:
Federal........................ - (3,289) 3,778
State.......................... 73 261 703
Foreign........................ - - (712)
------------- ------------ ------------
Total deferred ................... 73 (3,028) 3,769
------------- ------------ ------------
Total.............................$ 478 $ 6,100 $ 19,873
============= ============ ============
F-12
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Deferred tax assets and liabilities reflect the temporary differences between
financial reporting and tax basis of assets and liabilities and are measured by
applying enacted tax rates and laws to taxable years in which such temporary
differences are expected to be recovered or settled. The following are the
significant components of the Company's deferred tax assets and liabilities as
of December 31:
1996 1997
------------ ------------
(Dollars in thousands)
Deferred tax assets:
Residual interests............................ $ 3,209 $ 1,084
Foreign loss carry forward.................... - 963
State taxes................................... 535 786
Mark-to-market on loans held for sale......... 700 368
Legal expenses................................ 1,393 78
Other......................................... 579 224
------------ ------------
Total..........................................$ 6,416 $ 3,503
============= ============
Deferred tax liabilities:
Mortgage servicing rights.....................$ 2,585 $ 3,465
Other ........................................ 730 708
------------- ------------
Total..........................................$ 3,315 $ 4,173
============= ============
NOTE 8. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK
The Company's operations are conducted from leased facilities located in
various areas of the United States and the United Kingdom. These leases have
clauses which provide for increases in rent based on increases in the cost of
living index and options for renewal. The future minimum lease payments are as
follows:
Years Ending December 31: (Dollars in
thousands)
1998........................................................ $ 1,840
1999........................................................ 1,614
2000........................................................ 1,536
2001........................................................ 1,427
2002........................................................ 1,019
Thereafter.................................................. 78
In the ordinary course of business, the Company has liability under
representations and warranties made to purchasers and insurers of mortgage
loans. Under certain circumstances, the Company may become liable for the unpaid
principal and interest on defaulted loans or other loans if there has been a
breach of representation or warranties.
The Company has negotiated employment agreements with certain officers. These
agreements provide for the payment of base salaries, the issuance of common
stock subject to certain restrictions and the payment of severance benefits upon
termination.
The Company is involved in certain litigation arising in the normal course of
business. The Company believes that any liability with respect to such legal
actions, individually or in the aggregate, is not likely to be material to the
Company's consolidated financial position or consolidated results of operations.
F-13
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
At December 31, 1997, loans related to property located in the state of
California comprised approximately 50% of the total serviced loan portfolio
while no other state comprised more than 7%.
The Company funds substantially all of the loans it originates or purchases
through borrowings under its warehouse financing facilities and internally
generated funds. These borrowings are in turn repaid with the proceeds received
by the Company from selling such loans through loan sales or securitizations.
Any failure to renew or obtain adequate funding under those warehouse financing
facilities, or other borrowings, or any substantial reduction in the size of or
pricing in the markets for the Company's loans, could have a material adverse
effect on the Company's operations. To the extent that the Company is not
successful in maintaining or replacing existing financing, it would have to
curtail its loan production activities or sell loans earlier than is optimal,
thereby having a material adverse effect on the Company's consolidated financial
condition and consolidated results of operations.
Since 1992, the Company has pooled and sold through securitizations an
increasing percentage of the loans which it originates. The Company derives a
significant portion of its income by recognizing gains upon the sale of loans
through securitizations. These gains are due in part to the value recorded at
the time of sale of residual interests and retained mortgage servicing rights.
Adverse changes in the securitization market could impair the Company's ability
to purchase and sell loans through securitizations on a favorable or timely
basis. Any such impairment could have a material adverse effect upon the
Company's consolidated financial condition and consolidated results of
operations.
The Company has relied on credit enhancement to achieve a "AAA/aaa" rating
for the regular interests of the trusts in its securitizations. The credit
enhancement has generally been in the form of an insurance policy issued by an
insurance company insuring the timely repayment of the regular interests in each
of the securitization trusts. There can be no assurance that the Company will be
able to obtain credit enhancement in any form from the current insurer or any
other provider of credit enhancement on acceptable terms or that future
securitizations will be similarly rated. A downgrading of the insurer's credit
rating or its withdrawal of credit enhancement could have a material adverse
effect on the Company's consolidated financial condition and consolidated
results of operations.
NOTE 9. STOCKHOLDERS' EQUITY
The Company's shares of Class A and Class B Common Stock are identical,
except with respect to voting rights and the right to convert Class B Common
Stock to Class A Common Stock. Holders of Class A Common Stock are entitled to
one vote for each share held of record, and holders of Class B Common Stock are
entitled to four votes for each share held of record. Each share of Class B
Common Stock is freely convertible into one share of Class A Common Stock at the
option of the Class B stockholder. Shares of Class B Common Stock shall be
automatically converted to Class A Common Stock upon the transfer of Class B
Common Stock to a third party or when the number of shares of Class B Common
Stock represents less than 10% of the total number of shares of Common Stock
outstanding.
During 1996, FAMCO distributed S distribution notes of $45.0 million to its
stockholders. Such amount has been recorded as a dividend to Class B common
stockholders. In 1996, payments on the S distribution notes of $45.0 million
were made by the Company using proceeds from the Offering.
On May 11, 1996, the Company's Board of Directors approved a stock split of
its common stock whereby approximately 710 shares of common stock were issued
for each outstanding share of common stock. All share and per share amounts
included in the accompanying consolidated financial statements and footnotes
have been restated to reflect the stock split.
F-14
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
In June 1996, FAMCO granted 161,250 shares of restricted common stock to an
officer of the Company. These shares, which were exchanged for 161,250 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 was 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 1997 and 1996, 36,053 and 43,927 shares of such restricted
Class B Common Stock, respectively, have vested. During 1997 and 1996, $0.3
million and $0.5 million of compensation expense, respectively, was recognized.
In July 1996, the shareholders approved a stock incentive plan for directors,
officers and other key employees of the Company, under which 963,750 shares of
Class A Common Stock were available for grant. Under the plan, 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. The following is a summary of
changes in the stock incentive plan during the years ended December 31:
<TABLE>
<CAPTION>
1996 1997
------------------------- -------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Beginning of period........................ - - 793,625 $ 11.33
Grants..................................... 793,625 $ 11.33 117,779 17.04
Exercises.................................. - - (59,163) 11.33
Cancellations.............................. - - (37,169) 11.33
------------ ------------
End of period.............................. 793,625 $ 11.33 815,072 $ 12.16
============ ============
</TABLE>
Summary information related to stock options outstanding as of December 31,
1997 is as follows:
<TABLE>
<CAPTION>
Remaining
Exercise Options Contractual
Price Outstanding Life (months) Exercisable
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
$11.33 697,293 103 140,482
$13.59 17,090 112 4,273
$15.50 53,226 119 -
$16.75 5,970 119 -
$19.09 20,964 114 -
$21.92 20,529 117 -
------------ -----------
Total...................................... 815,072 144,755
============ ===========
Combined weighted average.................. 105
</TABLE>
F-15
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
The Company accounts for its stock incentive plan based on the intrinsic
value of a grant as of the date of the grant in accordance with Accounting
Principles Board Opinion No. 25. Accordingly, no compensation expenses has been
recognized in 1997 or 1996 for options granted under the Company's stock
incentive plan. Had compensation cost been recognized in accordance with the
fair value provisions of SFAS No. 123, pro forma net income would have been
$31.2 million and $30.7 million in 1997 and 1996, respectively, and net income
per share (basic and diluted) would have been $1.43 and $1.64 in 1997 and 1996,
respectively. The fair value of each option grant, a weighted average of $9.85
and $8.57 for options granted in 1997 and 1996, respectively, was estimated as
of the date of grant using the Black-Scholes option pricing model. The Company's
calculations are based on a single option valuation approach and forfeitures are
recognized as they occur. The weighted average assumptions used for grants in
1997 were: no dividend yield; expected volatility ranging from 27.54% to 37.74%;
risk-free interest rate of 6.00%; and expected lives of 10 years. The weighted
average assumptions used for grants in 1996 were: no dividend yield; expected
volatility of 58.78%; risk-free interest rate of 7.00%; and expected lives of 10
years.
In April 1997, the Board of Directors approved a share repurchase program
under which the Company is authorized to purchase up to 1,500,000 of its Class A
Common Stock. During 1997, the Company repurchased 1,169,300 shares at a cost of
$20,544,000. In January 1998, the Board of Directors authorized the repurchase
of an additional 2,000,000 shares of the Company's Class A Common Stock.
NOTE 10. NET INCOME PER SHARE
A reconciliation of the numerators and denominators used in basic and
diluted net income per share are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
(Dollars in thousands)
============ ============ ============
<S> <C> <C> <C>
Net income: Basic and diluted.......................... $ 30,542 $ 32,139 $ 32,772
============ ============ ============
Weighted average number of common shares
Basic................................................ 15,963,750 18,638,423 21,851,732
Effect of dilutive securities - stock options........ - 34,449 178,706
------------ ------------ ------------
Diluted.............................................. 15,963,750 18,672,872 22,030,438
============ ============ ============
Net income per share
Basic................................................ $ 1.91 $ 1.72 $ 1.50
Effect of dilutive securities - stock options........ - - 0.01
------------ ------------ ------------
Diluted.............................................. $ 1.91 $ 1.72 $ 1.49
============ ============ ============
</TABLE>
F-16
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
NOTE 11. RELATED PARTY TRANSACTIONS
For the three years ended December 31, 1997, the Company entered into
transactions with the following related parties: the principal stockholder of
the Company, entities in which the principal stockholder of the Company has a
controlling interest and companies owned by family members of the principal
stockholder of the Company. The following amounts represent related party
transactions for the years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Loans sold to related parties................................$ 3,188 $ 515 $ -
Loans purchased from related parties:
Loans purchased........................................... 24,967 31,033 68,668
Premiums paid ............................................ 193 1,208 2,658
Other fees received from related parties..................... 715 186 -
Payments to related parties:
Rent payments............................................. 18 464 521
Consulting fees........................................... 76 - -
Interest paid to stockholders on notes payable to
stockholder and
S distribution notes................................... 223 612 -
Interest received from related parties....................... - - 688
</TABLE>
The following amounts represent related party balances as of December 31:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Loans serviced for related parties...................................... $ 7,044 $ 3,882
Receivables from officers of the Company................................ 319 194
Balance outstanding on warehouse lines to related parties............... - 12,324
</TABLE>
NOTE 12. FINANCIAL INSTRUMENTS
The Company regularly securitizes and sells fixed and variable rate mortgage
loans. As part of its interest rate risk management strategy, the Company hedges
its interest rate risk related to its loans held for sale and origination
commitments by selling short or selling forward United States Treasury
Securities. For accounting purposes, selling short United States Treasury
Securities is not considered to be a hedge. Therefore, when selling short United
States Treasury Securities, the Company has recognized realized and unrealized
gains and losses on hedging activities in the period in which they occur. The
Company classifies forward sales of United States Treasury Securities as hedges
of specific loans held for sale or commitments to fund loans 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
the sale of loans hedged. Net gains and (losses) recognized on hedging
activities were $(161,000), $434,000 and $(255,000) for the years ended December
31, 1997, 1996 and 1995, respectively. The notional amount of forward sales of
United States Treasury Securities at December 31, 1997 was $11.2 million with
deferred losses of $60,000. There were no open positions or deferred gains or
losses on hedging activities at December 31, 1996.
F-17
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
The following disclosures of the estimated fair value of financial
instruments as of December 31, 1997 and 1996 are made in accordance with the
requirements of SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
<TABLE>
<CAPTION>
1996 1997
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents.........................$ 27,414 $ 27,414 $ 14,032 $ 14,032
Loans held for sale............................... 11,023 12,912 54,872 60,224
Loans receivable held for investment.............. 2,432 2,771 2,082 2,317
Warehouse financing receivables................... - - 12,324 12,324
Residual interests................................ 29,253 29,253 50,238 50,238
Liabilities:
Warehouse financing facilities.................... - - 57,742 57,742
Notes payable .................................... 131 131 25 25
</TABLE>
The fair value of loans is estimated based upon prices paid by the Company
for loans it purchases.
The fair value of warehouse financing receivables is based on rates and terms
currently available to companies of similar size as those to which the Company
has provided these facilities.
The fair value of residual interests is estimated based upon discounted cash
flows.
Rates currently available to the Company for debt with similar terms and
remaining maturities, were used to estimate the fair value of warehouse
financing facilities and the notes payable.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997 and 1996. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these consolidated financial statements since that date and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
The Company is exposed to on-balance sheet credit risk related to its loans
held for sale, residual interests and loans receivable held for investment. The
Company is exposed to off-balance sheet credit risk related to loans which the
Company has committed to originate. The Company is party to financial
instruments with off-balance sheet credit risk in the normal course of business.
These financial instruments include commitments to extend credit to borrowers.
At December 31, 1997 and 1996, the Company had outstanding commitments to extend
credit in the amounts of $20,407,000 and $7,524,000, respectively.
F-18
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
NOTE 13. DOMESTIC AND FOREIGN OPERATIONS
GEOGRAPHIC AREA - During 1997 and 1996, the Company operated in two
geographical areas consisting of the United States and the United Kingdom. There
were no significant transfers between geographical areas during such periods.
The following table represents revenue and income before income tax
provisions for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Revenue:
United States...................................................$ 70,811 $ 93,772
United Kingdom.................................................. 60 1,877
----------- -----------
Total.......................................................$ 70,871 $ 95,649
=========== ===========
Income (loss) before income tax provision:
United States...................................................$ 38,789 $ 54,680
United Kingdom.................................................. (550) (2,035)
----------- -----------
Total.......................................................$ 38,239 $ 52,645
=========== ===========
The following table represents identifiable assets of the Company as of
December 31:
</TABLE>
<TABLE>
<CAPTION>
1996 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Identifiable assets:
United States...................................................$ 84,383 $ 128,104
United Kingdom.................................................. 3,074 30,043
----------- -----------
Total.......................................................$ 87,457 $ 158,147
=========== ===========
</TABLE>
NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(Dollars in thousands except per share amounts) Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Total revenue...............................$ 14,810 $ 17,024 $ 18,922 $ 20,115
Income before income tax provision.......... 7,860 9,306 9,891 11,182
Net income.................................. 7,742 9,167 8,633 6,597
Basic net income per share................. 0.48 0.57 0.42 0.30
Diluted net income per share................ 0.48 0.57 0.42 0.30
1997
Total revenue............................... $ 21,437 $ 23,244 $ 23,395 $ 27,573
Income before income tax provision.......... 12,860 13,168 12,106 14,511
Net income.................................. 7,684 7,866 8,188 9,034
Basic net income per share.................. 0.35 0.36 0.38 0.42
Diluted net income per share................ 0.34 0.36 0.37 0.42
</TABLE>
F-19
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
First Alliance Corporation
We have audited the accompanying consolidated statements of financial condition
of First Alliance Corporation and subsidiaries (the Company) as of December 31,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion of these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of First Alliance Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
January 19, 1998
F-20
<PAGE>
<PAGE>
MASTER REPURCHASE AGREEMENT
Dated as of October 31, 1997
Between:
NATIONSCAPITAL MORTGAGE COMPANY
as Seller
and
FIRST ALLIANCE MORTGAGE CO.,
as Buyer
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in which the
Seller agrees to transfer to the Buyer mortgage loans or other assets (the
"Collateral") against the transfer of funds by the Buyer, with a simultaneous
agreement by the Buyer to transfer to the Seller such Collateral at a date
certain, against the transfer of funds by the Seller. Each such transaction
shall be referred to herein as a "Transaction" and, unless otherwise agreed in
writing, shall be governed by this Agreement.
2. DEFINITIONS
As used in this Agreement, and unless the context requires a different meaning,
the following terms shall have the meanings assigned to them below:
(a) "1934 Act" shall mean the Securities Exchange Act of 1934.
(b) "Act of Insolvency" shall mean, with respect to any party, (i)
the commencement by such party as debtor of any case or
proceeding under any bankruptcy, insolvency, reorganization,
liquidation, moratorium, dissolution, delinquency or similar law,
or such party seeking the appointment or election of a receiver,
conservator, trustee, custodian or similar official for such
party or any substantial part of its property, or the convening
of any meeting of creditors for purposes of commencing any such
case or proceeding or seeking such an appointment or election,
(ii) the commencement of any such case or proceeding against such
party, or another seeking such an appointment or election, or the
filing against a party of an application for a protective decree
under the provisions of SIPA, which (A) is consented to or not
timely contested by such party, (B) results in the entry of an
order for relief, such an appointment or election, the issuance
of such a protective decree or the entry of an order having a
similar effect, or (C) is not dismissed within 15 days, (iii) the
making by such party of a general assignment for the benefit of
creditors, or (iv) the admission in writing by such party of such
party's inability to pay such party's debts as they become due.
(c) "Additional Collateral" shall mean Mortgage Loans and/or cash
provided by the Seller to the Buyer pursuant to Paragraph 5(b)
hereof.
(d) "Additional Required Documents" shall mean the following
documents with respect to any Mortgage Loan:
(i) original disclosure statements complying with Regulation Z
("Truth in Lending") of the Board of Governors of the
Federal Reserve System and all agreements relating
thereto, if applicable;
(ii) original Equal Credit Opportunity Act notice and
additional disclosure statements or agreements relating
thereto, if applicable;
(iii) a certification as to whether or not such property falls
into a flood zone as identified by a HUD identified flood
map;
<PAGE>
(iv) an attorney's opinion of title and abstract of title or 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 Loans and qualified
to do business in the jurisdiction where the related
property is located, insuring the Seller, its successors
and assigns, as to the first priority lien of the related
Mortgage in the case of a Mortgage Loan secured by a first
priority lien and the second priority lien of the Mortgage
Loan in the case of a Purchased Loan secured by a second
lien on the related property, in the original principal
amount of the Purchased Loan; PROVIDED that the Seller
shall be the sole named insured of any such mortgage title
insurance policy, the assignment to the Buyer or the
Custodian as assignee of the Buyer of the Seller's
interest in such mortgage title insurance policy shall not
require the consent of or notification to the insurer or
the same has been obtained, and such mortgage title
insurance policy shall be in full force and effect and
will be in full force and effect and inure to the benefit
of the Buyer upon the consummation of the transactions
contemplated by this Agreement; and, PROVIDED FURTHER,
that no claims shall have been made under such mortgage
title insurance policy and no prior holder of the related
Mortgage Loan, including the Seller, shall have done, by
act or omission, anything that would impair the coverage
of such mortgage title insurance policy;
(v) a property and casualty insurance policy on the property
subject to the Mortgage Loan covering fire, hazard and
extended coverage, and if applicable, flood and earthquake
insurance, all in amounts not less than the principal
amount of the promissory note relating to the Mortgage
Loan (or the maximum amount issuable for flood insurance)
which insurance has been endorsed to provide for payment
thereof to the Seller, as mortgagee, together with written
notice to the mortgagor of the fact, if true, that
mortgagor's property lies within a flood zone;
(vi) original or copy of executed application by the obligor on
such Mortgage Loan for such Mortgage Loan;
(vii) original or copy of credit bureau report on the obligor on
such Mortgage Loan;
(viii) original HUD-1 settlement statement on such Mortgage Loan;
(ix) original complete appraisal obtained with respect to the
applicable property obtained in connection with the
Mortgage Loan;
(x) original or certified copy of mortgagee's title insurance
policy insuring the lien of the Mortgage Loan against the
applicable property; and
(xi) such other documents as may be required by the Seller's
Underwriting Standards, subject to reasonable variances
from the Underwriting Standards permitted by the Seller.
(e) "Agreement" shall mean this Master Repurchase Agreement, together
with all exhibits, schedules or amendments hereto and all
Confirmations hereunder.
(f) "Aggregate Commitment" shall have the meaning assigned to such
term in Paragraph 6.
(g) "Bankruptcy Code" shall mean Title 11 of the United States Code,
as amended.
(h) "Business Day" shall mean any day except Saturday, Sunday and any
day which is a legal holiday or a day on which banking
institutions are authorized or required by law to close in
Charlotte, North Carolina.
(i) "Buyer" shall mean First Alliance Mortgage Co., a California
corporation, with its principal place of business in Irvine,
California.
(j) "Collateral" shall have the meaning assigned to such term in
Paragraph 1.
(k) "Confirmation" shall mean a confirmation for a Transaction as
required by Paragraph 4(a) hereof, substantially in the form of
Exhibit A hereto.
(l) "Current Margin" shall mean, with respect to any date, the
difference between (i) the aggregate Market Value of all
Purchased Loans held by the Buyer on such date and (ii) the
aggregate Purchase Price paid by the Buyer for all Purchased
Loans held by the Buyer on such date.
2
<PAGE>
(m) "Custodian" shall mean The Bank of New York, a New York bank.
(n) "Default Rate" shall mean, for any day, the Pricing Rate for such
day plus 2.50%.
(o) "Eligible Mortgage Loan" shall mean a Mortgage Loan (i) with
respect to which each of the representations and warranties set
out in Exhibit B hereto is accurate and complete as of the date
of the related Confirmation (and the Seller by including any such
Mortgage Loan in any Transaction shall be deemed to so represent
and warrant to the Buyer at and as of the date of such
Transaction) and (ii) that has been outstanding no more than 182
days since its date of origination.
(p) "ERISA" shall mean the Employee Retirement Income Security Act of
1974.
(q) "FDIA" shall mean the Federal Deposit Insurance Act, as amended.
(r) "FDICIA" shall mean the Federal Deposit Insurance Corporation
Improvement Act of 1991.
(s) "Guarantor" shall mean any shareholder of Nationscapital Mortgage
Company.
(t) "Guaranty" shall mean the guaranty agreement, dated as of October
31, 1997, executed by the Guarantor in favor of the Buyer.
(u) "Income" shall mean, with respect to any Mortgage Loan at any
time, any principal thereof and all interest, dividends or other
distributions thereon.
(v) "Indemnified Parties" shall have the meaning assigned to such
term in Paragraph 15.
(w) "Margin" shall mean, with respect to any Mortgage Loan or pool of
Mortgage Loans, the difference between the Market Value of such
loan or loans and the Purchase Price for such loan or loans.
(x) "Margin Call" shall have the meaning assigned to such term in
Paragraph 5(b).
(y) "Margin Deficit" shall have the meaning assigned to such term in
Paragraph 5(b).
(z) "Market Value" shall mean, with respect to each Purchased Loan,
the market value of such Purchased Loan as determined by the
Buyer in its sole discretion.
(aa) "Mortgage Loan" shall mean a residential real estate secured
loan, including, without limitation: (i) a promissory note, any
reformation thereof and related deed of trust (or mortgage) and
security agreement; (ii) all guaranties and insurance policies,
including, without limitation, all mortgage (if applicable) and
title insurance policies and all fire and extended coverage
insurance policies and rights of the Seller to return premiums or
payments with respect thereto; and (iii) all right, title and
interest of the Seller in the property covered by such deed of
trust (or mortgage).
(bb) "Original Margin" shall mean, with respect to any date, the
difference between (i) the aggregate Market Value of all
Purchased Loans held by the Buyer on such date, determined as of
the most recent Purchase Date, and (ii) the Purchase Price paid
by the Buyer for all such Purchased Loans on such Purchase Date.
(cc) "Person" shall mean a corporation, an association, a partnership,
an organization, a business, a trust, an individual, a government
or political subdivision thereof, any governmental agency or any
other entity.
(dd) "Plan Party" shall have the meaning assigned to such term in
Paragraph 29(a).
(ee) "Price Differential" shall mean, with respect to any Transaction
as of any date, the difference between the Purchase Price paid by
the Buyer and the Repurchase Price to be paid by the Seller. The
Pricing Differential will equal 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.
(ff) "Pricing Rate" shall mean the per annum rate for determination of
the Price Differential, which rate shall be 10 percent.
3
<PAGE>
(gg) "Purchase Date" shall mean the date on which Purchased Loans are
to be transferred by the Seller to the Buyer.
(hh) "Purchased Loans" shall mean the Mortgage Loans transferred by
the Seller to the Buyer in a Transaction hereunder. The term
"Purchased Loans" with respect to any Transaction at any time
also shall include Additional Collateral delivered pursuant to
Paragraph 5(b) hereof.
(ii) "Purchase Price" shall mean the price at which Purchased Loans
are transferred by the Seller to the Buyer.
(jj) "Replacement Mortgage Loans" shall have the meaning assigned to
such term in Paragraph 13(c).
(kk) "Repurchase Date" shall mean the date on which the Seller is
required to repurchase the Purchased Loans from the Buyer, which
shall be (i) the 10th day of the calendar month in which the
Purchase Date occurs or, if such Purchase Date falls after the
10th day of such month, the 10th day of the following calendar
month (or, in each case, if such day is not a Business Day, the
next Business Day), or (ii) such earlier date as may be
determined by application of the provisions of Paragraph 13
hereof.
(ll) "Repurchase Price" shall mean the price at which Purchased Loans
are to be transferred from the Buyer to the Seller upon
termination of a Transaction, which will be determined in each
case as the sum of the Purchase Price and the Price Differential
as of the date of such determination.
(mm) "Repurchase Term" shall mean, with respect to any Transaction,
the period beginning on the Purchase Date and continuing through
the Repurchase Date.
(nn) "Required Documents" shall mean the following documents with
respect to any Mortgage Loan:
(i) the original executed and fully completed promissory note
relating to the Mortgage Loan (properly endorsed to the
Seller if purchased by the Seller from another
originator), which promissory note shall be duly endorsed
in blank without recourse by an authorized officer of the
Seller;
(ii) the original executed and fully completed mortgage or deed
of trust relating to the Mortgage Loan in proper form for
recordation in the appropriate jurisdiction and duly
recorded in the appropriate jurisdiction; PROVIDED,
HOWEVER, that a certified copy of the executed mortgage or
deed of trust relating to the Mortgage Loan may be
delivered to the Buyer in lieu of the original recorded
deed of trust or mortgage until such time as the original
recorded mortgage or deed of trust is received from the
recording jurisdiction and submitted to the Buyer; and
(iii) an original executed, fully completed and recordable but
unrecorded assignment of the mortgage or deed of trust
relating to the Mortgage Loan in proper form for
recordation in the appropriate jurisdiction (unless the
Buyer determines that under applicable state law the
assignment should be recorded in order to adequately
protect its interest, in which case the assignment shall
be recorded by the Seller and a certified true copy
thereof shall be provided to the Buyer), together with the
original or a duly certified copy of the fully completed
and proper assignment or assignments of the mortgage or
deed of trust from the original holder through any
subsequent transferees to the Seller in proper form for
recordation in the appropriate jurisdiction, duly recorded
if local requirements in the jurisdiction in which the
property is located required the recordation of such
assignment or assignments.
(oo) "SEC" shall mean the Securities and Exchange Commission.
(pp) "Servicer" shall mean Nationscapital Mortgage Company.
(qq) "SIPA" shall mean the Securities Investor Protection Act of 1970.
(rr) "Transaction" shall mean each transaction between the Seller and
the Buyer that is undertaken pursuant to a Confirmation.
(ss) "Underwriting Standards" shall mean the underwriting policies of
the Seller set forth in Exhibit C hereto.
3. INITIATION AND TERMINATION OF TRANSACTIONS
4
<PAGE>
(a) An agreement to enter into a Transaction may be made in writing
at the initiation of either the Buyer or the Seller and shall be
evidenced by a Confirmation delivered pursuant to Paragraph 4(a).
On the Purchase Date for the Transaction, the Purchased Loans
shall be transferred to the Buyer or its agent against the
transfer of the Purchase Price to an account of the Seller.
(b) The Buyer's obligation to purchase any Mortgage Loan shall be
subject to the following:
(i) The Buyer (or the Custodian if so directed by the Buyer)
shall have possession of the Required Documents for each
Mortgage Loan to be purchased; provided that such
possession may have been released to a prospective
purchaser of a Mortgage Loan (or a custodian acting on its
behalf) if the Buyer or the Custodian, as applicable, has
received a bailment letter for the related Required
Documents.
(ii) The Buyer's determination that the Mortgage Loans to be
purchased in the requested Transaction satisfy the
requirements of this Agreement.
(iii) The Seller's representations and warranties contained in
this Agreement and reaffirmed in the Confirmation shall be
true and correct.
(iv) The Purchase Price for such Transaction shall be at least
$250,000.
(v) The sum of the Purchase Price for such Transaction and the
aggregate Purchase Price paid for all Purchased Loans
owned by the Buyer immediately prior to the consummation
of the Transaction shall not exceed the Aggregate
Commitment.
(vi) No Event of Default shall have occurred under this
Agreement.
(vii) The Guaranty shall be in full force and effect.
(c) On the Repurchase Date for each Transaction, termination of the
Transaction will be effected by transfer to the Seller or its
agent of the Purchased Loans and any Income in respect thereof
received by the Buyer (and not previously credited or transferred
to, or applied to the obligations of the Seller hereunder)
against the transfer of the Repurchase Price to an account of the
Buyer.
4. TRANSACTION CONFIRMATION
(a) Upon the parties' agreement to enter into a Transaction
hereunder, the Buyer shall prepare and deliver to the Seller, at
least one Business Day prior to the Purchase Date for the
Transaction, a Confirmation for such Transaction.
(b) The Confirmation shall list the Purchased Loans and set forth (i)
the Purchase Date, (ii) the Purchase Price, (iii) the anticipated
Repurchase Date, (iv) the Pricing Rate or Repurchase Price
applicable to the Transaction, and (v) any additional terms or
conditions of the Transaction.
(c) The Confirmation, together with this Agreement, shall constitute
conclusive evidence of the terms agreed between the Buyer and the
Seller, and shall be binding upon the parties unless written
notice of objection is given by the objecting party prior to the
closing of the Transaction.
(d) In the event of any conflict between the terms of a Confirmation
and this Agreement, the Confirmation shall prevail.
5. MARGIN MAINTENANCE
(a) On Monday of each week during the Repurchase Term (or more often,
if the Buyer in its sole discretion so decides), the Buyer will
determine (i) the aggregate Market Value of all Purchased Loans
and other Collateral held by the Buyer and (ii) the Current
Margin for such date.
(b) If on any date during the term of this Agreement the Current
Margin for such date is less than the Original Margin for such
date (such shortfall, a "Margin Deficit"), the Buyer may by
notice to the Seller (such notice, a "Margin Call") require that
the Seller, at the Buyer's option, transfer to the Buyer cash or
additional Mortgage Loans reasonably acceptable to the Buyer
(collectively, "Additional Collateral"), so that the Current
Margin for such date will then equal or exceed the Original
Margin for such date; PROVIDED, HOWEVER, that the Buyer may not
make a Margin Call unless the Margin Deficit exceeds $100,000.
5
<PAGE>
(c) If any notice is given under subparagraph (b) of this Paragraph 5
on any Business Day, then the Seller shall transfer cash or
Mortgage Loans as provided in such subparagraph no later than the
close of business on the second Business Day following the date
on which such notice is given. Any cash transferred to the Buyer
pursuant to this subparagraph (c) shall be held by the Buyer for
so long as any Transaction remains in effect and shall be applied
against the Repurchase Price for any terminated Transaction on
the applicable Repurchase Date.
6. AGGREGATE COMMITMENT AND TERM
(a) The aggregate Purchase Price for all Purchased Loans owned by the
Buyer on any date shall at no time exceed $5,000,000 (the
"Aggregate Commitment").
(b) This Agreement shall continue in effect for a period of 364 days
from the date of its execution by both parties.
7. PAYMENTS ON MORTGAGE LOANS; SERVICING
The Seller shall act as servicer for all Mortgage Loans, will service all
Mortgage Loans in accordance with industry standards for loans held by third
parties and shall not sell or transfer its rights to service such loans without
the Buyer's consent. All funds received by the Seller, in its capacity as
servicer with respect to Mortgage Loans that are Purchased Loans, shall be held
by the Seller in trust for the Buyer until such Mortgage Loans have been
repurchased by the Seller; provided that all such funds may be held by the
Seller in the Seller's general servicing account.
8. REPURCHASE PRIOR TO REPURCHASE DATE
Notwithstanding any provision hereof to the contrary, (i) the Buyer may require
the Seller to repurchase any of the Purchased Loans subject to a Transaction
upon five Business Days' prior notice and (ii) the Seller shall promptly
repurchase any Purchased Loan that ceases to be an Eligible Mortgage Loan.
9. DELIVERY OF MORTGAGE LOANS
All of the Required Documents for Mortgage Loans that are to be Purchased Loans
for a Transaction shall be delivered to the Buyer (or the Custodian, if so
directed by the Buyer) at least one Business Day prior to the Purchase Date for
such Transaction.
10. REPRESENTATIONS AND WARRANTIES
(a) Each of the Buyer and the Seller represents and warrants to the
other that (i) it is duly authorized to execute and deliver this
Agreement, to enter into 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
individual signing this Agreement on its behalf is duly
authorized to do so on its behalf, (iv) it has obtained all
authorizations of any governmental body required in connection
with this Agreement and the Transactions hereunder and such
authorizations are in full force and effect and (v) the
execution, delivery and performance of this Agreement and the
Transactions hereunder will not violate any law, ordinance,
charter, bylaw or rule applicable to it or any material agreement
by which it is bound or by which any of its assets are affected.
On the Purchase Date for any Transaction the Buyer and the Seller
shall each be deemed to repeat all the foregoing representations
made by it.
(b) In addition to the foregoing, the Seller hereby represents and
warrants that, as of the date of this Agreement and as of the
Purchase Date for each Transaction:
(i) The Seller is servicing all Mortgage Loans in accordance
with industry standards for loans held by third parties.
(ii) No Event of Default has occurred or is continuing under
this Agreement.
(iii) Since the date of the most recent balance sheet or
financial statement delivered by the Seller to the Buyer
pursuant to the Agreement, there has been no material
adverse change in its financial condition or results of
operations.
6
<PAGE>
(c) The Seller hereby represents and warrants to the Buyer that, as
to each Mortgage Loan, as of the applicable Purchase Date or such
other date specified herein:
(i) The information set forth in the schedule of Mortgage
Loans attached to each Confirmation is true and correct in
all material respects.
(ii) Such Mortgage Loan is an Eligible Mortgage Loan.
11. COVENANTS
The Seller hereby covenants and agrees with the Buyer that, as long as the Buyer
has any obligation to enter into Transactions under the Agreement:
(a) The Seller shall notify the Buyer of any material default or
event of default that has occurred under any other credit
agreement for which the Seller is the primary obligor.
(b) The Seller shall hold (or deliver to the Custodian) all
Additional Required Documents for the Mortgage Loans that are
Purchased Loans in trust for the benefit of the Buyer.
(c) The Seller shall furnish or cause to be furnished to the Buyer:
(i) Within 90 days after the last day of each fiscal year of
the Seller, consolidated and consolidating statements of
income (and, in the case of the consolidated statement,
cash flows) for the Seller for such year and consolidated
and consolidating balance sheets for the Seller as of the
end of such year (with the foregoing consolidating
statements to separately display the income statement and
balance sheet of each of the Seller and its consolidated
Subsidiaries in a format reasonably acceptable to the
Buyer), presented fairly in all material respects in
accordance with GAAP and accompanied by an unqualified
report of a firm of independent certified public
accountants of nationally recognized standing; and
(ii) Within 45 days after the last day of each fiscal quarter,
(A) unaudited consolidated and consolidating statements of
income for the Seller for such quarter, and unaudited
consolidated and consolidating balance sheets for the
Seller as of the end of such quarter (with the foregoing
consolidating statements to separately display the income
and balance sheet of each of the Seller and its
consolidated subsidiaries in a format reasonably
acceptable to the Buyer), and (B) a certificate of an
officer of the Seller, whose position is vice president or
higher, stating that such financial statements are
presented fairly in all material respects and in
accordance with GAAP, subject to year-end audit
adjustments, and further certifying that neither the
Seller nor any affiliate thereof is in default under the
terms and conditions of any agreement evidencing or
securing any indebtedness of such entity.
(d) The Seller shall promptly furnish such additional financial and
other information, including, without limitation, financial
statements of the Seller, and information regarding the Purchased
Loans, as the Buyer may from time to time reasonably request.
(e) The Seller shall pay or otherwise satisfy at or before maturity
or before it becomes delinquent or accelerated, as the case may
be, all its indebtedness (including taxes), except indebtedness
being contested in good faith by appropriate proceedings and for
which provision is made to the satisfaction of the Buyer for the
payment thereof in the event the Seller is found to be obligated
to pay such indebtedness and which indebtedness is thereupon
promptly paid by the Seller.
(f) The Seller shall maintain its corporate existence and obtain and
maintain all rights, privileges, licenses, approvals, franchises,
properties and assets necessary or desirable in the normal
conduct of its business, including but not limited to all
approvals with respect to the SEC, and comply with all
contractual obligations and requirements of law (including,
without limitation, any requirements of law under or in
connection with ERISA, the federal Consumer Credit Protection
Act, the federal Real Estate Settlement Procedures Act, the
federal Equal Credit Opportunity Act, the federal
Truth-in-Lending Act, and any regulations promulgated
thereunder), except where the failure to so comply is not likely
to have a material adverse effect on the ability of the Seller to
perform under this Agreement.
7
<PAGE>
(g) The Seller shall keep proper books of record and account in which
full, true and correct entries in conformity with GAAP and all
requirements of law shall be made of all dealings and
transactions in relation to its business and activities.
(h) The Seller shall permit representatives of the Buyer to (A) visit
and inspect any of its properties and examine and make abstracts
from any of its books and records (including without limitation
books and records relating to the Purchased Loans) at any
reasonable time and as often as may reasonably be desired by the
Buyer (but, prior to the occurrence of an Event of Default, only
upon not less than two Business Days' prior notice), and (B)
discuss the business, operations, properties and financial and
other condition of the Seller with officers and employees of the
Seller, and with its independent certified public accountants;
PROVIDED, HOWEVER, that the results of any such visit,
inspection, examination, discussion or audit, to the extent such
results are proprietary and non-public, shall be maintained by
the Buyer in confidentiality except as required by law or
regulation or by any governmental agency or regulatory body
having authority over the Buyer, or to the extent such
information may be communicated to the legal counsel or auditors
of the Buyer.
(i) The Seller shall promptly give written notice to the Buyer of:
(i) the occurrence of any Event of Default;
(ii) any litigation or proceeding to which the Seller is a
party and which affects the Purchased Loans, the outcome
of which is reasonably likely to be determined adversely
to the Seller and which, if so determined, would have a
material adverse effect on the Purchased Loans, or the
consolidated business, operations, property, or financial
or other condition of the Seller taken as a whole;
(iii) a material adverse change known to responsible management
personnel of the Seller in the business, operations,
property or financial or other condition of the Seller;
and
(iv) any default by the Seller or any of the Seller's
affiliates under the terms and conditions of any agreement
evidencing or securing any indebtedness of such entity.
(j) The Seller shall pay all reasonable out-of-pocket costs and
expenses (including fees and disbursements of legal counsel)
incident to the enforcement of the Seller's obligations hereunder
or under any Confirmation, whether by judicial proceedings or
otherwise, including, without limitation, in connection with
bankruptcy, insolvency, liquidations, reorganization, moratorium
or other similar proceedings involving the Seller. The
obligations of the Seller under this Paragraph 11(j) shall be
effective and enforceable whether or not any Transaction is
outstanding hereunder and shall survive the termination of this
Agreement.
(k) The Seller shall originate or acquire Mortgage Loans only in
accordance with the Seller's Underwriting Standards in effect on
the date of origination or acquisition.
(l) The Seller shall not, directly or indirectly, create, incur,
assume or suffer to exist, any lien or other encumbrance upon the
Collateral.
(m) The Seller shall not, without providing written notice to the
Buyer, alter its current Underwriting Standards in any material
manner from those disclosed to the Buyer and attached to the
Agreement as Exhibit C.
12. EVENTS OF DEFAULT
The following shall constitute Events of Default hereunder (each, an "Event of
Default"):
(a) the Seller's failure to transfer or the Buyer's failure to
purchase Purchased Loans upon the applicable Purchase Date;
(b) the Seller's failure to repurchase or the Buyer's failure to
transfer Purchased Loans upon the applicable Repurchase Date;
(c) the Seller's or the Buyer's failure to comply with Paragraph 5
hereof;
(d) an Act of Insolvency occurs with respect to the Seller or the
Buyer;
(e) any representation or warranty made by the Seller or the Buyer in
this Agreement 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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(f) the Seller or the Buyer shall admit in writing to the other its
inability to, or its intention not to, perform any of its
obligations hereunder;
(g) if, for any reason, any Transaction is not deemed to be a
purchase and sale, and the Agreement shall for any reason cease
to create a valid, first priority security interest in any of the
Purchased Loans purported to be covered thereby;
(h) the Seller shall breach any covenant, requirement or obligation
contained in this Agreement;
(i) the Seller's obligations under any credit agreement or other
material agreement for which the Seller is the primary obligor
shall be accelerated; PROVIDED, HOWEVER, that if an Event of
Default shall occur as a result of a default under any credit
agreement or other material agreement described in this Section
12(i), and such default under such credit agreement or other
material agreement is remedied or cured by the Seller so that the
Buyer is not harmed in any material way, then such Event of
Default shall be deemed to have been remedied or cured without
further action upon the part of the Seller or the Buyer;
(j) the Seller shall fail to repurchase any Purchased Loans at the
Repurchase Price when required by Paragraph 8 of this Agreement;
(k) the Buyer or the Seller shall have reasonably determined that the
other party is or will be unable to meet its commitments under
this Agreement, shall have notified such other party of such
determination and such other party shall not have responded with
appropriate information to the contrary to the satisfaction of
the notifying party within one Business Day;
(l) in the reasonable judgment of the Buyer a material adverse change
shall have occurred in the business, operations, properties,
prospects or financial condition of the Seller; or
(m) the Seller shall merge or consolidate into any entity, unless the
surviving or resulting entity shall be acceptable to the Buyer,
in its sole discretion, and such entity expressly assumes by
written agreement, executed and delivered to the Buyer in form
and substance satisfactory to the Buyer, the performance of all
the Seller's duties and obligations hereunder; provided that a
reorganization involving only the Seller and its affiliates shall
not constitute an Event of Default.
13. REMEDIES UPON EVENT OF DEFAULT
Upon the occurrence of any Event of Default:
(a) The nondefaulting party may, at its option (which option shall be
deemed to have been exercised immediately upon the occurrence of
an Act of Insolvency), declare an Event of Default to have
occurred hereunder and, upon the exercise or deemed exercise of
such option, the Repurchase Date for each Transaction hereunder,
shall, if it has not already occurred, be deemed immediately to
occur (except that, in the event that the Purchase Date for any
Transaction has not yet occurred as of the date of such exercise
or deemed exercise, such Transaction shall be deemed immediately
canceled). The nondefaulting party shall (except upon the
occurrence of an Act of Insolvency) give notice to the defaulting
party of the exercise of such option as promptly as practicable.
(b) Upon the occurrence of an Event of Default by the Seller, if the
Buyer exercises or is deemed to have exercised the option
referred to in subparagraph (a) of this Paragraph, (i) the
Seller's obligation to repurchase all Purchased Loans, at the
Repurchase Price therefor on the Repurchase Date determined in
accordance with subparagraph (a) of this Paragraph, shall
thereupon become immediately due and payable; (ii) all Income
paid after such exercise or deemed exercise shall be retained by
the Buyer and applied to the aggregate unpaid Repurchase Price
and any other amounts owing by the Seller hereunder; (iii) the
Seller shall immediately deliver to the Buyer any Purchased Loans
that are subject to a Transaction which are then in the Seller's
possession or control; (iv) the Buyer may, without notice to the
Seller, (A) immediately sell, in a recognized market (or
otherwise in a commercially reasonable manner) at such price or
prices as the Buyer may reasonably deem satisfactory, any or all
Purchased Loans subject to such Transactions and shall apply the
proceeds thereof to the aggregate unpaid Repurchase Prices and
any other amounts owing by the Seller hereunder or (B) in its
sole discretion elect, in lieu of selling all or a portion of
such Purchased Loans, to give the Seller credit for such
Purchased Loans in an amount equal to the price therefor on such
date, obtained from a generally recognized source, against the
aggregate unpaid Repurchase Prices and any other amounts owing by
the Seller hereunder; and (v) the Buyer may refuse to enter into
any further Transactions with the Seller under this Agreement and
may determine that the Agreement is terminated.
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(c) Upon the occurrence of an Event of Default by the Buyer and
tender by the Seller of payment of the aggregate Repurchase Price
for any Transaction, (i) all right, title and interest in and
entitlement to all Purchased Loans subject to such Transaction
shall be deemed transferred to the Seller; (ii) the Buyer shall
deliver all such Purchased Loans to the Seller; (iii) the Seller
may, without notice to the Buyer, (A) immediately purchase, in a
commercially reasonable manner, at such price or prices as the
Seller may reasonably deem satisfactory, Mortgage Loans
("Replacement Mortgage Loans") of the same class and amount as
any Purchased Loans that are not delivered by the Buyer to the
Seller as required hereunder or (B) in its sole discretion elect,
in lieu of purchasing Replacement Mortgage Loans, to be deemed to
have purchased Replacement Mortgage Loans at the price therefor
on such date, obtained from a generally recognized source; and
(iv) the Buyer shall be liable to the Seller for any excess of
the price paid (or deemed paid) by the Seller for Replacement
Mortgage Loans over the Repurchase Price for the Purchased Loans
replaced thereby.
(d) The parties acknowledge and agree that (i) in the absence of a
generally recognized source for prices or bid or offer quotations
for any Mortgage Loan, the nondefaulting party may establish the
source therefor in its sole discretion; and (ii) all prices, bids
and offers shall be determined together with accrued Income
(except to the extent contrary to market practice with respect to
the relevant Mortgage Loans).
(e) For purposes of this Paragraph 13, the Repurchase Price for each
Transaction hereunder with respect to which the Buyer is in
default shall not increase above the amount of such Repurchase
Price for such Transaction determined as of the date of the
exercise or deemed exercise by the nondefaulting party of the
option referred to in subparagraph (a) of this Paragraph.
(f) The defaulting party shall be liable to the nondefaulting party
for (i) the amount of all reasonable legal or other expenses
incurred by the nondefaulting party in connection with or as a
result of an Event of Default, (ii) damages in an amount equal to
the cost (including all fees, expenses and commissions) of
entering into replacement transactions and entering into or
terminating hedge transactions in connection with or as a result
of an Event of Default, and (iii) any other loss, damage, cost or
expense directly arising or resulting from the occurrence of an
Event of Default in respect of a Transaction.
(g) To the extent permitted by applicable law, the defaulting party
shall be liable to the nondefaulting party for interest at the
Default Rate on any amounts owing by the defaulting party
hereunder from the date the defaulting party becomes liable for
such amounts hereunder until such amounts are (i) paid in full by
the defaulting party or (ii) satisfied in full by the exercise of
the nondefaulting party's rights hereunder.
(h) The nondefaulting party shall have, in addition to its rights
hereunder, any rights otherwise available to it under any other
agreement or applicable law.
(i) Upon default by the Seller, and for the period during which such
default is continuing, all rights of the Seller to receive
payments on the Mortgage Loans which it would otherwise be
authorized to receive hereunder shall cease, and all rights to
such payments shall become vested in the Buyer, which shall have
the sole right to receive such payments and apply them to the
amounts owed by the Seller pursuant to the Agreement. All
payments that are received by the Seller contrary to the
provisions of this clause (i) shall be received in trust for the
benefit of the Buyer, shall be segregated from other funds of the
Seller and shall be promptly paid to the Buyer.
(j) In addition to the other remedies available to the Buyer upon the
occurrence and during the continuance of an Event of Default by
the Seller, the Buyer shall be entitled to the right of set-off
with respect to any amounts owed by the Seller to the Buyer under
any contract, margin account or other arrangement. The Seller
hereby waives any right it may have to require that any deposits
held by the Buyer for the Seller be set off by the Buyer against
the Seller's obligations under the Agreement.
14. APPLICATION OF PROCEEDS
The proceeds of any sale of or other realization on any or all of the Collateral
at the time held by the Buyer under the Agreement, shall be applied by the Buyer
in the following order of priority:
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(a) First, to the payment of all reasonable costs and expenses of
such sale incurred by the Buyer and its affiliates and all
reasonable expenses (including the reasonable fees and expenses
of counsel), liabilities and advances reasonably made or incurred
by the Buyer and its affiliates in connection therewith.
(b) Second, to the payment of the outstanding Repurchase Price owed
by the Seller under the Agreement.
(c) Third, to the payment of all other amounts owed by the Seller
under the Agreement.
(d) Fourth, to the payment of any other amounts owed by the Seller to
the Buyer or any affiliate thereof under any other instrument or
agreement.
(e) Fifth, to the payment to the Seller, or to such other Person as
court of competent jurisdiction may direct, of any surplus then
remaining from such proceeds and other cash.
As used in the Agreement, "proceeds" of the Collateral shall mean cash and other
property received or otherwise realized in respect of the Purchased Loans.
15. INDEMNIFICATION
If the Buyer becomes involved in any capacity in any action, proceeding or
investigation in connection with any matter contemplated by this Agreement, the
Seller will reimburse the Buyer for its legal and other expenses (including the
cost of any investigation and preparation) as they are incurred by the Buyer.
The Seller also agrees to indemnify and hold harmless the Buyer and its
affiliates and their respective directors, officers, employees and agents
(collectively, the "Indemnified Parties"), from and against any and all losses,
claims, damages and liabilities, joint or several, related to or arising out of
any matters contemplated by this Agreement, unless (and this clause shall apply
only to the extent that it shall be finally judicially determined that) such
losses, claims, damages or liabilities resulted primarily from the gross
negligence or willful misconduct of the Buyer.
If the foregoing indemnification is for any reason unavailable to any of the
Indemnified Parties, then the Seller shall contribute to the amount paid or
payable by the Indemnified Parties as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative benefits
received by the Seller, on the one hand, and such Indemnified Parties, on the
other, arising out of the matters contemplated by this Agreement.
The reimbursement, indemnity and contribution provided for herein shall be in
addition to any other liability that the Seller may otherwise have under this
Agreement, at law or in equity, and shall survive the termination or expiration
of this Agreement.
16. PAYMENT AND TRANSFER
Unless otherwise mutually agreed, all transfers of funds hereunder shall be in
immediately available funds. All Mortgage Loans transferred by one party hereto
to the other party (a) shall be in suitable form for transfer or shall be
accompanied by duly executed instruments of transfer or assignment in blank and
such other documentation as the party receiving possession may reasonably
request, (b) shall be transferred on the book-entry system of a Federal Reserve
Bank, or (c) shall be transferred by any other method mutually acceptable to the
Seller and the Buyer.
17. LIMITED POWER OF ATTORNEY
The Seller hereby appoints the Buyer to act (after the occurrence and during the
continuation of an Event of Default) as the attorney-in-fact of the Seller for
the purpose of carrying out the provisions of this Agreement and taking any
action and executing any instruments that the Buyer shall deem necessary or
advisable to accomplish the purposes hereof. This appointment as
attorney-in-fact is irrevocable and is coupled with an interest. Without
limiting the generality of the foregoing, the Buyer and its assigns shall have
the right and power to sell Purchased Loans and to receive, endorse and collect
all checks made payable to the order of the Seller on account of the principal
or interest on any of the Purchased Loans and to give full discharge of the
same.
18. RIGHT OF FIRST REFUSAL
The Seller hereby grants to the Buyer a right of first refusal with respect to
all Mortgage Loans originated or acquired by the Seller or any other entity
owned or controlled by the Shareholders of Nationscapital Mortgage Company which
are transferred from the Buyer to the Seller upon termination of a Transaction,
pursuant to which no such Mortgage Loan shall be sold by the Seller to any third
party (except a third party from whom an unconditional commitment letter has
been obtained) without the Buyer's consent, which shall not be unreasonably
withheld. Such purchases shall be made pursuant to and in accordance with that
certain Mortgage Loan Purchase and Sale Agreement dated as of [July 1, 1996]
between the Seller and the Buyer, as the same may be amended from time to time.
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19. EFFECT OF TERMINATION
The termination of this Agreement by either party shall not eliminate any
liability for losses incurred by either party during the duration of this
Agreement. To the extent that this Agreement is terminated, the terms of this
Agreement shall continue to apply to any Transactions outstanding after the
termination of this Agreement. The provisions of Paragraph 15 relating to
Indemnification shall survive the termination of this Agreement.
20. TIME
All references to time contained in the Agreement shall be deemed to be local
time in [Irvine, California] on the applicable day.
21. FEES AND EXPENSES
Nothing in this Agreement shall act as a bar to the collection of any fees or
expenses of the Buyer that the Seller may agree to pay in any separate agreement
relating to any or all of the Transactions.
22. PAYMENT OF SECURED CREDITORS
The Seller may direct the Buyer to pay all or any portion of the Purchase Price
for a Transaction to one or more creditors of the Seller, or any of its
affiliates, if such payment is necessary to release a lien on the Mortgage Loans
that are to be purchased in such Transaction. Such payment and release of an
existing lien may occur simultaneously with the purchase of Mortgage Loans under
this Agreement.
23. SINGLE AGREEMENT
The Buyer and the Seller acknowledge that, and have entered into this Master
Repurchase Agreement 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 have been made in
consideration of each other. Accordingly, each of the Buyer and the Seller
agrees (a) 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, (b) 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 (c) 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.
24. NOTICES AND OTHER COMMUNICATIONS
Any and all notices, statements, demands or other communications hereunder may
be given by a party to the other by mail, facsimile, telegraph, messenger or
otherwise to the address listed below, or such other address as may be specified
in a notice of change of address hereafter received by the other:
SELLER: Nationscapital Mortgage Company
500 N. State College Blvd.
Suite 800
Orange, California 92668
Attention: Jamie Chisick
Telephone: [____________________]
Telephone: [____________________]
BUYER: First Alliance Mortgage Co.
17305 Von Karman Avenue
Irvine, California 92614
Attention: Director, Secondary Marketing
Telephone: (714) 224-8357
Facsimile: (714) 224-8366
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THIRD-PARTY
BENEFICIARY: First Union National Bank
301 South College Street, DC-06
Charlotte, North Carolina 28288
Attention: Wallace M. Saunders
Telephone: (704) 374-4868
Facsimile: (704) 374-7102
All notices, demands and requests hereunder may be made orally, to be confirmed
promptly in writing, or by other communication as specified in the preceding
sentence.
25. ENTIRE AGREEMENT; SEVERABILITY
This Agreement shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions. 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.
26. ASSIGNMENT
(a) Except as provided in Paragraph 26(c), the rights and obligations
of the parties under this Agreement and under any Transaction
shall not be assigned by either party without the prior written
consent of the other party, and any such assignment without the
prior written consent of the other party shall be null and void.
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.
(b) Subparagraph (a) of this Paragraph 26 shall not preclude a party
from assigning, charging or otherwise dealing with all or any
part of its interest in any sum payable to it under Paragraph 13
hereof.
(c) Notwithstanding the provisions of Subparagraph (a) of this
Paragraph 26, the Buyer may (and the parties contemplate that the
Buyer will) assign all of its rights hereunder to First Union
National Bank without obtaining the written consent of the
Seller. The parties acknowledge and agree that, to the extent the
Buyer's rights are so assigned, First Union National Bank shall
be entitled to the full benefits of this Agreement and may
enforce all of the parties' obligations hereunder.
27. GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA WITHOUT
GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
28. 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 in writing and duly executed by both of the parties hereto. Without
limitation on any of the foregoing, the failure to give a notice pursuant to
Paragraph 5(b) hereof will not constitute a waiver of any right to do so at a
later date.
29. USE OF EMPLOYEE PLAN ASSETS
(a) If assets of an employee benefit plan subject to any provision of
ERISA are intended to be used by either party hereto (the "Plan
Party") in a Transaction, the Plan Party shall so notify the
other party prior to the Transaction. The Plan Party shall
represent in writing to the other party that the Transaction does
not constitute a prohibited transaction under ERISA or is
otherwise exempt therefrom, and the other party may proceed in
reliance thereon but shall not be required so to proceed.
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(b) Subject to the last sentence of subparagraph (a) of this
Paragraph, any such Transaction shall proceed only if the Seller
furnishes or has furnished to the Buyer its most recent available
audited statement of its financial condition and its most recent
subsequent unaudited statement of its financial condition.
(c) By entering into a Transaction pursuant to this Paragraph, the
Seller shall be deemed to (i) represent to the Buyer that since
the date of the Seller's latest such financial statements, there
has been no material adverse change in the Seller's financial
condition which the Seller has not disclosed to the Buyer, and
(ii) agree to provide the Buyer with future audited and unaudited
statements of its financial condition as they are issued, so long
as it is a Seller in any outstanding Transaction involving a Plan
Party.
30. INTENT
(a) The parties recognize that each Transaction is a "repurchase
agreement" as that term is defined in Section 101 of Title 11 of
the Bankruptcy Code, and a "securities contract" as that term is
defined in Section 741 of the Bankruptcy Code. The parties
further intend and recognize that the Mortgage Loans constitute
"securities" as such term is defined in Section 101(49) of the
Bankruptcy Code.
(b) It is understood that either party's right to liquidate Mortgage
Loans delivered to it in connection with Transactions hereunder
or to exercise any other remedies pursuant to Paragraph 13 hereof
is a contractual right to liquidate such Transaction as described
in Sections 555 and 559 of the Bankruptcy Code.
(c) Although the parties intend that all Transactions hereunder be
sales and purchases and not loans, in the event any such
Transactions are deemed to be loans, the Seller shall be deemed
to have pledged to the Buyer as security for the performance by
the Seller of its obligations under each such Transaction, and
shall be deemed to have granted to the Buyer a security interest
in, all of the Purchased Loans with respect to all Transactions
hereunder and all Income thereon and other proceeds thereof.
(d) The parties agree and acknowledge that if a party hereto is an
"insured depository institution," as such term is defined in
FDIA, then each Transaction hereunder is a "qualified financial
contract," as that term is defined in FDIA and any rules, orders
or policy statements thereunder (except insofar as the type of
assets subject to such Transaction would render such definition
inapplicable).
(e) It is understood that this Agreement constitutes a "netting
contract" as defined in and subject to Title IV of FDICIA and
each payment entitlement and payment obligation under any
Transaction hereunder shall constitute a "covered contractual
payment entitlement" or "covered contractual payment obligation",
respectively, as defined in and subject to FDICIA (except insofar
as one or both of the parties is not a "financial institution" as
that term is defined in FDICIA).
31. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is a
broker or dealer registered with the SEC under Section 15 of the
1934 Act, the Securities Investor Protection Corporation has
taken the position that the provisions of SIPA do not protect the
other party with respect to any Transaction hereunder;
(b) in the case of Transactions in which one of the parties is a
government securities broker or a government securities dealer
registered with the SEC under Section 15C of the 1934 Act, SIPA
will not provide protection to the other party with respect to
any Transaction hereunder; and
(c) in the case of Transactions in which one of the parties is a
financial institution, funds held by the financial institution
pursuant to a Transaction hereunder are not on deposit and
therefore are not insured by the Federal Deposit Insurance
Corporation or the National Credit Union Share Insurance Fund, as
applicable.
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IN WITNESS WHEREOF, the Seller and the Buyer have caused this Master
Repurchase Agreement to be executed by their authorized representatives as of
this 31st day of October, 1997.
NATIONSCAPITAL MORTGAGE COMPANY,
as Seller
By:______________________________
Name:____________________________
Title:___________________________
FIRST ALLIANCE MORTGAGE CO.,
as Buyer
By:______________________________
Name:____________________________
Title:___________________________
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EXHIBIT A
FORM OF CONFIRMATION
[Date]
Nationscapital Mortgage Company
1045 W. Katella, #200
Orange, California 92667
Attention: Jamie Chisick
Ladies and Gentlemen:
Pursuant to the master repurchase agreement (the "Master Repurchase
Agreement"), dated as of October 31, 1997, between the undersigned (the "Buyer")
and you (the "Seller"), the Buyer hereby agrees to purchase the Mortgage Loans
identified on Schedule I attached hereto, subject to the terms set forth below:
Purchase Date: ________________
Repurchase Date: ________________
Purchase Price: ________________
Pricing Rate: ________________
Margin: [___]%
All of the representations and warranties made in the Master Repurchase
Agreement must be true and correct as of the Purchase Date and no Event of
Default shall have occurred. Capitalized terms not defined herein shall have the
meanings assigned to them in the Master Repurchase Agreement.
If you are in agreement with these terms, please execute the
acknowledgement and acceptance set forth below and return one copy of this
Confirmation to the Buyer.
Very truly yours,
FIRST ALLIANCE MORTGAGE CO.,
as Buyer
By:______________________________
Name:____________________________
Title:___________________________
Accepted and Agreed as of
this ____ day of __________, ____.
Nationscapital Mortgage Company,
as Seller
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
SCHEDULE I TO CONFIRMATION
MORTGAGE LOAN SCHEDULE
<PAGE>
EXHIBIT B
REPRESENTATIONS AND WARRANTIES
RELATING TO ELIGIBLE MORTGAGE LOANS
(a) The Mortgage Loan is a binding and valid obligation of the obligor
thereon, in full force and effect and enforceable in accordance with its terms.
(b) The Mortgage Loan is genuine in all respects as appearing on its
face and as represented in the books and records of the Seller and all
information set forth therein is true and correct.
(c) The Mortgage Loan is free of any default of any party thereto
(including the Seller), other than as expressly permitted pursuant to
subparagraph (d) below, counterclaims, offsets and defenses and from any
rescission, cancellation or avoidance, whether by operation of law or otherwise.
(d) No payment under the Mortgage Loan is more than 30 days past due the
payment due date set forth in the underlying promissory note and deed of trust
(or mortgage).
(e) The Mortgage Loan contains the entire agreement of the parties
thereto with respect to the subject matter thereof, has not been modified or
amended in any respect and is free of concessions or understandings with the
obligor thereon of any kind not expressed in writing therein.
(f) The Mortgage Loan complies in all respects and was originated in
accordance with all applicable laws and regulations governing the same,
including, without limitation, the federal Consumer Credit Protection Act, the
federal Real Estate Settlement Procedures Act, the federal Equal Credit
Opportunity Act, the federal Truth-in-Lending Act, and the regulations
promulgated thereunder and all applicable usury laws and restrictions, and all
notices, disclosures and other statements or information required by law or
regulation to be given, and any other act required by law or regulation to be
performed, in connection with the Mortgage Loan have been given and performed as
required.
(g) Unless otherwise provided for in the written disbursement
instructions relating to the Mortgage Loan, all proceeds of the Mortgage Loan
have been fully disbursed.
(h) At all times the Mortgage Loan will be free and clear of all liens.
(i) The property covered by the Mortgage Loan is insured against loss or
damage by fire and all other hazards normally included within standard extended
coverage in accordance with the provisions of the Mortgage Loan with the Seller
named as a loss payee thereon.
(j) If the property covered by the Mortgage Loan falls within a flood
zone as identified by a HUD-identified flood map, the property is insured
against flood damage in an amount equal to the lesser of the balance due under
the related Mortgage Loan or the maximum amount of insurance available under the
National Flood Insurance Program.
(k) The property covered by the Mortgage Loan is free and clear of all
liens except:
(i) the lien in favor of the Seller;
(ii) the lien of current real property taxes and assessments not
yet due and payable;
(iii) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record, as of the date of
recording, as are acceptable to mortgage lending institutions generally
and specifically referred to in a lender's title insurance policy
delivered to the originator of the Mortgage Loan and which (A) are
referred to or otherwise considered in the appraisal made for the
originator of the Mortgage Loan or (B) do not materially adversely
affect the appraised value of the property as set forth in such
appraisal;
(iv) other matters to which like properties are commonly subject
and which do not materially interfere with the benefits of the security
intended to be provided by the Mortgage Loan or the use, enjoyment,
value or marketability of the related property;
(v) liens subordinate in priority to the lien in favor of the
Seller; and
(vi) in the case of second priority Mortgage Loans, one lien
superior in priority to the lien in favor of the Seller.
<PAGE>
(l) The property shall be improved, and such improvements shall consist
of a completed one- to four-unit single family residence, including, but not
limited to, a condominium, planned unit development or townhouse, but excluding
in any event a co-op or mobile home.
(m) There has been delivered to the Buyer the Required Documents for the
Mortgage Loan; provided, however, that a Mortgage Loan, the Required Documents
for which have not been delivered to the Buyer, may be an Eligible Mortgage Loan
and may be included in a Transaction so long as the Required Documents for such
Mortgage Loan shall have been delivered to the Buyer within seven days of the
inclusion of such Mortgage Loan in a Transaction.
(n) The Mortgage Loan is not subject to any servicing arrangement with
any Person other than the Seller nor are any servicing rights relating to the
Mortgage Loan subject to any lien, claim, interest or negative pledge in favor
of any Person other than as permitted hereunder.
(o) The Seller has obtained or conducted an appraisal in connection with
the origination of the Mortgage Loan in accordance with the Seller's
Underwriting Standards.
(p) The Mortgage Loan is secured by a first or second priority mortgage
or deed of trust on the property covered thereby.
(q) The Mortgage Loan is not a revolving credit facility.
(r) No real property taxes or insurance payments due and payable with
respect to the property (or escrow installments therefor) covered by the
Mortgage Loan are past due the payment due date thereof.
(s) The Mortgage Loan complies with the Underwriting Standards.
<PAGE>
EXHIBIT C
SELLER'S UNDERWRITING STANDARDS
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL
<PAGE>
MASTER REPURCHASE AGREEMENT
Dated as of October 31, 1997
Between:
COAST SECURITY MORTGAGE, INC.,
as Seller
and
FIRST ALLIANCE MORTGAGE CO.,
as Buyer
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in which the
Seller agrees to transfer to the Buyer mortgage loans or other assets (the
"Collateral") against the transfer of funds by the Buyer, with a simultaneous
agreement by the Buyer to transfer to the Seller such Collateral at a date
certain, against the transfer of funds by the Seller. Each such transaction
shall be referred to herein as a "Transaction" and, unless otherwise agreed in
writing, shall be governed by this Agreement.
2. DEFINITIONS
As used in this Agreement, and unless the context requires a different meaning,
the following terms shall have the meanings assigned to them below:
(a) "1934 Act" shall mean the Securities Exchange Act of 1934.
(b) "Act of Insolvency" shall mean, with respect to any party, (i)
the commencement by such party as debtor of any case or
proceeding under any bankruptcy, insolvency, reorganization,
liquidation, moratorium, dissolution, delinquency or similar law,
or such party seeking the appointment or election of a receiver,
conservator, trustee, custodian or similar official for such
party or any substantial part of its property, or the convening
of any meeting of creditors for purposes of commencing any such
case or proceeding or seeking such an appointment or election,
(ii) the commencement of any such case or proceeding against such
party, or another seeking such an appointment or election, or the
filing against a party of an application for a protective decree
under the provisions of SIPA, which (A) is consented to or not
timely contested by such party, (B) results in the entry of an
order for relief, such an appointment or election, the issuance
of such a protective decree or the entry of an order having a
similar effect, or (C) is not dismissed within 15 days, (iii) the
making by such party of a general assignment for the benefit of
creditors, or (iv) the admission in writing by such party of such
party's inability to pay such party's debts as they become due.
(c) "Additional Collateral" shall mean Mortgage Loans and/or cash
provided by the Seller to the Buyer pursuant to Paragraph 5(b)
hereof.
(d) "Additional Required Documents" shall mean the following
documents with respect to any Mortgage Loan:
(i) original disclosure statements complying with Regulation Z
("Truth in Lending") of the Board of Governors of the
Federal Reserve System and all agreements relating
thereto, if applicable;
(ii) original Equal Credit Opportunity Act notice and
additional disclosure statements or agreements relating
thereto, if applicable;
(iii) a certification as to whether or not such property falls
into a flood zone as identified by a HUD identified flood
map;
<PAGE>
(iv) an attorney's opinion of title and abstract of title or 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 Loans and qualified
to do business in the jurisdiction where the related
property is located, insuring the Seller, its successors
and assigns, as to the first priority lien of the related
Mortgage in the case of a Mortgage Loan secured by a first
priority lien and the second priority lien of the Mortgage
Loan in the case of a Purchased Loan secured by a second
lien on the related property, in the original principal
amount of the Purchased Loan; PROVIDED that the Seller
shall be the sole named insured of any such mortgage title
insurance policy, the assignment to the Buyer or the
Custodian as assignee of the Buyer of the Seller's
interest in such mortgage title insurance policy shall not
require the consent of or notification to the insurer or
the same has been obtained, and such mortgage title
insurance policy shall be in full force and effect and
will be in full force and effect and inure to the benefit
of the Buyer upon the consummation of the transactions
contemplated by this Agreement; and, PROVIDED FURTHER,
that no claims shall have been made under such mortgage
title insurance policy and no prior holder of the related
Mortgage Loan, including the Seller, shall have done, by
act or omission, anything that would impair the coverage
of such mortgage title insurance policy;
(v) a property and casualty insurance policy on the property
subject to the Mortgage Loan covering fire, hazard and
extended coverage, and if applicable, flood and earthquake
insurance, all in amounts not less than the principal
amount of the promissory note relating to the Mortgage
Loan (or the maximum amount issuable for flood insurance)
which insurance has been endorsed to provide for payment
thereof to the Seller, as mortgagee, together with written
notice to the mortgagor of the fact, if true, that
mortgagor's property lies within a flood zone;
(vi) original or copy of executed application by the obligor on
such Mortgage Loan for such Mortgage Loan;
(vii) original or copy of credit bureau report on the obligor on
such Mortgage Loan;
(viii) original HUD-1 settlement statement on such Mortgage Loan;
(ix) original complete appraisal obtained with respect to the
applicable property obtained in connection with the
Mortgage Loan;
(x) original or certified copy of mortgagee's title insurance
policy insuring the lien of the Mortgage Loan against the
applicable property; and
(xi) such other documents as may be required by the Seller's
Underwriting Standards, subject to reasonable variances
from the Underwriting Standards permitted by the Seller.
(e) "Agreement" shall mean this Master Repurchase Agreement, together
with all exhibits, schedules or amendments hereto and all
Confirmations hereunder.
(f) "Aggregate Commitment" shall have the meaning assigned to such
term in Paragraph 6.
(g) "Bankruptcy Code" shall mean Title 11 of the United States Code,
as amended.
(h) "Business Day" shall mean any day except Saturday, Sunday and any
day which is a legal holiday or a day on which banking
institutions are authorized or required by law to close in
Charlotte, North Carolina.
(i) "Buyer" shall mean First Alliance Mortgage Co., a [California]
corporation, with its principal place of business in [Irvine,
California].
(j) "Collateral" shall have the meaning assigned to such term in
Paragraph 1.
(k) "Confirmation" shall mean a confirmation for a Transaction as
required by Paragraph 4(a) hereof, substantially in the form of
Exhibit A hereto.
(l) "Current Margin" shall mean, with respect to any date, the
difference between (i) the aggregate Market Value of all
Purchased Loans held by the Buyer on such date and (ii) the
aggregate Purchase Price paid by the Buyer for all Purchased
Loans held by the Buyer on such date.
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<PAGE>
(m) "Custodian" shall mean The Bank of New York, a New York bank.
(n) "Default Rate" shall mean, for any day, the Pricing Rate for such
day plus 2.50%.
(o) "Eligible Mortgage Loan" shall mean a Mortgage Loan (i) with
respect to which each of the representations and warranties set
out in Exhibit B hereto is accurate and complete as of the date
of the related Confirmation (and the Seller by including any such
Mortgage Loan in any Transaction shall be deemed to so represent
and warrant to the Buyer at and as of the date of such
Transaction) and (ii) that has been outstanding no more than 182
days since its date of origination.
(p) "ERISA" shall mean the Employee Retirement Income Security Act of
1974.
(q) "FDIA" shall mean the Federal Deposit Insurance Act, as amended.
(r) "FDICIA" shall mean the Federal Deposit Insurance Corporation
Improvement Act of 1991.
(s) "Guarantor" shall mean any shareholder of Coast Security
Mortgage, Inc.
(t) "Guaranty" shall mean the guaranty agreement, dated as of October
31, 1997, executed by the Guarantor in favor of the Buyer.
(u) "Income" shall mean, with respect to any Mortgage Loan at any
time, any principal thereof and all interest, dividends or other
distributions thereon.
(v) "Indemnified Parties" shall have the meaning assigned to such
term in Paragraph 15.
(w) "Margin" shall mean, with respect to any Mortgage Loan or pool of
Mortgage Loans, the difference between the Market Value of such
loan or loans and the Purchase Price for such loan or loans.
(x) "Margin Call" shall have the meaning assigned to such term in
Paragraph 5(b).
(y) "Margin Deficit" shall have the meaning assigned to such term in
Paragraph 5(b).
(z) "Market Value" shall mean, with respect to each Purchased Loan,
the market value of such Purchased Loan as determined by the
Buyer in its sole discretion.
(aa) "Mortgage Loan" shall mean a residential real estate secured
loan, including, without limitation: (i) a promissory note, any
reformation thereof and related deed of trust (or mortgage) and
security agreement; (ii) all guaranties and insurance policies,
including, without limitation, all mortgage (if applicable) and
title insurance policies and all fire and extended coverage
insurance policies and rights of the Seller to return premiums or
payments with respect thereto; and (iii) all right, title and
interest of the Seller in the property covered by such deed of
trust (or mortgage).
(bb) "Original Margin" shall mean, with respect to any date, the
difference between (i) the aggregate Market Value of all
Purchased Loans held by the Buyer on such date, determined as of
the most recent Purchase Date, and (ii) the Purchase Price paid
by the Buyer for all such Purchased Loans on such Purchase Date.
(cc) "Person" shall mean a corporation, an association, a partnership,
an organization, a business, a trust, an individual, a government
or political subdivision thereof, any governmental agency or any
other entity.
(dd) "Plan Party" shall have the meaning assigned to such term in
Paragraph 29(a).
(ee) "Price Differential" shall mean, with respect to any Transaction
as of any date, the difference between the Purchase Price paid by
the Buyer and the Repurchase Price to be paid by the Seller. The
Pricing Differential will equal 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.
(ff) "Pricing Rate" shall mean the per annum rate for determination of
the Price Differential, which rate shall be 10 percent.
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<PAGE>
(gg) "Purchase Date" shall mean the date on which Purchased Loans are
to be transferred by the Seller to the Buyer.
(hh) "Purchased Loans" shall mean the Mortgage Loans transferred by
the Seller to the Buyer in a Transaction hereunder. The term
"Purchased Loans" with respect to any Transaction at any time
also shall include Additional Collateral delivered pursuant to
Paragraph 5(b) hereof.
(ii) "Purchase Price" shall mean the price at which Purchased Loans
are transferred by the Seller to the Buyer.
(jj) "Replacement Mortgage Loans" shall have the meaning assigned to
such term in Paragraph 13(c).
(kk) "Repurchase Date" shall mean the date on which the Seller is
required to repurchase the Purchased Loans from the Buyer, which
shall be (i) the 10th day of the calendar month in which the
Purchase Date occurs or, if such Purchase Date falls after the
10th day of such month, the 10th day of the following calendar
month (or, in each case, if such day is not a Business Day, the
next Business Day), or (ii) such earlier date as may be
determined by application of the provisions of Paragraph 13
hereof.
(ll) "Repurchase Price" shall mean the price at which Purchased Loans
are to be transferred from the Buyer to the Seller upon
termination of a Transaction, which will be determined in each
case as the sum of the Purchase Price and the Price Differential
as of the date of such determination.
(mm) "Repurchase Term" shall mean, with respect to any Transaction,
the period beginning on the Purchase Date and continuing through
the Repurchase Date.
(nn) "Required Documents" shall mean the following documents with
respect to any Mortgage Loan:
(i) the original executed and fully completed promissory note
relating to the Mortgage Loan (properly endorsed to the
Seller if purchased by the Seller from another
originator), which promissory note shall be duly endorsed
in blank without recourse by an authorized officer of the
Seller;
(ii) the original executed and fully completed mortgage or deed
of trust relating to the Mortgage Loan in proper form for
recordation in the appropriate jurisdiction and duly
recorded in the appropriate jurisdiction; PROVIDED,
HOWEVER, that a certified copy of the executed mortgage or
deed of trust relating to the Mortgage Loan may be
delivered to the Buyer in lieu of the original recorded
deed of trust or mortgage until such time as the original
recorded mortgage or deed of trust is received from the
recording jurisdiction and submitted to the Buyer; and
(iii) an original executed, fully completed and recordable but
unrecorded assignment of the mortgage or deed of trust
relating to the Mortgage Loan in proper form for
recordation in the appropriate jurisdiction (unless the
Buyer determines that under applicable state law the
assignment should be recorded in order to adequately
protect its interest, in which case the assignment shall
be recorded by the Seller and a certified true copy
thereof shall be provided to the Buyer), together with the
original or a duly certified copy of the fully completed
and proper assignment or assignments of the mortgage or
deed of trust from the original holder through any
subsequent transferees to the Seller in proper form for
recordation in the appropriate jurisdiction, duly recorded
if local requirements in the jurisdiction in which the
property is located required the recordation of such
assignment or assignments.
(oo) "SEC" shall mean the Securities and Exchange Commission.
(pp) "Servicer" shall mean Coast Security Mortgage, Inc.
(qq) "SIPA" shall mean the Securities Investor Protection Act of 1970.
(rr) "Transaction" shall mean each transaction between the Seller and
the Buyer that is undertaken pursuant to a Confirmation.
(ss) "Underwriting Standards" shall mean the underwriting policies of
the Seller set forth in Exhibit C hereto.
3. INITIATION AND TERMINATION OF TRANSACTIONS
4
<PAGE>
(a) An agreement to enter into a Transaction may be made in writing
at the initiation of either the Buyer or the Seller and shall be
evidenced by a Confirmation delivered pursuant to Paragraph 4(a).
On the Purchase Date for the Transaction, the Purchased Loans
shall be transferred to the Buyer or its agent against the
transfer of the Purchase Price to an account of the Seller.
(b) The Buyer's obligation to purchase any Mortgage Loan shall be
subject to the following:
(i) The Buyer (or the Custodian if so directed by the Buyer)
shall have possession of the Required Documents for each
Mortgage Loan to be purchased; provided that such
possession may have been released to a prospective
purchaser of a Mortgage Loan (or a custodian acting on its
behalf) if the Buyer or the Custodian, as applicable, has
received a bailment letter for the related Required
Documents.
(ii) The Buyer's determination that the Mortgage Loans to be
purchased in the requested Transaction satisfy the
requirements of this Agreement.
(iii) The Seller's representations and warranties contained in
this Agreement and reaffirmed in the Confirmation shall be
true and correct.
(iv) The Purchase Price for such Transaction shall be at least
$250,000.
(v) The sum of the Purchase Price for such Transaction and the
aggregate Purchase Price paid for all Purchased Loans
owned by the Buyer immediately prior to the consummation
of the Transaction shall not exceed the Aggregate
Commitment.
(vi) No Event of Default shall have occurred under this
Agreement.
(vii) The Guaranty shall be in full force and effect.
(c) On the Repurchase Date for each Transaction, termination of the
Transaction will be effected by transfer to the Seller or its
agent of the Purchased Loans and any Income in respect thereof
received by the Buyer (and not previously credited or transferred
to, or applied to the obligations of the Seller hereunder)
against the transfer of the Repurchase Price to an account of the
Buyer.
4. TRANSACTION CONFIRMATION
(a) Upon the parties' agreement to enter into a Transaction
hereunder, the Buyer shall prepare and deliver to the Seller, at
least one Business Day prior to the Purchase Date for the
Transaction, a Confirmation for such Transaction.
(b) The Confirmation shall list the Purchased Loans and set forth (i)
the Purchase Date, (ii) the Purchase Price, (iii) the anticipated
Repurchase Date, (iv) the Pricing Rate or Repurchase Price
applicable to the Transaction, and (v) any additional terms or
conditions of the Transaction.
(c) The Confirmation, together with this Agreement, shall constitute
conclusive evidence of the terms agreed between the Buyer and the
Seller, and shall be binding upon the parties unless written
notice of objection is given by the objecting party prior to the
closing of the Transaction.
(d) In the event of any conflict between the terms of a Confirmation
and this Agreement, the Confirmation shall prevail.
5. MARGIN MAINTENANCE
(a) On Monday of each week during the Repurchase Term (or more often,
if the Buyer in its sole discretion so decides), the Buyer will
determine (i) the aggregate Market Value of all Purchased Loans
and other Collateral held by the Buyer and (ii) the Current
Margin for such date.
(b) If on any date during the term of this Agreement the Current
Margin for such date is less than the Original Margin for such
date (such shortfall, a "Margin Deficit"), the Buyer may by
notice to the Seller (such notice, a "Margin Call") require that
the Seller, at the Buyer's option, transfer to the Buyer cash or
additional Mortgage Loans reasonably acceptable to the Buyer
(collectively, "Additional Collateral"), so that the Current
Margin for such date will then equal or exceed the Original
Margin for such date; PROVIDED, HOWEVER, that the Buyer may not
make a Margin Call unless the Margin Deficit exceeds $100,000.
5
<PAGE>
(c) If any notice is given under subparagraph (b) of this Paragraph 5
on any Business Day, then the Seller shall transfer cash or
Mortgage Loans as provided in such subparagraph no later than the
close of business on the second Business Day following the date
on which such notice is given. Any cash transferred to the Buyer
pursuant to this subparagraph (c) shall be held by the Buyer for
so long as any Transaction remains in effect and shall be applied
against the Repurchase Price for any terminated Transaction on
the applicable Repurchase Date.
6. AGGREGATE COMMITMENT AND TERM
(a) The aggregate Purchase Price for all Purchased Loans owned by the
Buyer on any date shall at no time exceed $12,000,000 (the
"Aggregate Commitment").
(b) This Agreement shall continue in effect for a period of 364 days
from the date of its execution by both parties.
7. PAYMENTS ON MORTGAGE LOANS; SERVICING
The Seller shall act as servicer for all Mortgage Loans, will service all
Mortgage Loans in accordance with industry standards for loans held by third
parties and shall not sell or transfer its rights to service such loans without
the Buyer's consent. All funds received by the Seller, in its capacity as
servicer with respect to Mortgage Loans that are Purchased Loans, shall be held
by the Seller in trust for the Buyer until such Mortgage Loans have been
repurchased by the Seller; provided that all such funds may be held by the
Seller in the Seller's general servicing account.
8. REPURCHASE PRIOR TO REPURCHASE DATE
Notwithstanding any provision hereof to the contrary, (i) the Buyer may require
the Seller to repurchase any of the Purchased Loans subject to a Transaction
upon five Business Days' prior notice and (ii) the Seller shall promptly
repurchase any Purchased Loan that ceases to be an Eligible Mortgage Loan.
9. DELIVERY OF MORTGAGE LOANS
All of the Required Documents for Mortgage Loans that are to be Purchased Loans
for a Transaction shall be delivered to the Buyer (or the Custodian, if so
directed by the Buyer) at least one Business Day prior to the Purchase Date for
such Transaction.
10. REPRESENTATIONS AND WARRANTIES
(a) Each of the Buyer and the Seller represents and warrants to the
other that (i) it is duly authorized to execute and deliver this
Agreement, to enter into 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
individual signing this Agreement on its behalf is duly
authorized to do so on its behalf, (iv) it has obtained all
authorizations of any governmental body required in connection
with this Agreement and the Transactions hereunder and such
authorizations are in full force and effect and (v) the
execution, delivery and performance of this Agreement and the
Transactions hereunder will not violate any law, ordinance,
charter, bylaw or rule applicable to it or any material agreement
by which it is bound or by which any of its assets are affected.
On the Purchase Date for any Transaction the Buyer and the Seller
shall each be deemed to repeat all the foregoing representations
made by it.
(b) In addition to the foregoing, the Seller hereby represents and
warrants that, as of the date of this Agreement and as of the
Purchase Date for each Transaction:
(i) The Seller is servicing all Mortgage Loans in accordance
with industry standards for loans held by third parties.
(ii) No Event of Default has occurred or is continuing under
this Agreement.
(iii) Since the date of the most recent balance sheet or
financial statement delivered by the Seller to the Buyer
pursuant to the Agreement, there has been no material
adverse change in its financial condition or results of
operations.
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(c) The Seller hereby represents and warrants to the Buyer that, as
to each Mortgage Loan, as of the applicable Purchase Date or such
other date specified herein:
(i) The information set forth in the schedule of Mortgage
Loans attached to each Confirmation is true and correct in
all material respects.
(ii) Such Mortgage Loan is an Eligible Mortgage Loan.
11. COVENANTS
The Seller hereby covenants and agrees with the Buyer that, as long as the Buyer
has any obligation to enter into Transactions under the Agreement:
(a) The Seller shall notify the Buyer of any material default or
event of default that has occurred under any other credit
agreement for which the Seller is the primary obligor.
(b) The Seller shall hold (or deliver to the Custodian) all
Additional Required Documents for the Mortgage Loans that are
Purchased Loans in trust for the benefit of the Buyer.
(c) The Seller shall furnish or cause to be furnished to the Buyer:
(i) Within 90 days after the last day of each fiscal year of
the Seller, consolidated and consolidating statements of
income (and, in the case of the consolidated statement,
cash flows) for the Seller for such year and consolidated
and consolidating balance sheets for the Seller as of the
end of such year (with the foregoing consolidating
statements to separately display the income statement and
balance sheet of each of the Seller and its consolidated
Subsidiaries in a format reasonably acceptable to the
Buyer), presented fairly in all material respects in
accordance with GAAP and accompanied by an unqualified
report of a firm of independent certified public
accountants of nationally recognized standing; and
(ii) Within 45 days after the last day of each fiscal quarter,
(A) unaudited consolidated and consolidating statements of
income for the Seller for such quarter, and unaudited
consolidated and consolidating balance sheets for the
Seller as of the end of such quarter (with the foregoing
consolidating statements to separately display the income
and balance sheet of each of the Seller and its
consolidated subsidiaries in a format reasonably
acceptable to the Buyer), and (B) a certificate of an
officer of the Seller, whose position is vice president or
higher, stating that such financial statements are
presented fairly in all material respects and in
accordance with GAAP, subject to year-end audit
adjustments, and further certifying that neither the
Seller nor any affiliate thereof is in default under the
terms and conditions of any agreement evidencing or
securing any indebtedness of such entity.
(d) The Seller shall promptly furnish such additional financial and
other information, including, without limitation, financial
statements of the Seller, and information regarding the Purchased
Loans, as the Buyer may from time to time reasonably request.
(e) The Seller shall pay or otherwise satisfy at or before maturity
or before it becomes delinquent or accelerated, as the case may
be, all its indebtedness (including taxes), except indebtedness
being contested in good faith by appropriate proceedings and for
which provision is made to the satisfaction of the Buyer for the
payment thereof in the event the Seller is found to be obligated
to pay such indebtedness and which indebtedness is thereupon
promptly paid by the Seller.
(f) The Seller shall maintain its corporate existence and obtain and
maintain all rights, privileges, licenses, approvals, franchises,
properties and assets necessary or desirable in the normal
conduct of its business, including but not limited to all
approvals with respect to the SEC, and comply with all
contractual obligations and requirements of law (including,
without limitation, any requirements of law under or in
connection with ERISA, the federal Consumer Credit Protection
Act, the federal Real Estate Settlement Procedures Act, the
federal Equal Credit Opportunity Act, the federal
Truth-in-Lending Act, and any regulations promulgated
thereunder), except where the failure to so comply is not likely
to have a material adverse effect on the ability of the Seller to
perform under this Agreement.
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<PAGE>
(g) The Seller shall keep proper books of record and account in which
full, true and correct entries in conformity with GAAP and all
requirements of law shall be made of all dealings and
transactions in relation to its business and activities.
(h) The Seller shall permit representatives of the Buyer to (A) visit
and inspect any of its properties and examine and make abstracts
from any of its books and records (including without limitation
books and records relating to the Purchased Loans) at any
reasonable time and as often as may reasonably be desired by the
Buyer (but, prior to the occurrence of an Event of Default, only
upon not less than two Business Days' prior notice), and (B)
discuss the business, operations, properties and financial and
other condition of the Seller with officers and employees of the
Seller, and with its independent certified public accountants;
PROVIDED, HOWEVER, that the results of any such visit,
inspection, examination, discussion or audit, to the extent such
results are proprietary and non-public, shall be maintained by
the Buyer in confidentiality except as required by law or
regulation or by any governmental agency or regulatory body
having authority over the Buyer, or to the extent such
information may be communicated to the legal counsel or auditors
of the Buyer.
(i) The Seller shall promptly give written notice to the Buyer of:
(i) the occurrence of any Event of Default;
(ii) any litigation or proceeding to which the Seller is a
party and which affects the Purchased Loans, the outcome
of which is reasonably likely to be determined adversely
to the Seller and which, if so determined, would have a
material adverse effect on the Purchased Loans, or the
consolidated business, operations, property, or financial
or other condition of the Seller taken as a whole;
(iii) a material adverse change known to responsible management
personnel of the Seller in the business, operations,
property or financial or other condition of the Seller;
and
(iv) any default by the Seller or any of the Seller's
affiliates under the terms and conditions of any agreement
evidencing or securing any indebtedness of such entity.
(j) The Seller shall pay all reasonable out-of-pocket costs and
expenses (including fees and disbursements of legal counsel)
incident to the enforcement of the Seller's obligations hereunder
or under any Confirmation, whether by judicial proceedings or
otherwise, including, without limitation, in connection with
bankruptcy, insolvency, liquidations, reorganization, moratorium
or other similar proceedings involving the Seller. The
obligations of the Seller under this Paragraph 11(j) shall be
effective and enforceable whether or not any Transaction is
outstanding hereunder and shall survive the termination of this
Agreement.
(k) The Seller shall originate or acquire Mortgage Loans only in
accordance with the Seller's Underwriting Standards in effect on
the date of origination or acquisition.
(l) The Seller shall not, directly or indirectly, create, incur,
assume or suffer to exist, any lien or other encumbrance upon the
Collateral.
(m) The Seller shall not, without providing written notice to the
Buyer, alter its current Underwriting Standards in any material
manner from those disclosed to the Buyer and attached to the
Agreement as Exhibit C.
12. EVENTS OF DEFAULT
The following shall constitute Events of Default hereunder (each, an "Event of
Default"):
(a) the Seller's failure to transfer or the Buyer's failure to
purchase Purchased Loans upon the applicable Purchase Date;
(b) the Seller's failure to repurchase or the Buyer's failure to
transfer Purchased Loans upon the applicable Repurchase Date;
(c) the Seller's or the Buyer's failure to comply with Paragraph 5
hereof;
(d) an Act of Insolvency occurs with respect to the Seller or the
Buyer;
(e) any representation or warranty made by the Seller or the Buyer in
this Agreement 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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(f) the Seller or the Buyer shall admit in writing to the other its
inability to, or its intention not to, perform any of its
obligations hereunder;
(g) if, for any reason, any Transaction is not deemed to be a
purchase and sale, and the Agreement shall for any reason cease
to create a valid, first priority security interest in any of the
Purchased Loans purported to be covered thereby;
(h) the Seller shall breach any covenant, requirement or obligation
contained in this Agreement;
(i) the Seller's obligations under any credit agreement or other
material agreement for which the Seller is the primary obligor
shall be accelerated; PROVIDED, HOWEVER, that if an Event of
Default shall occur as a result of a default under any credit
agreement or other material agreement described in this Section
12(i), and such default under such credit agreement or other
material agreement is remedied or cured by the Seller so that the
Buyer is not harmed in any material way, then such Event of
Default shall be deemed to have been remedied or cured without
further action upon the part of the Seller or the Buyer;
(j) the Seller shall fail to repurchase any Purchased Loans at the
Repurchase Price when required by Paragraph 8 of this Agreement;
(k) the Buyer or the Seller shall have reasonably determined that the
other party is or will be unable to meet its commitments under
this Agreement, shall have notified such other party of such
determination and such other party shall not have responded with
appropriate information to the contrary to the satisfaction of
the notifying party within one Business Day;
(l) in the reasonable judgment of the Buyer a material adverse change
shall have occurred in the business, operations, properties,
prospects or financial condition of the Seller; or
(m) the Seller shall merge or consolidate into any entity, unless the
surviving or resulting entity shall be acceptable to the Buyer,
in its sole discretion, and such entity expressly assumes by
written agreement, executed and delivered to the Buyer in form
and substance satisfactory to the Buyer, the performance of all
the Seller's duties and obligations hereunder; provided that a
reorganization involving only the Seller and its affiliates shall
not constitute an Event of Default.
13. REMEDIES UPON EVENT OF DEFAULT
Upon the occurrence of any Event of Default:
(a) The nondefaulting party may, at its option (which option shall be
deemed to have been exercised immediately upon the occurrence of
an Act of Insolvency), declare an Event of Default to have
occurred hereunder and, upon the exercise or deemed exercise of
such option, the Repurchase Date for each Transaction hereunder,
shall, if it has not already occurred, be deemed immediately to
occur (except that, in the event that the Purchase Date for any
Transaction has not yet occurred as of the date of such exercise
or deemed exercise, such Transaction shall be deemed immediately
canceled). The nondefaulting party shall (except upon the
occurrence of an Act of Insolvency) give notice to the defaulting
party of the exercise of such option as promptly as practicable.
(b) Upon the occurrence of an Event of Default by the Seller, if the
Buyer exercises or is deemed to have exercised the option
referred to in subparagraph (a) of this Paragraph, (i) the
Seller's obligation to repurchase all Purchased Loans, at the
Repurchase Price therefor on the Repurchase Date determined in
accordance with subparagraph (a) of this Paragraph, shall
thereupon become immediately due and payable; (ii) all Income
paid after such exercise or deemed exercise shall be retained by
the Buyer and applied to the aggregate unpaid Repurchase Price
and any other amounts owing by the Seller hereunder; (iii) the
Seller shall immediately deliver to the Buyer any Purchased Loans
that are subject to a Transaction which are then in the Seller's
possession or control; (iv) the Buyer may, without notice to the
Seller, (A) immediately sell, in a recognized market (or
otherwise in a commercially reasonable manner) at such price or
prices as the Buyer may reasonably deem satisfactory, any or all
Purchased Loans subject to such Transactions and shall apply the
proceeds thereof to the aggregate unpaid Repurchase Prices and
any other amounts owing by the Seller hereunder or (B) in its
sole discretion elect, in lieu of selling all or a portion of
such Purchased Loans, to give the Seller credit for such
Purchased Loans in an amount equal to the price therefor on such
date, obtained from a generally recognized source, against the
aggregate unpaid Repurchase Prices and any other amounts owing by
the Seller hereunder; and (v) the Buyer may refuse to enter into
any further Transactions with the Seller under this Agreement and
may determine that the Agreement is terminated.
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(c) Upon the occurrence of an Event of Default by the Buyer and
tender by the Seller of payment of the aggregate Repurchase Price
for any Transaction, (i) all right, title and interest in and
entitlement to all Purchased Loans subject to such Transaction
shall be deemed transferred to the Seller; (ii) the Buyer shall
deliver all such Purchased Loans to the Seller; (iii) the Seller
may, without notice to the Buyer, (A) immediately purchase, in a
commercially reasonable manner, at such price or prices as the
Seller may reasonably deem satisfactory, Mortgage Loans
("Replacement Mortgage Loans") of the same class and amount as
any Purchased Loans that are not delivered by the Buyer to the
Seller as required hereunder or (B) in its sole discretion elect,
in lieu of purchasing Replacement Mortgage Loans, to be deemed to
have purchased Replacement Mortgage Loans at the price therefor
on such date, obtained from a generally recognized source; and
(iv) the Buyer shall be liable to the Seller for any excess of
the price paid (or deemed paid) by the Seller for Replacement
Mortgage Loans over the Repurchase Price for the Purchased Loans
replaced thereby.
(d) The parties acknowledge and agree that (i) in the absence of a
generally recognized source for prices or bid or offer quotations
for any Mortgage Loan, the nondefaulting party may establish the
source therefor in its sole discretion; and (ii) all prices, bids
and offers shall be determined together with accrued Income
(except to the extent contrary to market practice with respect to
the relevant Mortgage Loans).
(e) For purposes of this Paragraph 13, the Repurchase Price for each
Transaction hereunder with respect to which the Buyer is in
default shall not increase above the amount of such Repurchase
Price for such Transaction determined as of the date of the
exercise or deemed exercise by the nondefaulting party of the
option referred to in subparagraph (a) of this Paragraph.
(f) The defaulting party shall be liable to the nondefaulting party
for (i) the amount of all reasonable legal or other expenses
incurred by the nondefaulting party in connection with or as a
result of an Event of Default, (ii) damages in an amount equal to
the cost (including all fees, expenses and commissions) of
entering into replacement transactions and entering into or
terminating hedge transactions in connection with or as a result
of an Event of Default, and (iii) any other loss, damage, cost or
expense directly arising or resulting from the occurrence of an
Event of Default in respect of a Transaction.
(g) To the extent permitted by applicable law, the defaulting party
shall be liable to the nondefaulting party for interest at the
Default Rate on any amounts owing by the defaulting party
hereunder from the date the defaulting party becomes liable for
such amounts hereunder until such amounts are (i) paid in full by
the defaulting party or (ii) satisfied in full by the exercise of
the nondefaulting party's rights hereunder.
(h) The nondefaulting party shall have, in addition to its rights
hereunder, any rights otherwise available to it under any other
agreement or applicable law.
(i) Upon default by the Seller, and for the period during which such
default is continuing, all rights of the Seller to receive
payments on the Mortgage Loans which it would otherwise be
authorized to receive hereunder shall cease, and all rights to
such payments shall become vested in the Buyer, which shall have
the sole right to receive such payments and apply them to the
amounts owed by the Seller pursuant to the Agreement. All
payments that are received by the Seller contrary to the
provisions of this clause (i) shall be received in trust for the
benefit of the Buyer, shall be segregated from other funds of the
Seller and shall be promptly paid to the Buyer.
(j) In addition to the other remedies available to the Buyer upon the
occurrence and during the continuance of an Event of Default by
the Seller, the Buyer shall be entitled to the right of set-off
with respect to any amounts owed by the Seller to the Buyer under
any contract, margin account or other arrangement. The Seller
hereby waives any right it may have to require that any deposits
held by the Buyer for the Seller be set off by the Buyer against
the Seller's obligations under the Agreement.
14. APPLICATION OF PROCEEDS
The proceeds of any sale of or other realization on any or all of the Collateral
at the time held by the Buyer under the Agreement, shall be applied by the Buyer
in the following order of priority:
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(a) First, to the payment of all reasonable costs and expenses of
such sale incurred by the Buyer and its affiliates and all
reasonable expenses (including the reasonable fees and expenses
of counsel), liabilities and advances reasonably made or incurred
by the Buyer and its affiliates in connection therewith.
(b) Second, to the payment of the outstanding Repurchase Price owed
by the Seller under the Agreement.
(c) Third, to the payment of all other amounts owed by the Seller
under the Agreement.
(d) Fourth, to the payment of any other amounts owed by the Seller to
the Buyer or any affiliate thereof under any other instrument or
agreement.
(e) Fifth, to the payment to the Seller, or to such other Person as
court of competent jurisdiction may direct, of any surplus then
remaining from such proceeds and other cash.
As used in the Agreement, "proceeds" of the Collateral shall mean cash and other
property received or otherwise realized in respect of the Purchased Loans.
15. INDEMNIFICATION
If the Buyer becomes involved in any capacity in any action, proceeding or
investigation in connection with any matter contemplated by this Agreement, the
Seller will reimburse the Buyer for its legal and other expenses (including the
cost of any investigation and preparation) as they are incurred by the Buyer.
The Seller also agrees to indemnify and hold harmless the Buyer and its
affiliates and their respective directors, officers, employees and agents
(collectively, the "Indemnified Parties"), from and against any and all losses,
claims, damages and liabilities, joint or several, related to or arising out of
any matters contemplated by this Agreement, unless (and this clause shall apply
only to the extent that it shall be finally judicially determined that) such
losses, claims, damages or liabilities resulted primarily from the gross
negligence or willful misconduct of the Buyer.
If the foregoing indemnification is for any reason unavailable to any of the
Indemnified Parties, then the Seller shall contribute to the amount paid or
payable by the Indemnified Parties as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative benefits
received by the Seller, on the one hand, and such Indemnified Parties, on the
other, arising out of the matters contemplated by this Agreement.
The reimbursement, indemnity and contribution provided for herein shall be in
addition to any other liability that the Seller may otherwise have under this
Agreement, at law or in equity, and shall survive the termination or expiration
of this Agreement.
16. PAYMENT AND TRANSFER
Unless otherwise mutually agreed, all transfers of funds hereunder shall be in
immediately available funds. All Mortgage Loans transferred by one party hereto
to the other party (a) shall be in suitable form for transfer or shall be
accompanied by duly executed instruments of transfer or assignment in blank and
such other documentation as the party receiving possession may reasonably
request, (b) shall be transferred on the book-entry system of a Federal Reserve
Bank, or (c) shall be transferred by any other method mutually acceptable to the
Seller and the Buyer.
17. LIMITED POWER OF ATTORNEY
The Seller hereby appoints the Buyer to act (after the occurrence and during the
continuation of an Event of Default) as the attorney-in-fact of the Seller for
the purpose of carrying out the provisions of this Agreement and taking any
action and executing any instruments that the Buyer shall deem necessary or
advisable to accomplish the purposes hereof. This appointment as
attorney-in-fact is irrevocable and is coupled with an interest. Without
limiting the generality of the foregoing, the Buyer and its assigns shall have
the right and power to sell Purchased Loans and to receive, endorse and collect
all checks made payable to the order of the Seller on account of the principal
or interest on any of the Purchased Loans and to give full discharge of the
same.
18. RIGHT OF FIRST REFUSAL
The Seller hereby grants to the Buyer a right of first refusal with respect to
all Mortgage Loans originated or acquired by the Seller or any other entity
owned or controlled by the Shareholders of Coast Security Mortgage, Inc. which
are transferred from the Buyer to the Seller upon termination of a Transaction,
pursuant to which no such Mortgage Loan shall be sold by the Seller to any third
party (except a third party from whom an unconditional commitment letter has
been obtained) without the Buyer's consent, which shall not be unreasonably
withheld. Such purchases shall be made pursuant to and in accordance with that
certain Mortgage Loan Purchase and Sale Agreement dated as of [July 1, 1996]
between the Seller and the Buyer, as the same may be amended from time to time.
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19. EFFECT OF TERMINATION
The termination of this Agreement by either party shall not eliminate any
liability for losses incurred by either party during the duration of this
Agreement. To the extent that this Agreement is terminated, the terms of this
Agreement shall continue to apply to any Transactions outstanding after the
termination of this Agreement. The provisions of Paragraph 15 relating to
Indemnification shall survive the termination of this Agreement.
20. TIME
All references to time contained in the Agreement shall be deemed to be local
time in [Irvine, California] on the applicable day.
21. FEES AND EXPENSES
Nothing in this Agreement shall act as a bar to the collection of any fees or
expenses of the Buyer that the Seller may agree to pay in any separate agreement
relating to any or all of the Transactions.
22. PAYMENT OF SECURED CREDITORS
The Seller may direct the Buyer to pay all or any portion of the Purchase Price
for a Transaction to one or more creditors of the Seller, or any of its
affiliates, if such payment is necessary to release a lien on the Mortgage Loans
that are to be purchased in such Transaction. Such payment and release of an
existing lien may occur simultaneously with the purchase of Mortgage Loans under
this Agreement.
23. SINGLE AGREEMENT
The Buyer and the Seller acknowledge that, and have entered into this Master
Repurchase Agreement 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 have been made in
consideration of each other. Accordingly, each of the Buyer and the Seller
agrees (a) 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, (b) 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 (c) 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.
24. NOTICES AND OTHER COMMUNICATIONS
Any and all notices, statements, demands or other communications hereunder may
be given by a party to the other by mail, facsimile, telegraph, messenger or
otherwise to the address listed below, or such other address as may be specified
in a notice of change of address hereafter received by the other:
SELLER: Coast Security Mortgage, Inc.
500 N. State College Blvd.
Suite 800
Orange, California 92668
Attention: Mark Chisick
Telephone: [____________________]
Telephone: [____________________]
BUYER: First Alliance Mortgage Co.
17305 Von Karman Avenue
Irvine, California 92614
Attention: Director, Secondary Marketing
Telephone: (714) 224-8357
Facsimile: (714) 224-8366
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THIRD-PARTY
BENEFICIARY: First Union National Bank
301 South College Street, DC-06
Charlotte, North Carolina 28288
Attention: Wallace M. Saunders
Telephone: (704) 374-4868
Facsimile: (704) 374-7102
All notices, demands and requests hereunder may be made orally, to be confirmed
promptly in writing, or by other communication as specified in the preceding
sentence.
25. ENTIRE AGREEMENT; SEVERABILITY
This Agreement shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions. 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.
26. ASSIGNMENT
(a) Except as provided in Paragraph 26(c), the rights and obligations
of the parties under this Agreement and under any Transaction
shall not be assigned by either party without the prior written
consent of the other party, and any such assignment without the
prior written consent of the other party shall be null and void.
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.
(b) Subparagraph (a) of this Paragraph 26 shall not preclude a party
from assigning, charging or otherwise dealing with all or any
part of its interest in any sum payable to it under Paragraph 13
hereof.
(c) Notwithstanding the provisions of Subparagraph (a) of this
Paragraph 26, the Buyer may (and the parties contemplate that the
Buyer will) assign all of its rights hereunder to First Union
National Bank without obtaining the written consent of the
Seller. The parties acknowledge and agree that, to the extent the
Buyer's rights are so assigned, First Union National Bank shall
be entitled to the full benefits of this Agreement and may
enforce all of the parties' obligations hereunder.
27. GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA WITHOUT
GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
28. 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 in writing and duly executed by both of the parties hereto. Without
limitation on any of the foregoing, the failure to give a notice pursuant to
Paragraph 5(b) hereof will not constitute a waiver of any right to do so at a
later date.
29. USE OF EMPLOYEE PLAN ASSETS
(a) If assets of an employee benefit plan subject to any provision of
ERISA are intended to be used by either party hereto (the "Plan
Party") in a Transaction, the Plan Party shall so notify the
other party prior to the Transaction. The Plan Party shall
represent in writing to the other party that the Transaction does
not constitute a prohibited transaction under ERISA or is
otherwise exempt therefrom, and the other party may proceed in
reliance thereon but shall not be required so to proceed.
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(b) Subject to the last sentence of subparagraph (a) of this
Paragraph, any such Transaction shall proceed only if the Seller
furnishes or has furnished to the Buyer its most recent available
audited statement of its financial condition and its most recent
subsequent unaudited statement of its financial condition.
(c) By entering into a Transaction pursuant to this Paragraph, the
Seller shall be deemed to (i) represent to the Buyer that since
the date of the Seller's latest such financial statements, there
has been no material adverse change in the Seller's financial
condition which the Seller has not disclosed to the Buyer, and
(ii) agree to provide the Buyer with future audited and unaudited
statements of its financial condition as they are issued, so long
as it is a Seller in any outstanding Transaction involving a Plan
Party.
30. INTENT
(a) The parties recognize that each Transaction is a "repurchase
agreement" as that term is defined in Section 101 of Title 11 of
the Bankruptcy Code, and a "securities contract" as that term is
defined in Section 741 of the Bankruptcy Code. The parties
further intend and recognize that the Mortgage Loans constitute
"securities" as such term is defined in Section 101(49) of the
Bankruptcy Code.
(b) It is understood that either party's right to liquidate Mortgage
Loans delivered to it in connection with Transactions hereunder
or to exercise any other remedies pursuant to Paragraph 13 hereof
is a contractual right to liquidate such Transaction as described
in Sections 555 and 559 of the Bankruptcy Code.
(c) Although the parties intend that all Transactions hereunder be
sales and purchases and not loans, in the event any such
Transactions are deemed to be loans, the Seller shall be deemed
to have pledged to the Buyer as security for the performance by
the Seller of its obligations under each such Transaction, and
shall be deemed to have granted to the Buyer a security interest
in, all of the Purchased Loans with respect to all Transactions
hereunder and all Income thereon and other proceeds thereof.
(d) The parties agree and acknowledge that if a party hereto is an
"insured depository institution," as such term is defined in
FDIA, then each Transaction hereunder is a "qualified financial
contract," as that term is defined in FDIA and any rules, orders
or policy statements thereunder (except insofar as the type of
assets subject to such Transaction would render such definition
inapplicable).
(e) It is understood that this Agreement constitutes a "netting
contract" as defined in and subject to Title IV of FDICIA and
each payment entitlement and payment obligation under any
Transaction hereunder shall constitute a "covered contractual
payment entitlement" or "covered contractual payment obligation",
respectively, as defined in and subject to FDICIA (except insofar
as one or both of the parties is not a "financial institution" as
that term is defined in FDICIA).
31. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is a
broker or dealer registered with the SEC under Section 15 of the
1934 Act, the Securities Investor Protection Corporation has
taken the position that the provisions of SIPA do not protect the
other party with respect to any Transaction hereunder;
(b) in the case of Transactions in which one of the parties is a
government securities broker or a government securities dealer
registered with the SEC under Section 15C of the 1934 Act, SIPA
will not provide protection to the other party with respect to
any Transaction hereunder; and
(c) in the case of Transactions in which one of the parties is a
financial institution, funds held by the financial institution
pursuant to a Transaction hereunder are not on deposit and
therefore are not insured by the Federal Deposit Insurance
Corporation or the National Credit Union Share Insurance Fund, as
applicable.
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IN WITNESS WHEREOF, the Seller and the Buyer have caused this Master
Repurchase Agreement to be executed by their authorized representatives as of
this 31st day of October, 1997.
COAST SECURITY MORTGAGE, INC.,
as Seller
By:______________________________
Name:____________________________
Title:___________________________
FIRST ALLIANCE MORTGAGE CO.,
as Buyer
By:______________________________
Name:____________________________
Title:___________________________
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EXHIBIT A
FORM OF CONFIRMATION
[Date]
Coast Security Mortgage, Inc.
500 N. State College Blvd.
Suite 800
Orange, California 92668
Attention: Mark Chisick
Ladies and Gentlemen:
Pursuant to the master repurchase agreement (the "Master Repurchase
Agreement"), dated as of October 31, 1997, between the undersigned (the "Buyer")
and you (the "Seller"), the Buyer hereby agrees to purchase the Mortgage Loans
identified on SCHEDULE I attached hereto, subject to the terms set forth below:
Purchase Date: ________________
Repurchase Date: ________________
Purchase Price: ________________
Pricing Rate: ________________
Margin: [___]%
All of the representations and warranties made in the Master Repurchase
Agreement must be true and correct as of the Purchase Date and no Event of
Default shall have occurred. Capitalized terms not defined herein shall have the
meanings assigned to them in the Master Repurchase Agreement.
If you are in agreement with these terms, please execute the
acknowledgement and acceptance set forth below and return one copy of this
Confirmation to the Buyer.
Very truly yours,
FIRST ALLIANCE MORTGAGE CO.,
as Buyer
By:______________________________
Name:____________________________
Title:___________________________
Accepted and Agreed as of
this ____ day of __________, ____.
COAST SECURITY MORTGAGE, INC.,
as Seller
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
SCHEDULE I TO CONFIRMATION
MORTGAGE LOAN SCHEDULE
<PAGE>
EXHIBIT B
REPRESENTATIONS AND WARRANTIES
RELATING TO ELIGIBLE MORTGAGE LOANS
(a) The Mortgage Loan is a binding and valid obligation of the obligor
thereon, in full force and effect and enforceable in accordance with its terms.
(b) The Mortgage Loan is genuine in all respects as appearing on its
face and as represented in the books and records of the Seller and all
information set forth therein is true and correct.
(c) The Mortgage Loan is free of any default of any party thereto
(including the Seller), other than as expressly permitted pursuant to
subparagraph (d) below, counterclaims, offsets and defenses and from any
rescission, cancellation or avoidance, whether by operation of law or otherwise.
(d) No payment under the Mortgage Loan is more than 30 days past due the
payment due date set forth in the underlying promissory note and deed of trust
(or mortgage).
(e) The Mortgage Loan contains the entire agreement of the parties
thereto with respect to the subject matter thereof, has not been modified or
amended in any respect and is free of concessions or understandings with the
obligor thereon of any kind not expressed in writing therein.
(f) The Mortgage Loan complies in all respects and was originated in
accordance with all applicable laws and regulations governing the same,
including, without limitation, the federal Consumer Credit Protection Act, the
federal Real Estate Settlement Procedures Act, the federal Equal Credit
Opportunity Act, the federal Truth-in-Lending Act, and the regulations
promulgated thereunder and all applicable usury laws and restrictions, and all
notices, disclosures and other statements or information required by law or
regulation to be given, and any other act required by law or regulation to be
performed, in connection with the Mortgage Loan have been given and performed as
required.
(g) Unless otherwise provided for in the written disbursement
instructions relating to the Mortgage Loan, all proceeds of the Mortgage Loan
have been fully disbursed.
(h) At all times the Mortgage Loan will be free and clear of all liens.
(i) The property covered by the Mortgage Loan is insured against loss or
damage by fire and all other hazards normally included within standard extended
coverage in accordance with the provisions of the Mortgage Loan with the Seller
named as a loss payee thereon.
(j) If the property covered by the Mortgage Loan falls within a flood
zone as identified by a HUD-identified flood map, the property is insured
against flood damage in an amount equal to the lesser of the balance due under
the related Mortgage Loan or the maximum amount of insurance available under the
National Flood Insurance Program.
(k) The property covered by the Mortgage Loan is free and clear of all
liens except:
(i) the lien in favor of the Seller;
(ii) the lien of current real property taxes and assessments not
yet due and payable;
(iii) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record, as of the date of
recording, as are acceptable to mortgage lending institutions generally
and specifically referred to in a lender's title insurance policy
delivered to the originator of the Mortgage Loan and which (A) are
referred to or otherwise considered in the appraisal made for the
originator of the Mortgage Loan or (B) do not materially adversely
affect the appraised value of the property as set forth in such
appraisal;
(iv) other matters to which like properties are commonly subject
and which do not materially interfere with the benefits of the security
intended to be provided by the Mortgage Loan or the use, enjoyment,
value or marketability of the related property;
(v) liens subordinate in priority to the lien in favor of the
Seller; and
(vi) in the case of second priority Mortgage Loans, one lien
superior in priority to the lien in favor of the Seller.
(l) The property shall be improved, and such improvements shall consist
of a completed one- to four-unit single family residence, including, but not
limited to, a condominium, planned unit development or townhouse, but excluding
in any event a co-op or mobile home.
<PAGE>
(m) There has been delivered to the Buyer the Required Documents for the
Mortgage Loan; provided, however, that a Mortgage Loan, the Required Documents
for which have not been delivered to the Buyer, may be an Eligible Mortgage Loan
and may be included in a Transaction so long as the Required Documents for such
Mortgage Loan shall have been delivered to the Buyer within seven days of the
inclusion of such Mortgage Loan in a Transaction.
(n) The Mortgage Loan is not subject to any servicing arrangement with
any Person other than the Seller nor are any servicing rights relating to the
Mortgage Loan subject to any lien, claim, interest or negative pledge in favor
of any Person other than as permitted hereunder.
(o) The Seller has obtained or conducted an appraisal in connection with
the origination of the Mortgage Loan in accordance with the Seller's
Underwriting Standards.
(p) The Mortgage Loan is secured by a first or second priority mortgage
or deed of trust on the property covered thereby.
(q) The Mortgage Loan is not a revolving credit facility.
(r) No real property taxes or insurance payments due and payable with
respect to the property (or escrow installments therefor) covered by the
Mortgage Loan are past due the payment due date thereof.
(s) The Mortgage Loan complies with the Underwriting Standards.
<PAGE>
EXHIBIT C
SELLER'S UNDERWRITING STANDARDS
<PAGE>
EXHIBIT D
FORM OF OPINION OF COUNSEL
<PAGE>
MASTER REPURCHASE AGREEMENT
Dated as of October 27, 1997
Between:
FIRST ALLIANCE MORTGAGE CO.,
as Seller
and
FIRST UNION NATIONAL BANK,
as Buyer
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in which the
Seller agrees to transfer to the Buyer mortgage loans or other assets (the
"Collateral") against the transfer of funds by the Buyer, with a simultaneous
agreement by the Buyer to transfer to the Seller such Collateral at a date
certain, against the transfer of funds by the Seller. Each such transaction
shall be referred to herein as a "Transaction" and, unless otherwise agreed in
writing, shall be governed by this Agreement.
2. DEFINITIONS
As used in this Agreement, and unless the context requires a different meaning,
the following terms shall have the meanings assigned to them below:
(a) "1934 Act" shall mean the Securities Exchange Act of 1934.
(b) "Act of Insolvency" shall mean, with respect to any party,
(i) the commencement by such party as debtor of any case or
proceeding under any bankruptcy, insolvency, reorganization,
liquidation, moratorium, dissolution, delinquency or similar law,
or such party seeking the appointment or election of a receiver,
conservator, trustee, custodian or similar official for such
party or any substantial part of its property, or the convening
of any meeting of creditors for purposes of commencing any such
case or proceeding or seeking such an appointment or election,
(ii) the commencement of any such case or proceeding against such
party, or another seeking such an appointment or election, or the
filing against a party of an application for a protective decree
under the provisions of SIPA, which (A) is consented to or not
timely contested by such party, (B) results in the entry of an
order for relief, such an appointment or election, the issuance
of such a protective decree or the entry of an order having a
similar effect, or (C) is not dismissed within 15 days, (iii) the
making by such party of a general assignment for the benefit of
creditors, or (iv) the admission in writing by such party of such
party's inability to pay such party's debts as they become due.
(c) "Additional Collateral" shall mean Mortgage Loans and/or cash
provided by the Seller to the Buyer pursuant to Paragraph 5(b)
hereof.
(d) "Additional Required Documents" shall mean the following
documents with respect to any Mortgage Loan:
(i) original disclosure statements complying with Regulation Z
("Truth in Lending") of the Board of Governors of the
Federal Reserve System and all agreements relating
thereto, if applicable;
(ii) original Equal Credit Opportunity Act notice and
additional disclosure statements or agreements relating
thereto, if applicable;
(iii) a certification as to whether or not such property falls
into a flood zone as identified by a HUD identified flood
map;
<PAGE>
(iv) an attorney's opinion of title and abstract of title or 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 Loans and qualified
to do business in the jurisdiction where the related
property is located, insuring the Seller, its successors
and assigns, as to the first priority lien of the related
Mortgage in the case of a Mortgage Loan secured by a first
priority lien and the second priority lien of the Mortgage
Loan in the case of a Purchased Loan secured by a second
lien on the related property, in the original principal
amount of the Purchased Loan; PROVIDED that the Seller
shall be the sole named insured of any such mortgage title
insurance policy, the assignment to the Buyer or the
Custodian as assignee of the Buyer of the Seller's
interest in such mortgage title insurance policy shall not
require the consent of or notification to the insurer or
the same has been obtained, and such mortgage title
insurance policy shall be in full force and effect and
will be in full force and effect and inure to the benefit
of the Buyer upon the consummation of the transactions
contemplated by this Agreement; and, PROVIDED FURTHER,
that no claims shall have been made under such mortgage
title insurance policy and no prior holder of the related
Mortgage Loan, including the Seller, shall have done, by
act or omission, anything that would impair the coverage
of such mortgage title insurance policy;
(v) a property and casualty insurance policy on the property
subject to the Mortgage Loan covering fire, hazard and
extended coverage, and if applicable, flood and earthquake
insurance, all in amounts not less than the principal
amount of the promissory note relating to the Mortgage
Loan (or the maximum amount issuable for flood insurance)
which insurance has been endorsed to provide for payment
thereof to the Seller, as mortgagee, together with written
notice to the mortgagor of the fact, if true, that
mortgagor's property lies within a flood zone;
(vi) original or copy of executed application by the obligor on
such Mortgage Loan for such Mortgage Loan;
(vii) original or copy of credit bureau report on the obligor on
such Mortgage Loan;
(viii) original HUD-1 settlement statement on such Mortgage Loan;
(ix) original complete appraisal obtained with respect to the
applicable property obtained in connection with the
Mortgage Loan;
(x) original or certified copy of mortgagee's title insurance
policy insuring the lien of the Mortgage Loan against the
applicable property; and
(xi) such other documents as may be required by the Seller's
Underwriting Standards, subject to reasonable variances
from the Underwriting Standards permitted by the Seller.
(e) "Agreement" shall mean this Master Repurchase Agreement, together
with all exhibits, schedules or amendments hereto and all
Confirmations hereunder.
(f) "Aggregate Commitment" shall have the meaning assigned to such
term in Paragraph 6.
(g) "Bankruptcy Code" shall mean Title 11 of the United States Code,
as amended.
(h) "Business Day" shall mean any day except Saturday, Sunday and any
day which is a legal holiday or a day on which banking
institutions are authorized or required by law to close in
Charlotte, North Carolina.
(i) "Buyer" shall mean First Union National Bank, a national banking
association, with its principal place of business in Charlotte,
North Carolina.
(j) "Coast" shall mean Coast Security Mortgage, Inc.
(k) "Coast Master Repurchase Agreement" shall mean a Master
Repurchase Agreement between Coast, as seller, and Seller, as
buyer, which shall be in a form acceptable to the Buyer.
(l) "Collateral" shall have the meaning assigned to such term in
Paragraph 1.
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<PAGE>
(m) "Confirmation" shall mean a confirmation for a Transaction as
required by Paragraph 4(a) hereof, substantially in the form of
Exhibit A hereto.
(n) "Correspondent Confirmation" shall mean a written confirmation
for a repurchase transaction entered into by Seller and
Nationscapital or Coast pursuant to a Correspondent Master
Repurchase Agreement.
(o) "Correspondent Mortgage Loans" shall mean those Mortgage Loans
originated by Nationscapital or Coast and acquired by the Seller
pursuant to a Correspondent Master Repurchase Agreement.
(p) "Correspondent Master Repurchase Agreement" shall mean either of
the Nationscapital Master Repurchase Agreement or the Coast
Master Repurchase
Agreement.
(q) "Current Margin" shall mean, with respect to any date, the
difference between (i) the aggregate Market Value of all
Purchased Loans held by the Buyer on such date and (ii) the
aggregate Purchase Price paid by the Buyer for all Purchased
Loans held by the Buyer on such date.
(r) "Custodian" shall mean The Bank of New York, a New York bank.
(s) "Default Rate" shall mean, for any day, the Pricing Rate for such
day plus 2.50%.
(t) "Eligible Mortgage Loan" shall mean a Mortgage Loan (i) with
respect to which each of the representations and warranties set
out in Exhibit B hereto is accurate and complete as of the date
of the related Confirmation (and the Seller by including any such
Mortgage Loan in any Transaction shall be deemed to so represent
and warrant to the Buyer at and as of the date of such
Transaction) and (ii) that has been outstanding no more than 182
days since its date of origination.
(u) "ERISA" shall mean the Employee Retirement Income Security Act of
1974.
(v) "FDIA" shall mean the Federal Deposit Insurance Act, as amended.
(w) "FDICIA" shall mean the Federal Deposit Insurance Corporation
Improvement Act of 1991.
(x) "Income" shall mean, with respect to any Mortgage Loan at any
time, any principal thereof and all interest, dividends or other
distributions thereon.
(y) "Indemnified Parties" shall have the meaning assigned to such
term in Paragraph 15.
(z) "LIBOR" shall mean the London Interbank Offered Rate obtained on
page 3750 of Telerate as being the rate at which deposits in
immediately available U.S. dollars having a maturity of one month
are offered to or by reference banks in the London interbank
market, as determined by the Buyer at the time of each
Transaction.
(aa) "Margin" shall mean, with respect to any Mortgage Loan or pool of
Mortgage Loans, the difference between the Market Value of such
loan or loans and the Purchase Price for such loan or loans.
(bb) "Margin Call" shall have the meaning assigned to such term in
Paragraph 5(b).
(cc) "Margin Deficit" shall have the meaning assigned to such term in
Paragraph 5(b).
(dd) "Market Value" shall mean, with respect to each Purchased Loan,
the market value of such Purchased Loan as determined by the
Buyer in its sole discretion.
(ee) "Mortgage Loan" shall mean a residential real estate secured
loan, including, without limitation: (i) a promissory note, any
reformation thereof and related deed of trust (or mortgage) and
security agreement; (ii) all guaranties and insurance policies,
including, without limitation, all mortgage (if applicable) and
title insurance policies and all fire and extended coverage
insurance policies and rights of the Seller to return premiums or
payments with respect thereto; and (iii) all right, title and
interest of the Seller in the property covered by such deed of
trust (or mortgage).
(ff) "Nationscapital" shall mean Nationscapital Mortgage Company.
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<PAGE>
(gg) "Nationscapital Master Repurchase Agreement" shall mean a Master
Repurchase Agreement between Nationscapital, as seller, and
Seller, as buyer, which shall be in a form acceptable to the
Buyer.
(hh) "Original Margin" shall mean, with respect to any date, the
difference between (i) the aggregate Market Value of all
Purchased Loans held by the Buyer on such date, determined as of
the most recent Purchase Date for each such Purchased Loan, and
(ii) the Purchase Price paid by the Buyer for all such Purchased
Loans on such Purchase Dates.
(ii) "Person" shall mean a corporation, an association, a partnership,
an organization, a business, a trust, an individual, a government
or political subdivision thereof, any governmental agency or any
other entity.
(jj) "Plan Party" shall have the meaning assigned to such term in
Paragraph 29(a).
(kk) "Price Differential" shall mean, with respect to any Transaction
as of any date, the difference between the Purchase Price paid by
the Buyer and the Repurchase Price to be paid by the Seller. The
Pricing Differential will equal 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.
(ll) "Pricing Rate" shall mean the per annum rate for determination of
the Price Differential, which rate shall be (i) with respect to
Transactions involving Seller Mortgage Loans, LIBOR plus 25 basis
points; and (ii) with respect to Transactions involving
Correspondent Mortgage Loans, LIBOR plus 50 basis points.
(mm) "Purchase Date" shall mean the date on which Purchased Loans are
to be transferred by the Seller to the Buyer.
(nn) "Purchased Loans" shall mean the Mortgage Loans transferred by
the Seller to the Buyer in a Transaction hereunder. The term
"Purchased Loans" with respect to any Transaction at any time
also shall include Additional Collateral delivered pursuant to
Paragraph 5(b) hereof.
(oo) "Purchase Price" shall mean the price at which Purchased Loans
are transferred by the Seller to the Buyer.
(pp) "Replacement Mortgage Loans" shall have the meaning assigned to
such term in Paragraph 13(c).
(qq) "Repurchase Date" shall mean the date on which the Seller is
required to repurchase the Purchased Loans from the Buyer, which
shall be (i) the 10th day of the calendar month in which the
Purchase Date occurs or, if such Purchase Date falls after the
10th day of such month, the 10th day of the following calendar
month (or, in each case, if such day is not a Business Day, the
next Business Day), or (ii) such earlier date as may be
determined by application of the provisions of Paragraph 13
hereof.
(rr) "Repurchase Price" shall mean the price at which Purchased Loans
are to be transferred from the Buyer to the Seller upon
termination of a Transaction, which will be determined in each
case as the sum of the Purchase Price and the Price Differential
as of the date of such determination.
(ss) "Repurchase Term" shall mean, with respect to any Transaction,
the period beginning on the Purchase Date and continuing through
the Repurchase Date.
(tt) "Required Documents" shall mean the following documents with
respect to any Mortgage Loan:
(i) the original executed and fully completed promissory note
relating to the Mortgage Loan (properly endorsed to the
Seller if purchased by the Seller from another
originator), which promissory note shall be duly endorsed
in blank without recourse by an authorized officer of the
Seller;
(ii) the original executed and fully completed mortgage or deed
of trust relating to the Mortgage Loan in proper form for
recordation in the appropriate jurisdiction and duly
recorded in the appropriate jurisdiction; PROVIDED,
HOWEVER, that a certified copy of the executed mortgage or
deed of trust relating to the Mortgage Loan may be
delivered to the Buyer in lieu of the original recorded
deed of trust or mortgage until such time as the original
recorded mortgage or deed of trust is received from the
recording jurisdiction and submitted to the Buyer; and
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<PAGE>
(iii) an original executed, fully completed and recordable but
unrecorded assignment of the mortgage or deed of trust
relating to the Mortgage Loan in proper form for
recordation in the appropriate jurisdiction (unless the
Buyer determines that under applicable state law the
assignment should be recorded in order to adequately
protect its interest, in which case the assignment shall
be recorded by the Seller and a certified true copy
thereof shall be provided to the Buyer), together with the
original or a duly certified copy of the fully completed
and proper assignment or assignments of the mortgage or
deed of trust from the original holder through any
subsequent transferees to the Seller in proper form for
recordation in the appropriate jurisdiction, duly recorded
if local requirements in the jurisdiction in which the
property is located required the recordation of such
assignment or assignments.
(uu) "SEC" shall mean the Securities and Exchange Commission.
(vv) "Seller Mortgage Loans" shall mean those Mortgage Loans
originated or purchased by the Seller, other than Correspondent
Mortgage Loans.
(ww) "Servicer" shall mean First Alliance Mortgage Co.
(xx) "SIPA" shall mean the Securities Investor Protection Act of 1970.
(yy) "Transaction" shall mean each transaction between the Seller and
the Buyer that is undertaken pursuant to a Confirmation.
(zz) "Underwriting Standards" shall mean the underwriting policies of
the Seller set forth in Exhibit C hereto.
3. INITIATION AND TERMINATION OF TRANSACTIONS
(a) An agreement to enter into a Transaction may be made in writing
at the initiation of either the Buyer or the Seller and shall be
evidenced by a Confirmation delivered pursuant to Paragraph 4(a).
On the Purchase Date for the Transaction, the Purchased Loans
shall be transferred to the Buyer or its agent against the
transfer of the Purchase Price to an account of the Seller.
(b) The Buyer's obligation to purchase any Mortgage Loan shall be
subject to the following:
(i) The Buyer (or the Custodian if so directed by the Buyer)
shall have possession of the Required Documents for each
Mortgage Loan to be purchased; provided that such
possession may have been released to a prospective
purchaser of a Mortgage Loan (or a custodian acting on its
behalf) if the Buyer or the Custodian, as applicable, has
received a bailment letter for the related Required
Documents.
(ii) The Buyer's determination that the Mortgage Loans to be
purchased in the requested Transaction satisfy the
requirements of this Agreement.
(iii) The Seller's representations and warranties contained in
this Agreement and reaffirmed in the Confirmation shall be
true and correct.
(iv) The Purchase Price for such Transaction shall be at least
$1,000,000.
(v) The sum of the Purchase Price for such Transaction and the
aggregate Purchase Price paid for all Purchased Loans
owned by the Buyer immediately prior to the consummation
of the Transaction shall not exceed the Aggregate
Commitment.
(vi) No Event of Default shall have occurred under this
Agreement.
(vii) To the extent such Transaction includes Correspondent
Mortgage Loans, the related Confirmation shall identify
the Purchased Loans as such and shall be accompanied by an
assignment in the form of Exhibit D hereto transferring
all of the Seller's rights with respect to such Mortgage
Loans under the applicable Correspondent Master Repurchase
Agreement and Correspondent Confirmation(s).
(c) On the Repurchase Date for each Transaction, termination of the
Transaction will be effected by transfer to the Seller or its
agent of the Purchased Loans and any Income in respect thereof
received by the Buyer (and not previously credited or transferred
to, or applied to the obligations of the Seller hereunder)
against the transfer of the Repurchase Price to an account of the
Buyer.
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<PAGE>
4. TRANSACTION CONFIRMATION
(a) Upon the parties' agreement to enter into a Transaction
hereunder, the Buyer shall prepare and deliver to the Seller, at
least one Business Day prior to the Purchase Date for the
Transaction, a Confirmation for such Transaction.
(b) The Confirmation shall list the Purchased Loans and set forth (i)
the Purchase Date, (ii) the Purchase Price, (iii) the anticipated
Repurchase Date, (iv) the Pricing Rate or Repurchase Price
applicable to the Transaction, and (v) any additional terms or
conditions of the Transaction.
(c) The Confirmation, together with this Agreement, shall constitute
conclusive evidence of the terms agreed between the Buyer and the
Seller, and shall be binding upon the parties unless written
notice of objection is given by the objecting party prior to the
closing of the Transaction.
(d) In the event of any conflict between the terms of a Confirmation
and this Agreement, the Confirmation shall prevail.
5. MARGIN MAINTENANCE
(a) On Monday of each week during the Repurchase Term (or more often,
if the Buyer in its sole discretion so decides), the Buyer will
determine (i) the aggregate Market Value of all Purchased Loans
and other Collateral held by the Buyer and (ii) the Current
Margin for such date.
(b) If on any date during the term of this Agreement the Current
Margin for such date is less than the Original Margin for such
date (such shortfall, a "Margin Deficit"), the Buyer may by
notice to the Seller (such notice, a "Margin Call") require that
the Seller, at the Buyer's option, transfer to the Buyer cash or
additional Mortgage Loans reasonably acceptable to the Buyer
(collectively, "Additional Collateral"), so that the Current
Margin for such date will then equal or exceed the Original
Margin for such date; PROVIDED, HOWEVER, that the Buyer may not
make a Margin Call unless the Margin Deficit exceeds $100,000.
(c) If any notice is given under subparagraph (b) of this Paragraph 5
on any Business Day, then the Seller shall transfer cash or
Mortgage Loans as provided in such subparagraph no later than the
close of business on the second Business Day following the date
on which such notice is given. Any cash transferred to the Buyer
pursuant to this subparagraph (c) shall be held by the Buyer for
so long as any Transaction remains in effect and shall be applied
against the Repurchase Price for any terminated Transaction on
the applicable Repurchase Date.
6. AGGREGATE COMMITMENT AND TERM
(a) The aggregate Purchase Price for all Purchased Loans owned by the
Buyer on any date shall at no time exceed $100,000,000 (the
"Aggregate Commitment").
(b) This Agreement shall continue in effect for a period of 364 days
from the date of its execution by both parties.
7. PAYMENTS ON MORTGAGE LOANS; SERVICING
The Seller shall act as servicer for all Mortgage Loans, will service all
Mortgage Loans in accordance with industry standards for loans held by third
parties and shall not sell or transfer its rights to service such loans without
the Buyer's consent. All funds received by the Seller, in its capacity as
servicer with respect to Mortgage Loans that are Purchased Loans, shall be held
by the Seller in trust for the Buyer until such Mortgage Loans have been
repurchased by the Seller; provided that all such funds may be held by the
Seller in the Seller's general servicing account.
8. REPURCHASE PRIOR TO REPURCHASE DATE
Notwithstanding any provision hereof to the contrary, (i) the Buyer may require
the Seller to repurchase any of the Purchased Loans subject to a Transaction
upon two Business Days' prior notice and (ii) the Seller shall promptly
repurchase any Purchased Loan that ceases to be an Eligible Mortgage Loan.
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9. DELIVERY OF MORTGAGE LOANS
All of the Required Documents for Mortgage Loans that are to be Purchased Loans
for a Transaction shall be delivered to the Buyer (or the Custodian, if so
directed by the Buyer) at least one Business Day prior to the Purchase Date for
such Transaction.
10. REPRESENTATIONS AND WARRANTIES
(a) Each of the Buyer and the Seller represents and warrants to the
other that (i) it is duly authorized to execute and deliver this
Agreement, to enter into 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
individual signing this Agreement on its behalf is duly
authorized to do so on its behalf, (iv) it has obtained all
authorizations of any governmental body required in connection
with this Agreement and the Transactions hereunder and such
authorizations are in full force and effect and (v) the
execution, delivery and performance of this Agreement and the
Transactions hereunder will not violate any law, ordinance,
charter, bylaw or rule applicable to it or any material agreement
by which it is bound or by which any of its assets are affected.
On the Purchase Date for any Transaction the Buyer and the Seller
shall each be deemed to repeat all the foregoing representations
made by it.
(b) In addition to the foregoing, the Seller hereby represents and
warrants that, as of the date of this Agreement and as of the
Purchase Date for each Transaction:
(i) The Seller is servicing all Mortgage Loans in accordance
with industry standards for loans held by third parties.
(ii) No Event of Default has occurred or is continuing under
this Agreement.
(iii) Since the date of the most recent balance sheet or
financial statement delivered by the Seller to the Buyer
pursuant to the Agreement, there has been no material
adverse change in its financial condition or results of
operations.
(c) The Seller hereby represents and warrants to the Buyer that, as
to each Mortgage Loan, as of the applicable Purchase Date or such
other date specified herein:
(i) The information set forth in the schedule of Mortgage
Loans attached to each Confirmation is true and correct in
all material respects.
(ii) Such Mortgage Loan is an Eligible Mortgage Loan.
11. COVENANTS
The Seller hereby covenants and agrees with the Buyer that, as long as the Buyer
has any obligation to enter into Transactions under the Agreement:
(a) The Seller shall notify the Buyer of any material default or
event of default that has occurred under any other credit
agreement for which the Seller is the primary obligor.
(b) The Seller shall hold (or deliver to the Custodian) all
Additional Required Documents for the Mortgage Loans that are
Purchased Loans in trust for the benefit of the Buyer.
(c) The Seller shall furnish or cause to be furnished to the Buyer:
(i) Within 90 days after the last day of each fiscal year of
the Seller, consolidated and consolidating statements of
income (and, in the case of the consolidated statement,
cash flows) for the Seller for such year and consolidated
and consolidating balance sheets for the Seller as of the
end of such year (with the foregoing consolidating
statements to separately display the income and balance
sheet of each of the Seller and its consolidated
Subsidiaries in a format reasonably acceptable to the
Buyer), presented fairly in all material respects in
accordance with GAAP and accompanied by an unqualified
report of a firm of independent certified public
accountants of nationally recognized standing; and
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(ii) Within 45 days after the last day of each fiscal quarter,
(A) unaudited consolidated and consolidating statements of
income for the Seller for such quarter, and unaudited
consolidated and consolidating balance sheets for the
Seller as of the end of such quarter (with the foregoing
consolidating statements to separately display the income
statement and balance sheet of each of the Seller and its
consolidated subsidiaries in a format reasonably
acceptable to the Buyer), and (B) a certificate of an
officer of the Seller, whose position is vice president or
higher, stating that such financial statements are
presented fairly in all material respects and in
accordance with GAAP, subject to year-end audit
adjustments, and further certifying that neither the
Seller nor any affiliate thereof is in default under the
terms and conditions of any agreement evidencing or
securing any indebtedness of such entity.
(d) The Seller shall promptly furnish such additional financial and
other information, including, without limitation, financial
statements of the Seller, and information regarding the Purchased
Loans, as the Buyer may from time to time reasonably request.
(e) The Seller shall pay or otherwise satisfy at or before maturity
or before it becomes delinquent or accelerated, as the case may
be, all its indebtedness (including taxes), except indebtedness
being contested in good faith by appropriate proceedings and for
which provision is made to the satisfaction of the Buyer for the
payment thereof in the event the Seller is found to be obligated
to pay such indebtedness and which indebtedness is thereupon
promptly paid by the Seller.
(f) The Seller shall maintain its corporate existence and obtain and
maintain all rights, privileges, licenses, approvals, franchises,
properties and assets necessary or desirable in the normal
conduct of its business, including but not limited to all
approvals with respect to the SEC, and comply with all
contractual obligations and requirements of law (including,
without limitation, any requirements of law under or in
connection with ERISA, the federal Consumer Credit Protection
Act, the federal Real Estate Settlement Procedures Act, the
federal Equal Credit Opportunity Act, the federal
Truth-in-Lending Act, and any regulations promulgated
thereunder), except where the failure to so comply is not likely
to have a material adverse effect on the ability of the Seller to
perform under this Agreement.
(g) The Seller shall keep proper books of record and account in which
full, true and correct entries in conformity with GAAP and all
requirements of law shall be made of all dealings and
transactions in relation to its business and activities.
(h) The Seller shall permit representatives of the Buyer to (A) visit
and inspect any of its properties and examine and make abstracts
from any of its books and records (including without limitation
books and records relating to the Purchased Loans) at any
reasonable time and as often as may reasonably be desired by the
Buyer (but, prior to the occurrence of an Event of Default, only
upon not less than two Business Days' prior notice), and (B)
discuss the business, operations, properties and financial and
other condition of the Seller with officers and employees of the
Seller, and with its independent certified public accountants;
PROVIDED, HOWEVER, that the results of any such visit,
inspection, examination, discussion or audit, to the extent such
results are proprietary and non-public, shall be maintained by
the Buyer in confidentiality except as required by law or
regulation or by any governmental agency or regulatory body
having authority over the Buyer, or to the extent such
information may be communicated to the legal counsel or auditors
of the Buyer.
(i) The Seller shall promptly give written notice to the Buyer of:
(i) the occurrence of any Event of Default;
(ii) any litigation or proceeding to which the Seller is a
party and which affects the Purchased Loans, the outcome
of which is reasonably likely to be determined adversely
to the Seller and which, if so determined, would have a
material adverse effect on the Purchased Loans, or the
consolidated business, operations, property, or financial
or other condition of the Seller taken as a whole;
(iii) a material adverse change known to responsible management
personnel of the Seller in the business, operations,
property or financial or other condition of the Seller;
and
(iv) any default by the Seller or any of the Seller's
affiliates under the terms and conditions of any agreement
evidencing or securing any indebtedness of such entity.
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(j) The Seller shall pay (i) all legal expenses of the Buyer incident
to the preparation and negotiation of documents relating to
Transactions hereunder, up to a maximum of $7,500, and (ii) all
reasonable out-of-pocket costs and expenses (including fees and
disbursements of legal counsel) incident to the enforcement of
the Seller's obligations hereunder or under any Confirmation,
whether by judicial proceedings or otherwise, including, without
limitation, in connection with bankruptcy, insolvency,
liquidations, reorganization, moratorium or other similar
proceedings involving the Seller. The obligations of the Seller
under this Paragraph 11(j) shall be effective and enforceable
whether or not any Transaction is outstanding hereunder and shall
survive the termination of this Agreement.
(k) The Seller shall originate or acquire Mortgage Loans only in
accordance with the Seller's Underwriting Standards in effect on
the date of origination or acquisition.
(l) The Seller shall not, directly or indirectly, create, incur,
assume or suffer to exist, any lien or other encumbrance upon the
Collateral.
(m) The Seller shall not, without providing written notice to the
Buyer, alter its current Underwriting Standards in any material
manner from those disclosed to the Buyer and attached to the
Agreement as Exhibit C.
(n) the Seller shall identify all Purchased Loans as Seller Mortgage
Loans or Correspondent Mortgage Loans, as the case may be, in a
manner reasonably acceptable to the Buyer.
12. EVENTS OF DEFAULT
The following shall constitute Events of Default hereunder (each, an "Event of
Default"):
(a) the Seller's failure to transfer or the Buyer's failure to
purchase Purchased Loans upon the applicable Purchase Date;
(b) the Seller's failure to repurchase or the Buyer's failure to
transfer Purchased Loans upon the applicable Repurchase Date;
(c) the Seller's or the Buyer's failure to comply with Paragraph 5
hereof;
(d) an Act of Insolvency occurs with respect to the Seller or the
Buyer;
(e) any representation or warranty made by the Seller or the Buyer in
this Agreement shall have been incorrect or untrue in any
material respect when made or repeated or deemed to have been
made or repeated;
(f) the Seller or the Buyer shall admit in writing to the other its
inability to, or its intention not to, perform any of its
obligations hereunder;
(g) if, for any reason, any Transaction is not deemed to be a
purchase and sale, and the Agreement shall for any reason cease
to create a valid, first priority security interest in any of the
Purchased Loans purported to be covered thereby;
(h) the Seller shall breach any covenant, requirement or obligation
contained in this Agreement;
(i) the Seller's obligations under any credit agreement or other
material agreement for which the Seller is the primary obligor
shall be accelerated; PROVIDED, HOWEVER, that if an Event of
Default shall occur as a result of a default under any credit
agreement or other material agreement described in this Section
12(i), and such default under such credit agreement or other
material agreement is remedied or cured by the Seller so that the
Buyer is not harmed in any material way, then such Event of
Default shall be deemed to have been remedied or cured without
further action upon the part of the Seller or the Buyer;
(j) the Seller shall fail to repurchase any Purchased Loans at the
Repurchase Price when required by Paragraph 8 of this Agreement;
(k) the Buyer or the Seller shall have reasonably determined that the
other party is or will be unable to meet its commitments under
this Agreement, shall have notified such other party of such
determination and such other party shall not have responded with
appropriate information to the contrary to the satisfaction of
the notifying party within one Business Day;
(l) in the reasonable judgment of the Buyer a material adverse change
shall have occurred in the business, operations, properties,
prospects or financial condition of the Seller; or
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(m) the Seller shall merge or consolidate into any entity, unless the
surviving or resulting entity shall be acceptable to the Buyer,
in its sole discretion, and such entity expressly assumes by
written agreement, executed and delivered to the Buyer in form
and substance satisfactory to the Buyer, the performance of all
the Seller's duties and obligations hereunder; PROVIDED that a
reorganization involving only the Seller and its affiliates shall
not constitute an Event of Default.
13. REMEDIES UPON EVENT OF DEFAULT
Upon the occurrence of any Event of Default:
(a) The nondefaulting party may, at its option (which option shall be
deemed to have been exercised immediately upon the occurrence of
an Act of Insolvency), declare an Event of Default to have
occurred hereunder and, upon the exercise or deemed exercise of
such option, the Repurchase Date for each Transaction hereunder,
shall, if it has not already occurred, be deemed immediately to
occur (except that, in the event that the Purchase Date for any
Transaction has not yet occurred as of the date of such exercise
or deemed exercise, such Transaction shall be deemed immediately
canceled). The nondefaulting party shall (except upon the
occurrence of an Act of Insolvency) give notice to the defaulting
party of the exercise of such option as promptly as practicable.
(b) Upon the occurrence of an Event of Default by the Seller, if the
Buyer exercises or is deemed to have exercised the option
referred to in subparagraph (a) of this Paragraph, (i) the
Seller's obligation to repurchase all Purchased Loans, at the
Repurchase Price therefor on the Repurchase Date determined in
accordance with subparagraph (a) of this Paragraph, shall
thereupon become immediately due and payable; (ii) all Income
paid after such exercise or deemed exercise shall be retained by
the Buyer and applied to the aggregate unpaid Repurchase Price
and any other amounts owing by the Seller hereunder; (iii) the
Seller shall immediately deliver to the Buyer any Purchased Loans
that are subject to a Transaction which are then in the Seller's
possession or control; (iv) the Buyer may, without notice to the
Seller, (A) immediately sell, in a recognized market (or
otherwise in a commercially reasonable manner) at such price or
prices as the Buyer may reasonably deem satisfactory, any or all
Purchased Loans subject to such Transactions and shall apply the
proceeds thereof to the aggregate unpaid Repurchase Prices and
any other amounts owing by the Seller hereunder or (B) in its
sole discretion elect, in lieu of selling all or a portion of
such Purchased Loans, to give the Seller credit for such
Purchased Loans in an amount equal to the price therefor on such
date, obtained from a generally recognized source, against the
aggregate unpaid Repurchase Prices and any other amounts owing by
the Seller hereunder; and (v) the Buyer may refuse to enter into
any further Transactions with the Seller under this Agreement and
may determine that the Agreement is terminated.
(c) Upon the occurrence of an Event of Default by the Buyer and
tender by the Seller of payment of the aggregate Repurchase Price
for any Transaction, (i) all right, title and interest in and
entitlement to all Purchased Loans subject to such Transaction
shall be deemed transferred to the Seller; (ii) the Buyer shall
deliver all such Purchased Loans to the Seller; (iii) the Seller
may, without notice to the Buyer, (A) immediately purchase, in a
commercially reasonable manner, at such price or prices as the
Seller may reasonably deem satisfactory, Mortgage Loans
("Replacement Mortgage Loans") of the same class and amount as
any Purchased Loans that are not delivered by the Buyer to the
Seller as required hereunder or (B) in its sole discretion elect,
in lieu of purchasing Replacement Mortgage Loans, to be deemed to
have purchased Replacement Mortgage Loans at the price therefor
on such date, obtained from a generally recognized source; and
(iv) the Buyer shall be liable to the Seller for any excess of
the price paid (or deemed paid) by the Seller for Replacement
Mortgage Loans over the Repurchase Price for the Purchased Loans
replaced thereby.
(d) The parties acknowledge and agree that (i) in the absence of a
generally recognized source for prices or bid or offer quotations
for any Mortgage Loan, the nondefaulting party may establish the
source therefor in its sole discretion; and (ii) all prices, bids
and offers shall be determined together with accrued Income
(except to the extent contrary to market practice with respect to
the relevant Mortgage Loans).
(e) For purposes of this Paragraph 13, the Repurchase Price for each
Transaction hereunder with respect to which the Buyer is in
default shall not increase above the amount of such Repurchase
Price for such Transaction determined as of the date of the
exercise or deemed exercise by the nondefaulting party of the
option referred to in subparagraph (a) of this Paragraph.
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(f) The defaulting party shall be liable to the nondefaulting party
for (i) the amount of all reasonable legal or other expenses
incurred by the nondefaulting party in connection with or as a
result of an Event of Default, (ii) damages in an amount equal to
the cost (including all fees, expenses and commissions) of
entering into replacement transactions and entering into or
terminating hedge transactions in connection with or as a result
of an Event of Default, and (iii) any other loss, damage, cost or
expense directly arising or resulting from the occurrence of an
Event of Default in respect of a Transaction.
(g) To the extent permitted by applicable law, the defaulting party
shall be liable to the nondefaulting party for interest at the
Default Rate on any amounts owing by the defaulting party
hereunder from the date the defaulting party becomes liable for
such amounts hereunder until such amounts are (i) paid in full by
the defaulting party or (ii) satisfied in full by the exercise of
the nondefaulting party's rights hereunder.
(h) The nondefaulting party shall have, in addition to its rights
hereunder, any rights otherwise available to it under any other
agreement or applicable law.
(i) Upon default by the Seller, and for the period during which such
default is continuing, all rights of the Seller to receive
payments on the Mortgage Loans which it would otherwise be
authorized to receive hereunder shall cease, and all rights to
such payments shall become vested in the Buyer, which shall have
the sole right to receive such payments and apply them to the
amounts owed by the Seller pursuant to the Agreement. All
payments that are received by the Seller contrary to the
provisions of this clause (i) shall be received in trust for the
benefit of the Buyer, shall be segregated from other funds of the
Seller and shall be promptly paid to the Buyer.
(j) In addition to the other remedies available to the Buyer upon the
occurrence and during the continuance of an Event of Default by
the Seller, the Buyer shall be entitled to the right of set-off
with respect to any amounts owed by the Seller to the Buyer under
any contract, margin account or other arrangement. The Seller
hereby waives any right it may have to require that any deposits
held by the Buyer for the Seller be set off by the Buyer against
the Seller's obligations under the Agreement.
14. APPLICATION OF PROCEEDS
The proceeds of any sale of or other realization on any or all of the Collateral
at the time held by the Buyer under the Agreement, shall be applied by the Buyer
in the following order of priority:
(a) First, to the payment of all reasonable costs and expenses of
such sale incurred by the Buyer and its affiliates and all
reasonable expenses (including the reasonable fees and expenses
of counsel), liabilities and advances reasonably made or incurred
by the Buyer and its affiliates in connection therewith.
(b) Second, to the payment of the outstanding Repurchase Price owed
by the Seller under the Agreement.
(c) Third, to the payment of all other amounts owed by the Seller
under the Agreement.
(d) Fourth, to the payment of any other amounts owed by the Seller to
the Buyer or any affiliate thereof under any other instrument or
agreement.
(e) Fifth, to the payment to the Seller, or to such other Person as
court of competent jurisdiction may direct, of any surplus then
remaining from such proceeds and other cash.
As used in the Agreement, "proceeds" of the Collateral shall mean cash and other
property received or otherwise realized in respect of the Purchased Loans.
15. INDEMNIFICATION
If the Buyer becomes involved in any capacity in any action, proceeding or
investigation in connection with any matter contemplated by this Agreement, the
primary focus of which action, proceeding or investigation concerns the Seller,
Nationscapital or Coast, the Seller will reimburse the Buyer for its legal and
other expenses (including the cost of any investigation and preparation) as they
are incurred by the Buyer. The Seller also agrees to indemnify and hold harmless
the Buyer and its affiliates and their respective directors, officers, employees
and agents (collectively, the "Indemnified Parties"), from and against any and
all losses, claims, damages and liabilities, joint or several, related to or
arising out of any matters contemplated by this Agreement, unless (and this
clause shall apply only to the extent that) such losses, claims, damages or
liabilities resulted primarily from the gross negligence or willful misconduct
of the Buyer.
If the foregoing indemnification is for any reason unavailable to any of the
Indemnified Parties, then the Seller shall contribute to the amount paid or
payable by the Indemnified Parties as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative benefits
received by the Seller, on the one hand, and such Indemnified Parties, on the
other, arising out of the matters contemplated by this Agreement.
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The reimbursement, indemnity and contribution provided for herein shall be in
addition to any other liability that the Seller may otherwise have under this
Agreement, at law or in equity, and shall survive the termination or expiration
of this Agreement.
16. PAYMENT AND TRANSFER
Unless otherwise mutually agreed, all transfers of funds hereunder shall be in
immediately available funds. All Mortgage Loans transferred by one party hereto
to the other party (a) shall be in suitable form for transfer or shall be
accompanied by duly executed instruments of transfer or assignment in blank and
such other documentation as the party receiving possession may reasonably
request, (b) shall be transferred on the book-entry system of a Federal Reserve
Bank, or (c) shall be transferred by any other method mutually acceptable to the
Seller and the Buyer.
17. LIMITED POWER OF ATTORNEY
The Seller hereby appoints the Buyer to act (after the occurrence and during the
continuation of an Event of Default) as the attorney-in-fact of the Seller for
the purpose of carrying out the provisions of this Agreement and taking any
action and executing any instruments that the Buyer shall deem necessary or
advisable to accomplish the purposes hereof. This appointment as
attorney-in-fact is irrevocable and is coupled with an interest. Without
limiting the generality of the foregoing, the Buyer and its assigns shall have
the right and power to sell Purchased Loans and to receive, endorse and collect
all checks made payable to the order of the Seller on account of the principal
or interest on any of the Purchased Loans and to give full discharge of the
same.
18. EFFECT OF TERMINATION
The termination of this Agreement by either party shall not eliminate any
liability for losses incurred by either party during the duration of this
Agreement. To the extent that this Agreement is terminated, the terms of this
Agreement shall continue to apply to any Transactions outstanding after the
termination of this Agreement. The provisions of Paragraph 15 relating to
Indemnification shall survive the termination of this Agreement.
19. TIME
All references to time contained in the Agreement shall be deemed to be local
time in Charlotte, North Carolina on the applicable day.
20. FEES AND EXPENSES
Nothing in this Agreement shall act as a bar to the collection of any fees or
expenses of the Buyer that the Seller may agree to pay in any separate agreement
relating to any or all of the Transactions.
21. PAYMENT OF SECURED CREDITORS
The Seller may direct the Buyer to pay all or any portion of the Purchase Price
for a Transaction to one or more creditors of the Seller, or any of its
affiliates, if such payment is necessary to release a lien on the Mortgage Loans
that are to be purchased in such Transaction. Such payment and release of an
existing lien may occur simultaneously with the purchase of Mortgage Loans under
this Agreement.
22. OPINIONS OF COUNSEL
The Seller shall, on the date of the first Transaction hereunder and, upon the
request of the Buyer, on the date of any subsequent Transaction, cause to be
delivered to the Buyer, with reliance thereon permitted as to any Person or
entity that purchases the Purchased Loans from the Buyer, a favorable opinion of
the Seller's counsel with respect to the matters set forth in Exhibit E hereto,
in form and substance reasonably acceptable to the Buyer.
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23. SINGLE AGREEMENT
The Buyer and the Seller acknowledge that, and have entered into this Master
Repurchase Agreement 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 have been made in
consideration of each other. Accordingly, each of the Buyer and the Seller
agrees (a) 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, (b) 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 (c) 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.
24. NOTICES AND OTHER COMMUNICATIONS
Any and all notices, statements, demands or other communications hereunder may
be given by a party to the other by mail, facsimile, telegraph, messenger or
otherwise to the address listed below, or such other address as may be specified
in a notice of change of address hereafter received by the other:
SELLER: First Alliance Mortgage Co.
17305 Von Karman Avenue
Irvine, California 92614
Attention: Director, Secondary Marketing
Telephone: (714) 224-8357
Facsimile: (714) 224-8366
BUYER: First Union National Bank
301 South College Street, DC-06
Charlotte, North Carolina 28288
Attention: Wallace M. Saunders
Telephone: (704) 374-4868
Facsimile: (704) 374-7102
All notices, demands and requests hereunder may be made orally, to be confirmed
promptly in writing, or by other communication as specified in the preceding
sentence.
25. ENTIRE AGREEMENT; SEVERABILITY
This Agreement shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions. 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.
26. NON-ASSIGNABILITY; TERMINATION
(a) The rights and obligations of the parties under this Agreement
and under any Transaction shall not be assigned by either party
without the prior written consent of the other party, and any
such assignment without the prior written consent of the other
party shall be null and void. 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.
(b) Subparagraph (a) of this Paragraph 26 shall not preclude a party
from assigning, charging or otherwise dealing with all or any
part of its interest in any sum payable to it under Paragraph 13
hereof.
27. GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT
GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
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28. 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 in writing and duly executed by both of the parties hereto. Without
limitation on any of the foregoing, the failure to give a notice pursuant to
Paragraph 5(b) hereof will not constitute a waiver of any right to do so at a
later date.
29. USE OF EMPLOYEE PLAN ASSETS
(a) If assets of an employee benefit plan subject to any provision of
ERISA are intended to be used by either party hereto (the "Plan
Party") in a Transaction, the Plan Party shall so notify the
other party prior to the Transaction. The Plan Party shall
represent in writing to the other party that the Transaction does
not constitute a prohibited transaction under ERISA or is
otherwise exempt therefrom, and the other party may proceed in
reliance thereon but shall not be required so to proceed.
(b) Subject to the last sentence of subparagraph (a) of this
Paragraph, any such Transaction shall proceed only if the Seller
furnishes or has furnished to the Buyer its most recent available
audited statement of its financial condition and its most recent
subsequent unaudited statement of its financial condition.
(c) By entering into a Transaction pursuant to this Paragraph, the
Seller shall be deemed to (i) represent to the Buyer that since
the date of the Seller's latest such financial statements, there
has been no material adverse change in the Seller's financial
condition which the Seller has not disclosed to the Buyer, and
(ii) agree to provide the Buyer with future audited and unaudited
statements of its financial condition as they are issued, so long
as it is a Seller in any outstanding Transaction involving a Plan
Party.
30. INTENT
(a) The parties recognize that each Transaction is a "repurchase
agreement" as that term is defined in Section 101 of Title 11 of
the Bankruptcy Code, and a "securities contract" as that term is
defined in Section 741 of the Bankruptcy Code. The parties
further intend and recognize that the Mortgage Loans constitute
"securities" as such term is defined in Section 101(49) of the
Bankruptcy Code.
(b) It is understood that either party's right to liquidate Mortgage
Loans delivered to it in connection with Transactions hereunder
or to exercise any other remedies pursuant to Paragraph 13 hereof
is a contractual right to liquidate such Transaction as described
in Sections 555 and 559 of the Bankruptcy Code.
(c) Although the parties intend that all Transactions hereunder be
sales and purchases and not loans, in the event any such
Transactions are deemed to be loans, the Seller shall be deemed
to have pledged to the Buyer as security for the performance by
the Seller of its obligations under each such Transaction, and
shall be deemed to have granted to the Buyer a security interest
in, all of the Purchased Loans with respect to all Transactions
hereunder and all Income thereon and other proceeds thereof.
(d) The parties agree and acknowledge that if a party hereto is an
"insured depository institution," as such term is defined in
FDIA, then each Transaction hereunder is a "qualified financial
contract," as that term is defined in FDIA and any rules, orders
or policy statements thereunder (except insofar as the type of
assets subject to such Transaction would render such definition
inapplicable).
(e) It is understood that this Agreement constitutes a "netting
contract" as defined in and subject to Title IV of FDICIA and
each payment entitlement and payment obligation under any
Transaction hereunder shall constitute a "covered contractual
payment entitlement" or "covered contractual payment obligation",
respectively, as defined in and subject to FDICIA (except insofar
as one or both of the parties is not a "financial institution" as
that term is defined in FDICIA).
31. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is a
broker or dealer registered with the SEC under Section 15 of the
1934 Act, the Securities Investor Protection Corporation has
taken the position that the provisions of SIPA do not protect the
other party with respect to any Transaction hereunder;
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(b) in the case of Transactions in which one of the parties is a
government securities broker or a government securities dealer
registered with the SEC under Section 15C of the 1934 Act, SIPA
will not provide protection to the other party with respect to
any Transaction hereunder; and
(c) in the case of Transactions in which one of the parties is a
financial institution, funds held by the financial institution
pursuant to a Transaction hereunder are not on deposit and
therefore are not insured by the Federal Deposit Insurance
Corporation or the National Credit Union Share Insurance Fund, as
applicable.
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IN WITNESS WHEREOF, the Seller and the Buyer have caused this Master
Repurchase Agreement to be executed by their authorized representatives as of
this 27th day of October, 1997.
FIRST ALLIANCE MORTGAGE CO.,
as Seller
By:______________________________
Name:____________________________
Title:___________________________
FIRST UNION NATIONAL BANK,
as Buyer
By:______________________________
Name:____________________________
Title:___________________________
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EXHIBIT A
FORM OF CONFIRMATION
[Date]
First Alliance Mortgage Co.
17305 Von Karman Avenue
Irvine, California 92614
Attention: Director, Secondary Marketing
Ladies and Gentlemen:
Pursuant to the master repurchase agreement (the "Master Repurchase
Agreement"), dated as of October 27, 1997, between the undersigned (the "Buyer")
and you (the "Seller"), the Buyer hereby agrees to purchase the Mortgage Loans
identified on SCHEDULE I attached hereto, subject to the terms set forth below:
Purchase Date: ________________
Repurchase Date: ________________
Purchase Price: ________________
Pricing Rate: ________________
Margin: _____%
All of the representations and warranties made in the Master Repurchase
Agreement must be true and correct as of the Purchase Date and no Event of
Default shall have occurred. Capitalized terms not defined herein shall have the
meanings assigned to them in the Master Repurchase Agreement.
If you are in agreement with these terms, please execute the
acknowledgement and acceptance set forth below and return one copy of this
Confirmation to the Buyer.
Very truly yours,
FIRST UNION NATIONAL BANK,
as Buyer
By:______________________________
Name:____________________________
Title:___________________________
Accepted and Agreed as of
this ____ day of __________, ____.
FIRST ALLIANCE MORTGAGE CO.,
as Seller
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
SCHEDULE I TO CONFIRMATION
MORTGAGE LOAN SCHEDULE
<PAGE>
EXHIBIT B
REPRESENTATIONS AND WARRANTIES
RELATING TO ELIGIBLE MORTGAGE LOANS
(a) The Mortgage Loan is a binding and valid obligation of the obligor
thereon, in full force and effect and enforceable in accordance with its terms.
(b) The Mortgage Loan is genuine in all respects as appearing on its
face and as represented in the books and records of the Seller and all
information set forth therein is true and correct.
(c) The Mortgage Loan is free of any default of any party thereto
(including the Seller), other than as expressly permitted pursuant to
subparagraph (d) below, counterclaims, offsets and defenses and from any
rescission, cancellation or avoidance, whether by operation of law or otherwise.
(d) No payment under the Mortgage Loan is more than 30 days past due the
payment due date set forth in the underlying promissory note and deed of trust
(or mortgage).
(e) The Mortgage Loan contains the entire agreement of the parties
thereto with respect to the subject matter thereof, has not been modified or
amended in any respect and is free of concessions or understandings with the
obligor thereon of any kind not expressed in writing therein.
(f) The Mortgage Loan complies in all respects and was originated in
accordance with all applicable laws and regulations governing the same,
including, without limitation, the federal Consumer Credit Protection Act, the
federal Real Estate Settlement Procedures Act, the federal Equal Credit
Opportunity Act, the federal Truth-in-Lending Act, and the regulations
promulgated thereunder and all applicable usury laws and restrictions, and all
notices, disclosures and other statements or information required by law or
regulation to be given, and any other act required by law or regulation to be
performed, in connection with the Mortgage Loan have been given and performed as
required.
(g) Unless otherwise provided for in the written disbursement
instructions relating to the Mortgage Loan, all proceeds of the Mortgage Loan
have been fully disbursed.
(h) At all times the Mortgage Loan will be free and clear of all liens.
(i) The property covered by the Mortgage Loan is insured against loss or
damage by fire and all other hazards normally included within standard extended
coverage in accordance with the provisions of the Mortgage Loan with the Seller
named as a loss payee thereon.
(j) If the property covered by the Mortgage Loan falls within a flood
zone as identified by a HUD-identified flood map, the property is insured
against flood damage in an amount equal to the lesser of the balance due under
the related Mortgage Loan or the maximum amount of insurance available under the
National Flood Insurance Program.
(k) The property covered by the Mortgage Loan is free and clear of all
liens except:
(i) the lien in favor of the Seller;
(ii) the lien of current real property taxes and assessments not
yet due and payable;
(iii) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record, as of the date of
recording, as are acceptable to mortgage lending institutions generally
and specifically referred to in a lender's title insurance policy
delivered to the originator of the Mortgage Loan and which (A) are
referred to or otherwise considered in the appraisal made for the
originator of the Mortgage Loan or (B) do not materially adversely
affect the appraised value of the property as set forth in such
appraisal;
(iv) other matters to which like properties are commonly subject
and which do not materially interfere with the benefits of the security
intended to be provided by the Mortgage Loan or the use, enjoyment,
value or marketability of the related property;
(v) liens subordinate in priority to the lien in favor of the
Seller; and
(vi) in the case of second priority Mortgage Loans, one lien
superior in priority to the lien in favor of the Seller.
(l) The property shall be improved, and such improvements shall consist
of a completed one- to four-unit single family residence, including, but not
limited to, a condominium, planned unit development or townhouse, but excluding
in any event a co-op or mobile home.
<PAGE>
(m) There has been delivered to the Buyer the Required Documents for the
Mortgage Loan; provided, however, that a Mortgage Loan, the Required Documents
for which have not been delivered to the Buyer, may be an Eligible Mortgage Loan
and may be included in a Transaction so long as the Required Documents for such
Mortgage Loan shall have been delivered to the Buyer within seven days of the
inclusion of such Mortgage Loan in a Transaction.
(n) The Mortgage Loan is not subject to any servicing arrangement with
any Person other than the Seller nor are any servicing rights relating to the
Mortgage Loan subject to any lien, claim, interest or negative pledge in favor
of any Person other than as permitted hereunder.
(o) The Seller has obtained or conducted an appraisal in connection with
the origination of the Mortgage Loan in accordance with the Seller's
Underwriting Standards.
(p) The Mortgage Loan is secured by a first [or second] priority
mortgage or deed of trust on the property covered thereby.
(q) The Mortgage Loan is not a revolving credit facility.
(r) No real property taxes or insurance payments due and payable with
respect to the property (or escrow installments therefor) covered by the
Mortgage Loan are past due the payment due date thereof.
(s) The Mortgage Loan complies with the Underwriting Standards.
<PAGE>
EXHIBIT C
SELLER'S UNDERWRITING STANDARDS
[attached]
<PAGE>
EXHIBIT D
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, First Alliance Mortgage Co. (the "Assignor") hereby
transfers and assigns to First Union National Bank (the "Assignee") all of its
right, title and interest in and under that certain Master Repurchase Agreement
dated as of October 27, 1997, between [Nationscapital Mortgage Company/Coast
Security Mortgage, Inc.], as seller, and Assignor, as buyer, and the transaction
entered into thereunder pursuant to the written confirmation thereof dated as of
[____________ __, ____], a copy of which is attached hereto, each to the extent
it relates to mortgage loans sold by the Assignor to the Assignee pursuant to
the Master Repurchase Agreement dated as of October __, 1997, between the
Assignor, as Seller, and the Assignee, as Buyer.
IN WITNESS WHEREOF, the Assignor has caused this assignment to be
executed by its duly authorized representative this ____ day of ____________,
____.
FIRST ALLIANCE MORTGAGE CO.,
as Assignor
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
EXHIBIT E
FORM OF OPINION OF COUNSEL
[attached]
<PAGE>
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT
FIRST ALLIANCE CORPORATION
SUBSIDIARIES OF THE REGISTRANT
First Alliance Mortgage Company
Incorporated in California
Names under which the subsidiary also does business:
First Alliance Credit Corporation and Pacific Reconveyance.
First Alliance Mortgage Company
Incorporated in Minnesota
First Alliance Services
Incorporated in California
First Alliance Residual Holding Company
Incorporated in Delaware
First Alliance Acceptance Corporation
Incorporated in Delaware
First Alliance Mortgage Company, Limited
Incorporated in the United Kingdom
First Alliance Corporation, Limited
Incorporated in the United Kingdom
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<PERIOD-START> JAN-01-1997
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<SECURITIES> 0
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